BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW,
v. ) AND FINAL DECISION
AUDITING DIVISION OF THE ) Appeal No. 91‑1767
UTAH STATE TAX COMMISSION, ) Account No. XXXXX
Respondent. ) Tax Type: Withholding
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. G. Blaine Davis, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner was XXXXX. Present and representing Respondent were XXXXX, Assistant Attorney General, and XXXXX, XXXXX, and XXXXX, of the Auditing Division.
Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is withholding tax.
2. The period in question is XXXXX, through XXXXX.
3. The Petitioner is a sole proprietor of a business known as XXXXX, which has been in operation since XXXXX.
4. The business provides welding services to the public, but it's principal customer is a gold mining company located in XXXXX, where they weld cathodes used in the gold refining process utilized by that company.
5. The Petitioner previously held a state employee withholding account no. XXXXX. That withholding account was closed in XXXXX after XXXXX indicated that there had been no withholding due since XXXXX.
6. For the years XXXXX through XXXXX, the business had employees, and was withholding taxes from the wages and salaries of its employees, was issuing W‑2 forms to its employees for the year, but was not filing withholding tax returns, nor was it remitting to the Utah State Tax Commission the amounts of tax which had been withheld.
7. In addition to the employees on whom withholding was being made, there were two persons who performed work for the company who had been classified as independent contractors and on whom no tax had been withheld. Those two employees were XXXXX, the accountant for the business, and XXXXX, who performed welding services for the business. It is the position of Petitioner that both XXXXX and XXXXX were independent contractors and were not employees of the company. It is the position of the Respondent that both persons were employees and were not independent contractors.
8. Pursuant to the audit, a new withholding account no was issued to Petitioner: XXXXX.
9. With respect to XXXXX, he performed accounting and bookkeeping services for Petitioner. He prepared the payroll and dealt with accounts payable and accounts receivable. He put in such time as he deemed necessary, but it was frequently as much as eight hours and sometimes as few as four hours per day. Petitioner testified that he usually worked nearly thirty hours per week. He started off working in the office of Petitioner, but then for the last few years worked primarily from his home, although he would stop into the business each morning, check the mail, and then take it to his house to perform his work. He started working for Petitioner in approximately XXXXX or XXXXX, and was still working for Petitioner at the time the audit was concluded in XXXXX. However, XXXXX is now deceased. There was conflicting testimony as to whether XXXXX had other employment, with Petitioner testifying that XXXXX had told him that he did not have any other accounting jobs, but that he believed that he was performing accounting services for at least two other businesses. The Respondent, by and through XXXXX, testified that during the audit XXXXX had told him that he did not have any other employment and did not perform accounting services for any other businesses. XXXXX was paid on an hourly basis, and received payment for his services on the same day that all other employees were paid. The Commission finds that the Respondent has made an assessment and a determination that XXXXX was an employee, and Petitioner has failed to sustain his burden of proof to show that XXXXX was not an employee.
10. With respect to XXXXX, he performed welding services for Petitioner, primarily when Petitioner needed extra welders. XXXXX owned his own welding equipment, which he sometimes used, but he sometimes used the equipment of Petitioner. In addition, XXXXX owned additional welding equipment, which he would sometimes lease to Petitioner at the rate of $$$$$ per hour. Petitioner paid XXXXX at the rate of $$$$$ per hour. Petitioner provided all of the supplies and materials for use by XXXXX. XXXXX was paid his hourly rate on the same days, twice per month, as all other employees, and when XXXXX traveled, he did not pay his own travel expenses, but instead he traveled in the vehicles of Petitioner and Petitioner paid all of his motel expenses and food and other travel expenses exactly the same as he did for other employees. Petitioner paid XXXXX about $$$$$ per hour more than he paid other employees, but he provided health insurance to his other employees, but did not provide health insurance to XXXXX. Petitioner testified that XXXXX could come and go as he pleased, and that he left whenever he had other welding services to perform for other clients. XXXXX also had his own company, which was XXXXX, but XXXXX filled out a time card exactly as other employees did. After the audit performed by the Tax Commission, Petitioner did obtain job invoices from XXXXX, but they contained exactly the same information which had previously been submitted on the time cards. XXXXX spent nearly forty hours per week working for Petitioner, but he did leave at his own schedule and did perform welding services for other individuals and companies. The Respondent has determined that XXXXX was an employee of Petitioner, and Petitioner has not met his burden of proof to establish that XXXXX was an independent contractor and not an employee. Therefore, the Commission determines that XXXXX was an employee of Petitioner for purposes of the withholding tax requirements.
11. The Respondent has proposed that penalties be imposed upon Petitioner as follows:
a.) A 100% penalty for underpayment due to fraud with intent to evade the tax pursuant to the provisions of Section 59‑1401(3)(d), for failure to remit the withholding tax which had been withheld from the employees wages.
b.) A 100% penalty for underpayment due to fraud with intent to evade the tax, pursuant to the provisions of Section 591‑401(3)(d), Utah Code Annotated, for failure to withhold the tax at the proper rates during XXXXX.
c.) A 15% penalty for underpayment of the tax due to the intentional disregard of law or rule, pursuant to the provisions of Section 59‑1‑401(3)(b), Utah Code Annotated, for the failure to properly classify workers as employees and specifically for failing to classify XXXXX and XXXXX as employees.
d.) A $$$$$ penalty, pursuant to the provisions of Section 59‑1‑401(4) for failure to file an information return or a complete supporting schedule for each of the annual reconciliations.
Every employer making a payment of wages is required to deduct and withhold from wages an amount that is sufficient to pay the Utah income tax. (Utah Code Ann. '59‑10‑402.)
Every employer who withholds and deducts an amount from the wages of its employees is required to pay to the Utah State Tax Commission, on a quarterly basis, the amounts withheld from the wages of its employees, and is also required to file therewith tax returns as required by the Commission. Employers are further required to file an annual return to summarize and reconcile the withholding for its employees for the previous year. (Utah Code Ann. '59‑10‑406.)
Employers who deduct and withhold amounts from the wages of its employees, are required to hold all such amounts in trust for payment to the Commission. In the event of any delinquency in the payment of such amounts to the Commission, the State of Utah is to have a lien upon all of the assets of the employer and all property owned or used by the employer in the conduct of the business, including stock‑in‑trade, business fixtures and equipment, and the lien is to be prior to any other lien of any kind. (Utah Code Ann. '59‑10‑406.)
Penalties are imposed upon wrongful conduct of taxpayers as follows:
a. If an underpayment of tax is due to negligence, the penalty is 10% of the underpayment.
b. If an underpayment of tax is due to intentional disregard of law or rule, the penalty is 15% of the tax due.
c. For intent to evade the tax, the penalty is the greater of $500 per period or 50% of the tax due.
d. If an underpayment of tax is due to fraud with intent to evade the tax, the penalty is the greater of $500 per period or 100% of the underpayment.
e. For failing to file an information return or supporting schedule, the penalty is $50 for each return or schedule up to a maximum of $1,000.
If an employer fails to withhold the required tax, and thereafter the income subject to withholding is reported and the resulting tax is paid by the recipient, any tax which the employer should have withheld is not to be collected from the employer. However, in such event the employer does remain responsible for penalties and interest on the total amount of taxes that should have been withheld. (Administrative Rule R865‑19‑16I.)
There are some factors that would indicate that both XXXXX and XXXXX were independent contractors. XXXXX performed bookkeeping services for the Petitioner, which is a type of service frequently performed by independent contractors. XXXXX also, for a portion of the time in question, performed those services primarily from his personal residence. XXXXX sometimes utilized his own welding equipment, and apparently did work for other people. He was compensated on a basis which did not provide him with health insurance, whereas the other employees received health insurance, but the hourly wage for XXXXX was more than the other welders by an amount almost exactly equal to the amount it would take to pay for health insurance.
On the other hand, although there are some factors which would indicate that both XXXXX and XXXXX might be independent contractors, there are more factors which would indicate that they were employees. In reviewing Respondent's exhibit 5, the employer / employee checklist which was performed by XXXXX when he performed the audit on Petitioner, many of those employee factors can readily be seen. Both XXXXX and XXXXX were subject to the directions, instructions, and supervision of Petitioner. Their services were integrated in the business of Petitioner, and they both performed their services personally instead of through any other employees. Neither XXXXX nor XXXXX could hire or fire any other people, and they both had a continuing working relationship and spent the principal portion of their working time with Petitioner's business and worked either on the premises of Petitioner or traveled with Petitioner's other employees under the same terms and circumstances as the employees. Both XXXXX and XXXXX were paid an hourly wage rather than a fixed fee for a job, and they were paid that hourly amount on the same day as the other employees were paid. Although XXXXX had some investment in his welding equipment, XXXXX did not provide any of his own equipment. It also appeared that both workers could be discharged by Petitioner, or could terminate without any further responsibility, and because they were paid on an hourly basis, there was not necessarily any profit built into the jobs, but instead they were paid just like employees.
Accordingly, the preponderance of the evidence indicates that both XXXXX and XXXXX were employees of Petitioner for withholding tax purposes, and Petitioner should therefore be liable for the withholding taxes due on such employees. However, in accordance with Administrative Rule R865‑9‑16I(f), credit should be, and has been, applied for those individuals who complied with the income tax requirement and have properly filed income tax returns, reported the income and paid the tax due thereon.
Having determined that the two individuals were employees for the Petitioner, the only remaining issue is the correctness of the penalties proposed by the Auditing Division. Those penalties, as proposed, were as follows:
1. A $$$$$ penalty for each failure to file an annual reconciliation.
2. A 15% penalty for intentional disregard of the law for failure to properly classify XXXXX and XXXXX as employees instead of independent contractors.
3. A 100% penalty for fraud with intent to evade taxes for the failure to withhold taxes at the proper rates in XXXXX.
4. A 100% penalty for fraud with intent to evade taxes for failure to remit the withholding tax which had been withheld from employee's wages.
With respect to the $$$$$ penalty for each failure to file an annual reconciliation, such penalties appear to be proper. The auditing report, Respondent's Exhibit 2, indicates that there were annual reconciliations which were not filed for several years, which facts were not challenged by Petitioner, and the proposed $$$$$ penalty for each year is therefore appropriate and is sustained.
With respect to the proposed %%%%% penalty for intentional disregard for failure to properly classify workers as employees, such a penalty is questionable. In the case of Hales Sand & Gravel. Inc. v. Audit Division of the Tax Commission of Utah, 842 P.2nd 887, (Utah 1992), the Utah Supreme Court discussed the penalties and stated as follows:
A 10 percent negligence penalty is appropriate when the taxpayer has failed to pay taxes and a reasonable investigation into the applicable rules and statutes would have revealed that the taxes were due. A 15 percent penalty for intentional disregard of the law is imposed when the taxpayer has failed to pay taxes, a reasonable investigation into the applicable rules and statutes would have revealed that the taxes were due, and the Commission has informed the taxpayer that the taxes were due. See id. section 59‑1‑401(3)(b): Chicago Bridge and Iron Company v. State Tax Comm'n, 196 Utah Adv. Rep. 18, 21‑22 (Sept. 30, 1992). In both instances the taxpayer can escape the penalty if he or she can show that he or she based the non payment of taxes on a legitimate. good faith interpretation of an arguable point of law. Of Chicago Bridge and Iron Co. 196 Utah Adv. Rep. at 21‑22. (emphasis added)
The last point stated by the Utah Supreme Court in Hales Sand and Gravel, supra, was also emphasized in the case of Chicago Bridge and Iron Company v. State Tax Commission, 839 P.2nd 303 (196 Adv. Rep. 18. In that case, the Petitioner Chicago Bridge and Iron Company, had entered into a stipulation on a prior sales tax audit in 1984, and the Auditing Division had followed that stipulation with a letter stating its position with respect to the prior assessment of sales taxes. Several years later, during another audit the Auditing Division attempted to impose a 15% penalty for the intentional disregard of law or rule, and the basis for the "intentional disregard" was the letter which had been written several years previously stating the position of the Auditing Division with regard to that issue. The Commission sustained the 15% penalty for intentional disregard of the law or rule. However, the Supreme Court refused to affirm the 15% penalty. The Court, in refusing to affirm the Commission's decision stated as follows:
Although XXXXX did not comply with the Commission's demand in the February 29 letter, we do not believe that constituted an "intentional disregard of law or rule" as that term is used by the statute. When the letter was sent, XXXXX... (position)... was arguable. Indeed, the Commission states in it's brief, "the letter evidences a long standing disagreement between the Auditing Division and Petitioner regarding Utah sales tax."
The Commission cannot base a finding of "intentional disregard of law or rule" merely on a letter written to a taxpayer asserting the Commission's position on an arguable question of law. The Commission's letter did not constitute a rule or law, and XXXXX disregard of the letter did not, therefore, constitute an intentional disregard of the law. In our view, the dispute as to XXXXX liability for sales taxes was a good faith dispute, even though XXXXX position was wrong. Accordingly, in applying those principals to this case, the Petitioner took the position that XXXXX and XXXXX were independent contractors, and there was evidence to support that position. The Respondent did not present any evidence of "intentional disregard of law or rule," nor did Respondent present any evidence of negligence. Therefore, even though the Commission has hereby determined that the position of the Petitioner was wrong as to that issue, it cannot support a determination that taking such a position was an intentional disregard of the law or rules of the Commission, and in fact, it cannot even sustain a negligence penalty on the amounts determined to be due on the reclassification of the workers as employees. Therefore, no penalties of any amount are to be imposed upon the additional taxes incurred by the reclassification of XXXXX and XXXXX as employees instead of independent contractors.
With respect to the proposed penalty for failure to withhold taxes at the proper rates in XXXXX, there was no testimony or evidence given which would sustain a 100% fraud penalty for intent to evade taxes on said amounts. In fact, the only evidence is that the withholding from the paychecks of employees was not done at the proper rate, but there was no evidence to indicate that it was anything more than a simple mistake on behalf of Petitioner or the bookkeeper of Petitioner. Without such further evidence, no penalty of any amount should be imposed on the failure to withhold at the proper rates in XXXXX.
The final penalty proposed by the Respondent was a 100% penalty for fraud with intent to evade the taxes because of the failure of Petitioner to remit to the Tax Commission amounts which had been withheld from the wages of the employees. However, again, no evidence was presented with respect to the intentions of Petitioner to try to evade the tax.
This issue has been dealt with in two separate cases, Dennis M. Silver v. Auditing Division of the State Tax Commission of Utah, 820 P.2nd 912, (Utah 1991) and Jensen v. State Tax Commission, 835 P.2nd 965, (Utah 1992). In the Dennis M. Silver case, the Utah Supreme Court said as follows:
(The statute) requires that one have an "intent to evade" a tax or legal requirement before one is exposed to the penalty. . . . The usual meaning of the term "intent" is that one must have a conscious objective or desire to accomplish the prohibited end . . . . The object of the required intent . . . is "to evade" the requirements of the tax laws. "Evade" is defined as avoidance of something by effort, skill, dexterity, contrivance, subterfuge, ingenuity, or artifice. (31 C.J.S. evade (1964).) We read the term "intent to evade," then to require a conscious desire to avoid a legal requirement with which the actor knows he or she is obligated to comply; it is not sufficient that the actor merely intends not to do that which the law, in fact, may require. In short an intent not to file a tax return, even though required by law to file, is an "intent to evade" only if the actor is aware that he or she is legally required to file.
In the Jensen case, supra, the court stated as follows:
In the income tax arena, fraud is an actual intentional wrong doing with the specific intent to evade tax believed to be owing. Fahy v. Commissioner, 43 T.C.N. (CCH) 387, 394 (1982).
The court, in the Jensen case, also indicated that the taxing agency
must prove income tax fraud by clear and convincing evidence, and that the burden of proof to show fraud is on the Commission.
In applying those principals to this case, the evidence indicates that the Petitioner did withhold some payroll taxes from the payroll checks of its emplyees for several years and that it did not file tax returns or remit those taxes to the State of Utah. The Petitioner had also previously canceled his withholding tax number and represented that there would not be any further taxes withheld from the wages of emplyees, he did not reinstate his number or obtain a new one. Petitioner also retained and used the money which had been withheld from the wages of his employees and he never made any effort or attempt to account for those funds or to remit them to the State Tax Commission.
There was no evidence of fraud on behalf of Petitioner because there was no showing of a contrivance or subterfuge to try to deceive the taxing authorities. Therefore, the 100% penalty is no sustained. However, when the Petitioner previously had a withholding license and canceled it, he clearly had knowledge of his obligation to withhold taxes from wages and to remit those taxes to the State Tax Commission. Petitioner substantially complied with the withholding requirement, but failed to remit those trust funds to the Commission. Over the years that are the subject of this proceeding, the Petitioner withheld taxes for several employees for more than one hundred (100) paydays without making any effort to comply with the reporting or remitting requirements of the law. He also used those funds for an extended period of time. His knowledge of those requirements is demonstrated by his compliance with those requirements for numerous periods prior to his cancellation of the prior withholding tax license. The Commission therefore finds that the Petitioner had a conscious desire to avoid the reporting and remitting requirements of the law with which he knew he was obligated to comply. Accordingly, the Petitioner should be subject to a penalty of the greater of $$$$$ per period or 50% of the tax due for intent to evade the tax, pursuant to the provisions of 59‑1401(5)(a)(iii),U.C.A., as amended. In addition, pursuant to section 59‑1‑401(1), a penalty of the greater of $50 or 10% of the tax due on the withholding tax returns is sustained for failure to file the required tax returns, and an additional penalty of the greater of $50 or 10% of the tax due for failure to pay such tax within ninety (90) days of the due date of the return is also sustained.
DECISION AND ORDER
Based upon the foregoing, the Tax Commission finds and orders as follows:
1. The imposition of the additional tax as proposed by the Auditing Division is sustained.
2. The imposition of the $50 penalty for each failure to file an annual reconciliation is sustained.
3. The imposition of penalties are not sustained to either the failure to withhold at the proper rates in XXXXX, or to the amounts which have been determined to be due based upon the reclassification of XXXXX and XXXXX as employees.
4. The imposition of the 10% failure to file penalty and the additional 10% failure to pay penalty on the amounts which were withheld from the paychecks of the employees of Petitioner and not remitted to the Tax Commission are also sustained. However, the proposed "fraud with intent to evade the tax" penalty in an amount of the greater of $500 per period or 100% of the underpayment proposed by Respondent on the amounts withheld and not remitted is not sustained, but is reduced to the greater of $500 per period or 50% of the tax due for "intent to evade the tax."
5. The interest on the amounts due is to be adjusted to the extent such adjustment is required.
DATED this 21 day of September, 1994.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
Val Oveson Roger O. Tew
Joe B. Pacheco Alice Shearer
NOTICE: You have twenty (20) days after the date of a final order to file a Request for Reconsideration with the Commission. If you do not file a Request for Reconsideration with the Commission, you have thirty (30) days after the date of a final order to file a.) a Petition for Judicial Review in the Supreme Court, or b.) a Petition for Judicial Review by trial de novo in district court. (Utah Administrative Rule R861‑1‑5A(P) and Utah Code Ann. 59‑1601(1), 63‑46b‑13(1), 63‑46‑14(3)(a).)