SUTA (State Unemployment Tax Act) Dumping refers to tax evasion schemes where an employer paying high unemployment insurance (UI) premiums attempt to shift their payroll and employees to a company with a lower tax rate, thereby paying less unemployment insurance premiums. Section 8-76-104 of the Colorado Employment Security Act (CESA), details the civil and criminal penalties that could be imposed for SUTA Dumping violations.
The State Unemployment Tax Act (SUTA) prohibits tax manipulation schemes. There are several variations of the schemes employed, however, the most common are Affiliated Shell Transaction and Purchased Shell Transaction.
Affiliated Shell Transaction
A new corporation is registered, in which a small amount of payroll is reported each year until a low UI rate is attained. Once the low rate is attained, a large amount of payroll from a related company, that has a higher rate, is transferred.
Established Company A's UI rate is 10% in 2010. The company forms a subsidiary, Company B, in that same year, solely to obtain a lower rate. Company B is assigned an UI account number with a rate of 4%. Company B continues to report payroll until the rate has been reduced to 1%. After the rate has been suitably reduced, Company A moves all of the employees to Company B.
This is a violation of Section 8-76-104, because the employer transferred its business to another, wherein all employees, at the time of transfer, were under substantially common ownership, management, or control.
Purchased Shell Transaction
A business with a large payroll and a high UI tax rate purchases a company with a low UI rate and transfers its payroll to the purchased entity.
Company A has a large payroll. The company rate increased to 7.72% due to benefit charges. Given the rate increase, Company A purchases Company B, which has a rate of 2.52%, the purchase was made solely to transfer the large payroll and employees from Company A to avoid payment of unemployment insurance premiums at the higher rate.
This is a violation of Section 8-76-104, because the employer purchased a company with a lower rate, solely to transfer the large payroll and employees and, thereby, pay a lesser amount in unemployment insurance premiums.
Under the experience rating system, employers are assigned premium rates based on a number of factors including the amount of money already paid and unemployment benefits payments made to former employees. When an employer attempts to avoid paying premiums at a rate appropriate to that experience, they shift the burden onto all employers in the state.
SUTA Dumping is harmful for the following reasons:
- Undermines the integrity of the Unemployment Insurance system which could potentially cost the UI Trust Fund millions of dollars each year.
- Adversely affects premium rates for all employers. When some employers avoid contributing the correct amount of premiums to the UI Trust fund, other employers are burdened with higher rates, which results in an uneven playing field.
In accordance with CESA section 8-76-104, penalties are imposed when individuals "knowingly violate or attempt to violate" or "knowingly advise another person to violate the law as follows:
The Division may assign an employer the highest contribution rate assignable for the year in which the violation was attempted or occurred, as well as the next three years.
If the person knowingly advises another person in a way that results in a violation of SUTA Dumping laws, that person may be subject to a civil fine of not more than $5,000.
In addition to any penalty imposed, any violation may be prosecuted as a Class 1 misdemeanor pursuant to section 18-1.3-501 of the Colorado Revised Statutes.
You are an integral part of the Colorado Department of Labor and Employment's effort to combat fraud. Therefore, if you think an employer is engaging in SUTA dumping activities, you may file a written complaint by completing the form below:
The information provided is treated as confidential and is not typically shared with the employer. In addition, the specific outcome or results of the investigation may not be shared with the reporting party, as the employer's information must be held confidential.