[Congressional Record Volume 144, Number 41 (Thursday, April 2, 1998)]
[Senate]
[Pages S3138-S3139]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. MACK (for himself, Mr. Kerry, Mr. D'Amato, Mrs. Feinstein, 
        Mr. Bond, Ms. Moseley-Braun, Mr. Coverdell, Mrs. Boxer, Mr. 
        Gregg, Mr. Kennedy, Mr. Thurmond, Mr. Robb, Mr. Grams, Mr. 
        Bumpers, Mr. Coats, Mr. Dodd, Mr. Inhofe, Mr. Inouye, Mr. 
        Santorum, Mr. Durbin, Ms. Snowe, Mr. Wyden, and Mr. Hollings):
  S. 1924. A bill to restore the standards used for determining whether 
technical workers are not employees as in effect before the Tax Reform 
Act of 1986; to the Committee on Finance.

[[Page S3139]]

               the technical workers fairness act of 1998

  Mr. MACK. Mr. President, today Senator Kerry and I introduce the 
Technical Workers Fairness Act of 1998. This bill would repeal Section 
1706 of the 1986 Tax Reform Act, something that is long overdue and is 
now supported by a strong bipartisan consensus.
  Section 1706 added a new subsection (d) to Section 530 of the Revenue 
Act of 1978. For the class of businesses known as ``technical services 
firms'' who provide technical services to their customers, Section 1706 
removed the Section 530 employment tax safe harbors that otherwise 
apply to all other types of businesses that use the services of 
independent contractors. These Section 530 safe harbors were enacted by 
Congress in 1978 to protect business taxpayers, especially small 
businesses, from arbitrary IRS decisions interpreting the common law 
employment test in employment tax audits.
  Yet Section 1706 leaves one group of taxpayers back in the pre-
Section 530 days. As a result of Section 1706, if a technical services 
firm hires, as an independent contractor, a computer programmer, 
systems analyst, software engineer, or similarly-skilled worker who 
will perform services for that firm's customers, then the technical 
services firm--which is operating in a so-called ``three-party'' 
arrangement--must prove to the IRS that this worker is an independent 
contractor under the centuries-old common law employment test that 
Congress found so troublesome in 1978. Even if the firm can show that 
it has a reasonable basis for treating the worker as an independent 
contractor--for instance, if its past treatment of this worker as an 
independent contractor was approved by the IRS in prior IRS audits, or 
its treatment is consistent with industry practice or a relevant court 
ruling, all of which constitute a ``safe harbor'' under Section 530--
none of these factors is relevant because of the enactment of Section 
1706.
  The harm caused to the technical services industry and its workers by 
Section 1706 is more than theoretical. Technical services firms which 
use independent contractors--even if they act in good faith--can be 
severely penalized by the IRS and forced to pay ``unpaid'' employment 
taxes even though the contractors have already paid these same taxes in 
full. In fact, some IRS auditors have used Section 1706 to claim that 
even incorporated independent contractors are not legitimate. Left with 
only the common law employment test to demonstrate a worker's status to 
the IRS, many technical services firms will not hire any independent 
contractors in order to avoid tempting an IRS audit.
  In 1991, the Treasury Department issued a 100-page study of Section 
1706, as required by Congress. The Treasury Study found that tax 
compliance is actually better-than-average among technical services 
workers compared to other contractors in other industries. It also 
found the scope of Section 1706 was ``difficult to justify on equity or 
other policy considerations.'' Further, Section 1706 is the only 
occasion since the enactment of Section 530 that Congress has ever cut 
back on the safe harbor protections in Section 530. In fact, in 
response to concerns that IRS decisions in independent contractor 
audits were too often arbitrary and unpredictable, in the Small 
Business Job Protection Act of 1996 Congress expanded the Section 530 
protections and even shifted the burden of proof from the taxpayer to 
the IRS. More recently, the Department of Labor's Bureau of Labor 
Statistics found that many high-tech professionals are actually being 
forced to work as employees when their preference is to be independent 
contractors.
  It is time to repeal Section 1706 and end the discrimination against 
this one industry.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1924

         Be it enacted by the Senate and House of Representatives 
     of the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Technical Workers Fairness 
     Act of 1998''.

     SEC. 2. RESTORATION OF STANDARDS FOR DETERMINING WHETHER 
                   TECHNICAL WORKERS ARE NOT EMPLOYEES.

       (a) Repeal of Section 530(d) of the Revenue Act of 1978.--
     Section 530(d) of the Revenue Act of 1978 (as added by 
     section 1706 of the Tax Reform Act of 1986) is repealed.
       (b) Effective Date.--The amendment made by subsection (c) 
     shall apply to periods ending after the date of enactment of 
     this Act.

  Mr. KERRY. Mr. President, I join Senator Mack in supporting his 
legislation to repeal Section 1706 of the 1986 Tax Reform Act. We must 
take this opportunity to repeal an unfair section of employment tax law 
which singles out only the computer and high-technology industry and 
makes it difficult for firms in that industry to retain the services of 
self-employed contractors.
  For many years, the common law test used to classify a worker as an 
employee or an independent contractor for employment tax purposes 
lacked precision and predictability. In 1978, in Section 530 of the 
1978 Revenue Act, Congress acted to allow taxpayers, as an alternative 
to the common law test, to use a ``reasonable basis'' safe haven test 
to classify a worker. However, in 1986, Congress enacted Section 1706 
which eliminated all Section 530 protections from only the technical 
services industry, and only in so-called ``three party situations'' in 
that industry in which a worker is paid by a technical service firm to 
perform services for a customer.
  I have heard from a number of computer consultants in Massachusetts 
who believe this unfairly discriminates against the computer consulting 
industry and seriously impairs the ability of legitimate self-employed 
computer consultants to work effectively in the marketplace. Many firms 
in Massachusetts will not use the services of valid self-employed 
contractors because they believe doing so could attract an Internal 
Revenue Service audit and potentially subject the companies to 
penalties or back tax liabilities.
  For many years, along with many of my colleagues in the Senate, I 
have worked unsuccessfully to develop and enact a new definition of 
``leased employee.'' The legislation introduced by Senator Mack today 
is another effort to resolve this problem; it will repeal Section 1706 
and thereby renew the ``reasonable basis'' safe haven test to classify 
workers in the computer consultant industry. A 1991 Treasury Department 
report stated that the tax compliance rates of computer consultants 
were somewhat better than those of other workers who are classified as 
independent contractors. That study also found that the treatment of 
technical service workers as independent contractors actually 
``increases tax revenue'' which ``tends to offset'' any revenue loss 
that might result from any noncompliance by such individuals ``because 
direct compensation to independent contractors is substituted for tax 
favored employee fringe benefits.''
  Repealing Section 1706 will allow companies to hire computer 
consultants without fearing a negative ruling from the IRS. We should 
take this step this year, and I look forward to working with Senator 
Mack to gain Congressional passage of this legislation.
                                 ______