SUTA Dumping
During the 2005 legislative session, the Georgia Legislature passed House Bill 520 (HB520) which, in part, implemented the federal “SUTA Dumping Prevention Act of 2004” (P.L. 108-295). “SUTA” refers to the State Unemployment Tax Act.
“SUTA Dumping” is a new name for a broad group of tax avoidance practices sometimes used by employers to improperly and quickly reduce their unemployment insurance tax rates by the sale, transfer, or acquisition of separate business entities or workers attached to those business entities. SUTA Dumping shifts unemployment insurance (UI) tax costs from those employers to all Georgia employers while at the same time negatively impacting the solvency of the state UI trust fund.
Effective January 1, 2006, federal law requires states to:
- Mandate the transfer of unemployment insurance tax rate experience when there is substantially common ownership, management, or control between an employer and its successor.
- Prohibit the transfer of unemployment insurance tax rate experience when a person who is not already an employer becomes an employer by acquiring a business for the sole or primary purpose of obtaining a lower tax rate.
HB520 was enacted to implement these requirements to maintain the integrity of employer experience rating and the Unemployment Insurance Trust Fund.
Penalties
Under current Georgia law, it is illegal to knowingly make false statements or omit material facts on UI tax documents in order to reduce unemployment taxes. See O.C.G.A. 34-8-256.
Beginning July 1, 2006, any employer who violates or attempts to violate, or any person who advises another to violate or to attempt to violate, the new SUTA Dumping laws will be subject to be assigned the highest rate of contributions allowable by law, effective the year of the violation and the next three (3) years after the year of the violation. If the person committing the violation is not an employer, that person may be subject to a civil monetary penalty of up to $5,000.00 per violation. See the following examples of SUTA Dumping.
Please direct questions regarding this law change or other unemployment insurance tax concerns to the Georgia Department of Labor Adjudication Unit or call (404) 232-3300.
SUTA Dumping Schemes
Examples of prohibited SUTA dumping schemes are:
1. Affiliated Shell Transaction
- An employer establishes a separate legal entity with a separate UI account that reports a small payroll each year until it secures a low or minimum UI rate. When the first employer’s rate increases, staff is transferred into the business with the lower rate account.
2. Purchased Shell Transactions - An employer with a high UI rate purchases an unrelated corporate shell entity with a low UI rate and transfers its staff to the purchased entity.
3. Horizontal Employer Accounts
- Multiple employer accounts are maintained, and staff is moved from one account to another to take advantage of lower rates.
4. New Employer Rate
- An employer with a high UI rate files a registration form requesting a new employer account number (new employers pay 2.70 percent in Georgia), then transfers its payroll/staff to the new employer account.
5. Leasing / Cancel Leasing
- An employer with a high UI rate moves their workers to their own leasing company. Once the original business account is eligible for a lower rate, they cancel the leasing arrangement and return staff to the original business account. Sometimes a similar switch is accomplished between leasing companies every few years.
6. Reporting Under a Client’s Employer Account Number
- An employee leasing company or professional employer organization with a high UI rate shifts its workers to the account number of one of its clients with a lower UI rate.
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