SUTA (State Unemployment Tax Act) Dumping is a term for an activity that some employers use to avoid high UI (Unemployment Insurance) tax rates. SUTA Dumping compromises experience rating systems by eliminating the incentive for employers to keep employees working and returning claimants to work as soon as possible, and unfairly shifts costs to other employers. In order to maintain the integrity of their experience rating systems and unemployment funds, Federal law required that states enact legislation to deter UI tax rate manipulation schemes, to ensure they are detected early, and to immediately correct the problem when found.
On September 1, 2005, in response to the Federal law, the Texas Legislature passed HB 3250 in the 79th Regular Session. HB 3250 addresses the SUTA Dumping issue by mandating transfer of compensation experience when certain conditions and certain relationships exist between the previous and new owners of a business, and applies to the transfer of businesses that occur on or after September 1, 2005. The following discussion describes the changes to each section of the Texas Unemployment Compensation Act (TUCA). Any questions concerning these recent amendments to the TUCA can be directed to your nearest TWC Tax Office or by e-mail to the Tax Department.
This legislation amended the Texas Unemployment Compensation Act by incorporating provisions mandated by federal legislation. Employers engage in SUTA dumping when they unlawfully attempt to lower the amount of their unemployment insurance taxes by altering their experience ratings. Chapters 201 and 204 of the Texas Unemployment Compensation Act have been revised in an attempt to strengthen the financial integrity of the unemployment insurance program by reducing tax avoidance due to this manipulation of unemployment experience.
HB 3250 expanded liability under Section 201.022 of the Labor Code to include all acquisitions, whether total or partial. "Employer" means an individual or employing unit that receives, "by any means," all or part of the organization, trade, business, or "workforce" of another that was an employer subject to this subtitle at the time of the acquisition. Additionally, it eliminated the requirement to either elect coverage or become subject under Section 201.021 for partial acquisitions.
HB 3250 amended Section 204.081 by adding two new definitions. The term "person" is defined as an individual, trust, estate, partnership, association, company, or corporation.
"Substantially common management or control" exists if the predecessor continues to:
- own or manage the organization that conducts the organization, trade, or business.
- own or manage the assets necessary to conduct the organization, trade, or business.
- control through security or lease arrangement the assets necessary to conduct the organization, trade, or business.
- direct the internal affairs or conduct of the organization, trade, or business.
Section 204.083 requires the transfer of compensation experience in acquisitions of all or part of an experience-rated organization, trade or business in which there is substantially common management or control or substantially common ownership.
Section 204.084 addresses approval of compensation experience for partial acquisitions of business that do not have substantially common management or control or substantially common ownership. In addition, this section states the conditions under which the businesses involved in those partial acquisitions may apply for a transfer of compensation experience and the conditions under which the Commission shall approve or deny such a transfer. The method used to calculate the successor employing unit's initial contribution rate is outlined for both experience-rated and non-experience rated successor employers.
Section 204.085 addresses the contribution rate for successor employers that acquire part of the organization, trade, or business that is definitely identifiable and segregable, when there is substantially common management or control or substantially common ownership. It details the computation of an experience rate for a partial acquisition and clarifies when a new computation of experience rate will take effect for a successor employing unit with an experience rate and without an experience rate. Section 204.0851 addresses the contribution rate for total acquisitions and partial acquisitions in which there is substantially common management or control or substantially common ownership. This section excludes partial acquisitions that met the identifiable and segregable requirements under section 204.085. It details the computation of experience rates and clarifies when a new computation of experience rate will take effect for a successor employing unit with an experience rate and without an experience rate. It also addresses the computation of the predecessor employing unit's contribution rate.
Section 204.087 defines an offense and sets the penalties for persons that advise others to violate the provisions of this subchapter, or commit violations of the subchapter. Violations are Class A misdemeanors.
The new Section 204.088 charges the Commission with adopting a rule that establishes procedures for identifying the transfer or acquisition of a business. TWC Rule 815.116, adopted February 19, 2007, requires the agency to use an electronic method to track and monitor employee movement between companies. The TWC uses SUTA software to track and monitor employee transfers from one company to another.
The new Section 204.089 requires that the Commission administer this subchapter in conformity with federal regulations prescribed by the United States Secretary of Labor.
Please e-mail questions or comments to tax@twc.state.tx.us
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