BEFORE THE UTAH STATE TAX
COMMISSION
___________________________
XXXXX, INC., )
dba XXXXX, :
Petitioner, ) FINDINGS OF FACT,
: CONCLUSIONS
OF LAW AND
v. ) FINAL DECISION
:
AUDITING
DIVISION OF THE ) Appeal No. 92-1880
UTAH STATE TAX
COMMISSION :
) Account
No. XXXXX
Respondent. :
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission on XXXXX for a formal
hearing. Lisa L. Olpin, Administrative
Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner was
XXXXX XXXXX, president of XXXXX Inc. and XXXXX, an accountant for Petitioner. Present and representing Respondent was
XXXXX, Assistant Utah Attorney General.
Based
upon the testimony and evidence presented at the hearing, the Tax Commission
makes its findings of fact:
FINDINGS OF FACT
1. The tax in question is withholding tax.
2. The audit period spans XXXXX through XXXXX.
3. At issue in this matter is whether or not
Petitioner should have classified 82 of its workers as employees rather than
independent sub-contractors, thereby requiring Petitioner to have deducted
withholding tax on paychecks.
4. The Auditing Division determined that these
82 Petitioners were actually employees.
As such, Auditing assessed Petitioner $$$$$ in withholding taxes, $$$$$
in penalties and $$$$$ in interest.
Petitioner was then credited $$$$$ for withholding tax payments that
some of these workers reported back to the Tax Commission for the audit period.
5. As of the date of the hearing, Petitioner
owed a balance of $$$$$ which includes the penalty and interest assessments
above.
6. Petitioner is a drywall business. It bids on the hanging and finishing of
drywall in construction projects.
7. Petitioner retained a team of its own
employees to hang the drywall.
Sometimes these employees were persons Petitioner trained for the work. The employees were paid on an hourly basis.
8. Mr. XXXXX, president of XXXXX Inc., stated
that 60% of his work force were XXXXX employees. The remaining 40% were considered subcontractors. At issue is
whether or not these supposed subcontractors were truly independent contractors
or XXXXX employees.
9. Whenever Petitioner needed drywall workers
above and beyond its employees, it would contact drywallers by phone or
mail. Sometimes they would have already
called Petitioner looking for work.
10. Mr. XXXXX would then give these workers the
individual option of signing a statement requesting that they be treated as
independent contractors as many of them wanted to do.
11. These signed statements read as follows:
"I, hereby request from XXXXX, Inc., that I be treated as an independent
contractor and do not want FICA, federal or state taxes withheld from my income
earned. I agree that I will pay for my
own taxes, being self employed and will also agree not to apply for
unemployment compensation based on any income I may receive from you."
12. Petitioner told these workers where a
particular job was located and given a date to complete the dry wall. They worked their own hours.
13. They supplied their own tools and equipment,
including nails and screws. If they
wanted, they were able to purchase the nails and screws from Petitioner at a
reduced cost. They drove their own
trucks. Petitioner supplied only the
sheetrock and scaffolding.
14. Petitioner checked the quality of the work
performed and occasionally fired a worker for poor workmanship. If work was not done to Petitioner's
satisfaction or if a worker had abandoned a job, Petitioner would finish the
work and suffer any damages incurred.
Petitioner, as the general contractor, took full responsibility for the
quality of work.
15. Petitioner did not seek recourse from a
worker for walking off of a job or poor work because the worker usually did not
have the money to pay anyway.
Petitioner would just not hire the person(s) in the future.
16. Petitioner paid these classified independent
contractors on a weekly basis per job or per amount of square footage of
drywall installed.
17. Workers assigned out of state also received
a subsistence amount included in their pay.
While Petitioner provided lodging, most of these workers elected to
sleep in their trucks.
18. The workers worked in crews of two or
three. XXXXX employees worked apart
from the designated independent contractors.
If a lone worker was hired, Petitioner treated the worker as an
employee.
19. None of the workers had an investment
interest in Petitioner's corporation.
20. In some instances, a designated independent
contractor would bring helpers with him to do the work. Depending on the arrangement, Petitioner
would just pay the so-called independent contractor who would then pay his
helpers. Of the 82 workers in question
in the audit, however, all 82 were directly paid by Petitioner whether they
were designated "independent contractors' helpers" or not.
21. In addition to contesting the
re-classification of the 82 independent contractors to employee status in
general, Petitioner addressed three workers specifically: XXXXX, XXXXX and
XXXXX.
22. XXXXX, a drywall hanger, was engaged by
Petitioner to put drywall in a home.
Mr. XXXXX brought four helpers with him, namely his brother XXXXX,
XXXXX, XXXXX and an underage boy.
23. Mr. XXXXX testified that Mr. XXXXX
supervised these four helpers and paid them himself. On one occasion, Mr. XXXXX recalled paying XXXXX directly because
he was leaving the state.
24. The audit report shows that Petitioner paid
XXXXX $$$$$ directly in the 2nd and 3rd quarters of XXXXX.
25. Mr. XXXXX checked on Mr. XXXXX's work in
XXXXX once or twice a week. He was
concerned that Mr. XXXXX left his helpers unsupervised at times. If Mr. XXXXX wanted some work re-done,
sometimes Mr. XXXXX would do it and sometimes not.
26. At one point, Mr. XXXXX told Mr. XXXXX to
get rid of the underage helper for fear "they'd be in trouble if he got
hurt."
27. As described earlier, Petitioner provided
Mr. XXXXX all of the drywall, but none of the tools, equipment, nails or
screws. Neither did Petitioner control
the hours Mr. XXXXX worked.
28. Petitioner also specifically addressed the
re-classification of independent contractor XXXXX to employee status.
29. Mr. XXXXX, a carpenter, performed metal
framing for Petitioner in XXXXX, XXXXX and in Salt Lake City. Mr. XXXXX had his son help him with work. Petitioner, however, considered Mr. XXXXX an
independent contractor and paid only Mr. XXXXX and not the son for the work.
30. Lastly, Petitioner specifically challenged
the re-classification of independent contractor XXXXX to employee status.
31. Petitioner hired Mr. XXXXX as an
employee. Later, Mr. XXXXX left
Petitioner to work for XXXXX, an independent contractor. Mr. XXXXX trained Mr. XXXXX in drywall
installation.
32. Mr. XXXXX was then hired by Petitioner as an
independent contractor. Mr. XXXXX
worked for Petitioner with several of his own helpers.
33. Later, Mr. XXXXX left northern Utah for St.
George and Mr. XXXXX took over his account with Petitioner. At times, Mr. XXXXX had as many as twelve
helpers under him doing a job for Petitioner.
34. Petitioner paid Mr. XXXXX's helpers directly
according to the amount Mr. XXXXX instructed.
35. At times Mr. XXXXX let go his own helpers
who Petitioner thought were doing a good job.
Mr. XXXXX, however, felt he had no control over the situation as these workers
were Mr. XXXXX's helpers, not his own.
36. Mr. XXXXX also knew that Mr. XXXXX did not
have a contractor's license at the time.
37. State Tax Commission employee, XXXXX,
testified that she had spoken with Mr. XXXXX prior to the hearing date. He told her that he had to babysit his
workers because they were irresponsible at times. It is unclear, however, if Mr. XXXXX was referring to his
employees or his supposed independent contractors or both.
38. Further, the Auditing Division had
questionnaires that some of the 82 workers in question responded to. These questionnaires, however, were not
offered into evidence and are not a part of this record.
39. In closing, Petitioner argued that the 82
workers, and in particular Mr. XXXXX, Mr. XXXXX and Mr. XXXXX, are independent
contractors based upon Mr. XXXXX's testimony.
At the very least, Petitioner asked that the penalty amount be waived as
Mr. XXXXX acted reasonably in handling these workers as independent contractors
under the facts before him at the time.
40. The Auditing Division, on the other hand,
advised the Tax Commission to consider the 20 point criteria outlined by the
Internal Revenue Service at Revenue Rulings 87-41 in making its determination. Respondent contends that Petitioner has not
met its burden in showing that the workers in question are independent
contractors as opposed to employees.
CONCLUSIONS OF LAW
Applicable
Utah law is found at Utah Code Ann. Section 59-10-402
(1) which states the following:
"Each
employer making payment of wages shall deduct and withhold from wages an amount
to be determined by a commission rule which will, as closely as possible, pay
the income tax imposed by this chapter."
The
terms "employee" and "employer" are defined at Utah Code
Ann. Section 59-10-401(1,2) and are listed below:
(1)
"Employee" means and includes every individual performing services
for an employer, either within or without, or both within or without the state
of Utah, or any individual performing services within the state of Utah, the
performance of which services constitutes, establishes, and determines the
relationship between the parties as that of employer and employee, and includes
offices of corporations, individuals, including elected officials, performing
services for the United States Government or any agency or instrumentality
thereof, or the state of Utah or any county, city, municipality, or political
subdivision thereof.
(2)
"Employer" means a person or organization transacting business in or
deriving any income from sources within the state of Utah for whom an
individual performs or performed any services, of whatever nature, and who has
control of the payment of wages for such services, or is the officer, agent or
employee of the person or organization having control of the payment of
wages. It includes any officer or
department of state or federal government, or any political subdivision or
agency of the federal or state government, or any city organized under a
charter, or any political body not a subdivision or agency of the state.
The
20 common law factors in helping to determine whether or not an
employer-employee relationship exists is found in the Revenue Rulings at 87-41.
These same factors are also listed at Utah Code Ann. 35-4-22.3(3)(a-t) in
different verbiage. This entire section
is listed below:
(a)
whether the individual works his own schedule or is required to comply with
another person's instructions about when, where, and how work is to be
performed;
(b)
whether the individual uses his own methods and requires no specific training
from the purchaser, or is trained by an experienced employee working with him,
is required to take correspondence or other courses, attend meetings, and by
other methods indicates that the employer wants the services performed;
(c)
whether the individual's services are independent of the success or
continuation of a business or are merged into the business where success and
continuation of the business depends upon those services and the employer
coordinates work with the work of others;
(d)
whether the individual's services may be assigned to others or must be rendered
personally;
(e)
whether the individual has the right to hire, supervise, and pay other
assistants pursuant to a contract under which the individual is responsible
only for the attainment of a result or the individual hires, supervises, and
pays workers at the direction of the employer;
(f)
whether the individual was hired to do one job and has no continuous business
relationship with the person for whom the services are performed or continues
to work for the same person year after year;
(g)
whether the individual establishes his own time schedule or the employer sets
the time schedule;
(h)
whether the individual is free to work when and for whom he chooses, or is
required to devote full-time to the business of the employer, and is restricted
from doing other gainful work;
(i)
whether the individual uses his own office, desk, telephone, or other equipment
or is physically within the employer's direction and supervision;
(j)
whether the individual is free to perform services at his own pace or performs
services in the order or sequence set by the employer;
(k)
whether the individual submits no reports or is required to submit regular oral
or written reports to the employer;
(l)
whether the individual is paid by the job or on a straight commission or is
paid by the employer in regular amounts at stated intervals;
(m)
whether the individual accounts for his own expenses or is paid by the employer
for expenses;
(n)
whether the individual furnishes his own tools or is furnished tools and
materials by the employer;
(o)
whether the individual has a real, essential, and adequate investment in the business
or has a lack of investment and depends on the employer for such facilities;
(p)
whether the individual may realize a profit or suffer a loss as a result of
services performed or cannot realize a profit or loss by making good or poor
decisions;
(q)
whether the individual works for a number of persons or firms at the same time
or usually works for only one employer;
(r)
whether the individual has his own office and assistants, holds a business
license, is listed in business directories, maintains a business telephone, or
advertises in newspapers or does not make services available except through a
business in which he or she has no interest;
(s)
whether the individual may not be fired or discharged as long as he produces a
result which meets contract specifications or may be discharged at any time;
and
(t)
whether the individual agrees to complete a specific service, and is
responsible for its satisfaction or is legally obligated to perform the
service, or may terminate his or her relationship with the employer at any
time.
Penalties
are addressed at Utah Admin. RuleR865-9I-16(F):
"If
the employer fails to withhold the tax under Utah Code Ann. Section 59-10-406,
and thereafter, the income subject to withholding is reported and the resulting
tax is paid by the recipient, any tax required to be withheld shall not be
collected from the employer. However,
this rule does not relieve the employer from liability for penalties or
interest associated with
failure to withhold."
DECISION AND ORDER
In
this case, the testimony of Petitioner's witness, XXXXX, is uncontroverted as
Respondent did not present opposing evidence.
At issue then, is the proper application of the law to the facts.
Compelled
to consider the limited evidence given in light of relevant law, the Tax
Commission finds no alternative other than to accept on this occasion
Petitioner's classification of the 82 workers in question for the audit period
XXXXX-XXXXX as independent contractors.
Other Utah Supreme Court cases with similar fact patterns and like
conclusions are found at XXXXX XXXXX. v. Unemployment Compensation Division, 22
Utah 2d 338 (1969) and XXXXX dba XXXXX v. Department of Employment Security,
681 P. 2d 1273 (Utah 1984).
The
Commission, therefore, orders the Auditing Division to amend its audit to
reflect this determination. Petitioner
is not obligated to pay the tax, penalty or interest amounts as currently
assessed. It is so ordered.
DATED
this 11th day of August, 1993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val Oveson* Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer*
Commissioner Commissioner