[Federal Register Volume 61, Number 100 (Wednesday, May 22, 1996)]
[Notices]
[Pages 25690-25693]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12751]
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[[Page 25691]]
DEPARTMENT OF LABOR
Employment and Training Administration
Federal-State Unemployment Compensation Program: Unemployment
Insurance Program Letters Interpreting Federal Unemployment Insurance
Law
The Employment and Training Administration interprets Federal law
requirements pertaining to unemployment compensation as part of its
role in the administration of the Federal-State unemployment
compensation program. These interpretations are issued in Unemployment
Insurance Program Letters (UIPLs) to the State Employment Security
Agencies (SESAs). The UIPL described below is published in the Federal
Register in order to inform the public.
UIPL 14-96
Several States have requested guidance concerning the Federal
requirements for experience rating as they relate to Indian tribes. In
order to assure consistent treatment of Indian tribes by the States,
this UIPL sets forth the applicable Federal law and the Department of
Labor's interpretation of the law. This UIPL was developed with the
assistance and advice of the Internal Revenue Service.
Dated: May 16, 1996.
Timothy M. Barnicle,
Assistant Secretary of Labor.
Classification: UI
Correspondence Symbol: TEURL
Date: April 12, 1996.
Directive: Unemployment Insurance Program Letter No. 14-96.
To: All State Employment Security Agencies.
From: Mary Ann Wyrsch, Director, Unemployment Insurance Service.
Subject: Experience Rating of Indian Tribes.
1. Purpose. To advise States of the application of the
experience rating requirements of Federal law to Indian tribes.
2. References. Sections 501, 1402(a)(15), 3301-3310 (the Federal
Unemployment Tax Act (FUTA)), 7701(a), 7871, and 7873(a)(2) of the
Internal Revenue Code (IRC); 25 U.S.C. Sections 450b and 479;
Revenue Rulings 56-110, 59-354, 68-493 and 85-194; and Unemployment
Insurance Program Letters (UIPLs) 29-83, 29-83, Change 1, 12-87 and
24-89.
3. Background. It is the Department's position that the granting
of reimbursement status to Indian tribes liable for the Federal
unemployment tax is consistent with the experience rating
requirements of Section 3303(a)(1), FUTA. However, some States have
nevertheless granted such Indian tribes reimbursement status.
Although congressional action has been anticipated on this matter
for a considerable time, it does not appear to be forthcoming.
Therefore, the Department is issuing this UIPL to assure consistent
treatment of tribes for experience rating purposes. This UIPL also
contains a discussion concerning State jurisdiction over the tribes.
Rescissions: None.
Expiration Date: April 30, 1997.
Unless greater specificity is required, this UIPL will use the
term ``tribe'' to describe the Indian tribe, its tribal government
as well as other tribal governmental entities and tribal business
enterprises. Section 7701(a)(40)(A) of the IRC defines the term
``Indian tribal government'' to mean ``the governing body of any
tribe, band, community, village, or group of Indians, or (if
applicable) Alaska natives, which is determined by the Secretary [of
the Treasury], after consultation with the Secretary of the
Interior, to exercise governmental functions.'' Tribal governments,
usually called ``tribal councils,'' frequently operate business
enterprises. ``Tribe'' is not defined in the IRC. For purposes of
the Indian Self-Determination and Education Assistance Act, a tribe
is defined as ``any Indian tribe, band, nation or other organized
group or community * * * which is recognized as eligible for the
special programs and services provided by the United States to
Indians because of their status as Indians.'' 25 U.S.C.
Sec. 450b(e). For purposes of the Indian Reorganization Act, a
``tribe'' refers to ``any Indian tribe, organized band, pueblo, or
Indians residing on one reservation.'' 25 U.S.C. Sec. 479.
4. Federal Law Requirements. Section 3301, FUTA, imposes an
excise tax on every employer (as defined in Section 3306(a)(1),
FUTA) with ``respect to having individuals in his employ * * *'' To
encourage States to cover these services, Section 3302, FUTA,
provides for a ``normal'' and an ``additional'' credit against this
tax. Also, as described below, FUTA requires States to cover
services performed for certain entities which are not subject to the
FUTA tax and to offer such entities a reimbursement option.
As a condition of receiving the additional credit, Section
3303(a)(1), FUTA, requires that State law provide that ``no reduced
rate of contributions * * * is permitted to a person (or group of
persons) * * * except on the basis of his (or their) experience with
respect to unemployment or other factors bearing a direct relation
to unemployment risk.'' (Emphasis added.) Therefore, except as
explained below, if an entity is a ``person,'' that entity may be
assigned a reduced rate only on the basis of its experience or other
factors bearing a direct relation to unemployment risk (hereafter
``experience''). If a ``person'' is assigned a rate that is not
based on experience, the State's assignment of rates will conflict
with Federal law requirements and all employers in the State will
lose the additional credit against the FUTA tax.
To determine if an entity is a ``person,'' States may rely on
the entity's FUTA tax status. Section 3306(a)(12), FUTA, defines the
term ``employer'' as, in part, ``any person * * *.'' Only
``employers'' are liable for the FUTA tax (Section 3301, FUTA).
Thus, any entity determined by the IRS to be an employer subject to
and liable for the FUTA tax is a ``person'' which must be experience
rated.
However, since the term ``person'' is broader than the term
``employer,'' it is possible for an entity to be a ``person'' even
though it is not liable for the FUTA tax. One way this will happen
is if all the services performed for a ``person'' are excluded from
the definition of ``employment'' in Section 3306, FUTA. Two of these
exclusions are described in paragraphs (7) and (8) of Section
3306(c):
(7) service performed in the employ of a State, or any political
subdivision thereof, or any instrumentality of any one or more of
the foregoing which is wholly owned by one or more States or
political subdivisions; and any service performed in the employ of
any instrumentality of one or more States or political subdivisions
to the extent that the instrumentality is, with respect to such
service, immune under the Constitution of the United States from the
tax imposed by section 3301;
(8) service performed in the employ of a religious, charitable,
educational or other organization described in section 501(c)(3)
which is exempt from income tax under section 501(a).
Since these State and local governmental entities and nonprofit
organizations are not subject to the FUTA tax, the principal
incentive for requiring State unemployment compensation (UC)
coverage--the receipt of the tax credits against the FUTA tax for
the individual employer--is absent. Sections 3304(a)(6) and 3309,
FUTA, therefore, require, as a condition for all employers in a
State to receive credit against the FUTA tax, that the State cover
these services. These sections further require that States extend
the option to make ``payments (in lieu of contributions),'' commonly
called reimbursements, based on these services. The only way a
``person'' can qualify for reimbursing status under a State law
without conflicting with Federal law is by meeting one of these two
exclusions.
Providing reimbursement status is viewed by the Department as
assigning a zero rate to the ``person'' because no prospective
liability is created. (Similarly, assigning no rate is viewed as
assigning a zero rate.) Unless the ``person'' qualified for
reimbursement status as discussed in the preceding paragraph, a
conflict with Section 3303(a)(1), FUTA, would exist since the zero
rate would not be based on experience. In addition, such a zero rate
would not be based on the three years of experience immediately
preceding the computation date and ``persons'' would not receive
rates based on the same factors over the same period of time. (A
discussion of these experience rating requirements is found in UIPL
29-83 and its Change 1.)
5. Status of Tribes under Federal Law. It is well established
that the IRS and the courts consider tribes to be ``persons'' for
Federal tax purposes. The term ``person'' is define in Section
7701(a)(1), IRC, ``to mean and include an individual, a trust,
estate, partnership, association, company or corporation.'' IRS
Revenue Ruling 85-194 addressed whether an Indian tribal
[[Page 25692]]
government was a ``person.'' That ruling held that the definition of
``person'' in Section 7701(a)(1), IRC, ``is sufficiently broad to
include a governmental body.'' See Ohio v. Helvering, 292 U.S. 360
(1934). Therefore, the tribal government was a ``person.'' The fact
that tribes may perform governmental functions does not, therefore,
form a basis for excepting them from the definition of ``person.''
In fact, in cases where they are subject to the FUTA tax, they are
plainly ``persons'' under Federal law since only ``persons'' are
subject to this tax.
In Revenue Ruling 56-110, the IRS determined that a business
enterprise operated by a tribe is not an instrumentality wholly-
owned by the United States and, therefore, is liable for the FUTA
tax. Revenue Ruling 59-354 held that a tribal council is liable for
FUTA taxes for employees of the council and employees of tribal
council business enterprises. Revenue Ruling 68-493 held that
services performed by an Indian employee are not excepted from the
FUTA definition of employment merely because the Indian is a ward of
the United States.
Courts have upheld the IRS position that tribes are subject to
FUTA. See Matter of Cabazon Indian Casino, 57 B.R. 398 (Bankr. 9th
Cir. 1986), and Washoe Tribes v. United States, 79-2 U.S. Tax Cas.
(CCH) P97189. Also, Confederated Tribes of Warm Springs Reservation
v. Kurtz, 691 F.2d 878 (9th Cir. 1982), established that tribes are
liable for Federal excise taxes. Under Section 3301, FUTA, the FUTA
tax is specifically defined as an excise tax.
The FUTA liability of tribes is confirmed by the fact that two
special provisions were deemed necessary to exempt certain tribal
services from the FUTA tax. First, an amnesty provision was created
in 1986 to exempt service in the employ of ``a qualified Indian
entity'' from the FUTA tax for a specific period during which the
entity (that is, the tribe) was not covered by a State UC program.
See UIPL 12-87. Second, Section 1402(a)(15) and 7873(a)(2) were
added to the IRC in 1988 to exclude from the FUTA tax services
``performed in a fishing rights-related activity of an Indian tribe
by a member of such tribe for another member of such tribe or for a
qualified Indian entity.'' See UIPL 24-89.
Even though tribes perform governmental functions, this does not
mean that a tribe may be treated as a governmental entity for FUTA
purposes. In fact, in Section 7871, IRC, Congress has clearly
delineated those situations where a tribe may be treated as a State
for Federal tax purposes. These purposes do not include the FUTA
tax.\1\ The FUTA governmental exclusion in Section 3306(c)(7)
applies only to State governments or ``political subdividisons
thereof.'' In the attached correspondence, the IRS has confirmed
that, even where tribes are considered to be political subdivisions
or agencies of a State under State law, the tribes remain subject to
the FUTA tax in the same way as other private employers. (The IRS
further stated that tribes would likely not be allowed a credit
against the FUTA tax for any reimbursements made to a State's
unemployment fund.) A State may, for UC purposes, treat a tribe as a
Section 3306(c)(7), FUTA, entity only if the tribe is in fact such
an entity under Federal law. Merely designating a tribe as a
governmental entity under State UC law is not sufficient; the tribe
must be a Section 3306(c)(7) entity in all respects. The term
``polical subdivision'' is a Federal law term; it is not affected by
the State's use of that term.
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\1\ Section 7871 lists 17 different provisions/chapters of
Federal law, including those addressing charitable contributions,
accident and health plans, and bonds. Although Section 7871(a)(2)
provides that tribes will be treated as States for purposes of four
excise taxes, the FUTA tax is not mentioned. (Section 3301, FUTA,
describes the FUTA tax as an excise tax.) The legislative history of
Section 7871 is clear that the need for legislation arose because
``Indian tribal governments are not treated as State and local
governments.'' S. Rep. No. 646, 97th Cong. 2nd. Sess. 8 (1982).
Also, see Cabazon at 401.
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In sum, if a tribe is subject to the FUTA tax, it is a
``person.'' This tribe is not a governmental entity described in
Section 3306(c)(7) since such entities are exempt from the FUTA tax.
The State may not give this tribe reimbursable status and may assign
it a reduced rate only on the basis of its experience.
6. Status of Tribes under State Law--Jurisdictional Issues. The
provisions of FUTA relating to taxable services do not require a
State to cover these services for UC purposes. Instead, coverage is
encouraged by granting employers credit against the FUTA tax for
contributions paid on services covered under State law. Since States
have limited jurisdictional rights over tribes or activities on
reservations, State UC coverage has not always been extended to the
tribes. In some States, the continuation of coverage for tribal
services is conditioned on the tribe's payment of its UC benefit
costs. If tribes are not covered under State law, then they will not
be eligible for any credit against the FUTA tax.
A leading State court decision on this jurisdictional matter is
Employment Security Department v. the Cheyenne River Sioux Tribe,
119 N.W.2d 285 (S.D. 1963). In this case, South Dakota sought to
collect from a tribe contributions owed to the State's UC fund. The
Cheyenne Court noted that the tribal authority in certain areas
results in the existence of three forms of government within the
geographical confines of the State: the United States of America,
the State itself and Indian tribes. In concluding that the Cheyenne
River Sioux Tribe was immune from suit, the Court decided that
``unless Congress enacts a statute authorizing, or consenting to,
actions to enforce the claimed liability, the courts of this state
have no jurisdiction of the Tribe in this civil action.''
The United States Supreme Court has confirmed the States'
limited jurisdiction over tribes. In Bryan v. Itasca County, 426
U.S. 373, 96 S.Ct. 2102 (1976), the Court held that States may not
impose a tax, in this case a personal property tax, on Indians
living on reservations without the consent of Congress. In White
Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143, 100 S.Ct. 2578,
2583 (1980), the Court held that States could not impose taxes on a
non-tribal company operating on a reservation. The White Mountain
opinion provided a useful summary concerning the status of tribes:
The status of the tribes has been described as `` `an anomalous
one and of complex character,' '' for despite their partial
assimilation into American culture, the tribes have retained `` `a
semi-independent position . . . not as States, not as nations, not
as possessed of the full attributes of sovereignty, but as a
separate people, with the power of regulating their internal and
social relations, and thus far not brought under the laws of the
Union or the State within whose limits they resided.' '' [Citations
omitted.]
At least one State mandates UC coverage of tribes on the basis
that, through Section 3305(d), FUTA, Congress has provided States
with the authority to cover services on lands held in trust for the
tribes by the Federal government. That section provides that ``[n]o
person shall be relieved from compliance with a State unemployment
compensation law on the ground that services were performed on land
or premises owned, held, or possessed by the United States, and any
State shall have full jurisdiction and power to enforce the
provisions of such law to the same extent and with the same effect
as though such place were not owned, held, or possessed by the
United States.'' The Department has not, however, taken a position
on this.
In short, States have limited jurisdictional authority to impose
or collect a State UC tax on tribes. However, unless this tax is
imposed by the State and paid by the tribes, the tribes receive no
credit against the FUTA tax for which they are liable.
7. Summary. Although tribes may perform governmental activities,
this does not mean that they are not liable for the FUTA tax. In
fact, both the IRS and the courts have concluded that tribes are
``persons'' liable for the tax. For employers in a State to receive
the additional credit, the State may assign reduced rates to any
``person'' only on the basis of experience. If a State does not
assign a rate based on experience to a FUTA liable employer, this
experience requirement is not met. Only entities excluded from the
FUTA tax under Sections 3306(c) (7) and (8) qualify for
reimbursement status. As FUTA liable tribes are not among those
entities qualifying for the reimbursement option, they must be
assigned a reduced rate only on the basis of experience.
8. Action Required. State agencies should assure that, for
experience rating purposes,tribes are treated consistent with the
Federal law requirements described herein.
9. Inquiries. Please direct inquiries to the appropriate
Regional Office.
Attachment
Department of the Treasury
Internal Revenue Service
Washington, D.C. 20224
October 10, 1995.
Ms. Mary Ann Wyrsch,
Director, Unemployment Insurance Service, U.S. Department of Labor,
200 Constitution Avenue, N.W., Washington, D.C. 20210
Dear Ms. Wyrsch: This is in response to your letter of August
29, 1995, to Commissioner Richardson requesting our
[[Page 25693]]
views on the liability of Indian tribes under the Federal
Unemployment Tax Act (FUTA). Your letter was forwarded to this
office for reply.
You state that the Colorado Employment Security Act has amended
their definition of ``Political Subdivision,'' for purposes of the
Employment Security Act, to include an Indian tribe organized
pursuant to the Indian Reorganization Act of 1934. This amendment
confers on Indian tribes in Colorado the option of either paying
contributions to the State unemployment fund or reimbursing the
State account for the amount of benefits paid based upon service
with the Tribe. You question whether this amendment to Colorado law
and the fact that tribes have chosen the reimbursement option
changes the status of the tribes for purposes of determining the
amount of tax due under FUTA. As explained below, it is the position
of the Internal Revenue Service that Indian tribes are treated in
the same way as private employers. The amendment to Colorado law
does not change our position.
In addition you ask whether Indian tribes being treated as
political subdivisions of a State are exempt from FUTA. If tribes
are being treated as private employers, you also ask whether the
FUTA tax is reduced by any reimbursements made by the tribes. While
we are unable to comment directly on the Indian tribes in Colorado,
we can provide the following general information.
Section 3301 of the Internal Revenue Code imposes on every
employer a tax (the FUTA tax) on the total wages (as defined in
section 3306(b)) paid by him during the calendar year with respect
to employment (as defined in section 3306(c)). Thus, unless the
payments are excepted from the term ``wages'' or the services
performed by the employee are excepted from the term ``employment''
such payments will be subject to FUTA.
Section 3306(c)(7) provides an exception from the definition of
``employment,'' for purposes of FUTA, for service performed in the
employ of a State or political subdivision.
Section 3309 allows States to provide for unemployment coverage
for governmental organization under the ``direct reimbursement
method.'' Under the direct reimbursement method, a qualifying
organization is allowed to obtain state unemployment coverage for
its employees by agreeing to reimburse the State for unemployment
benefits that are attributable to services performed for the
organization. The reimbursement of benefits is in lieu of paying
state unemployment tax based on the experience rate of the
organization. This provision applies to service which is excluded
from the term ``employment'' by reason of section 3306(c)(7), which
is service performed in the employ of a State, or political
subdivision thereof.
It is the long-standing position of the Service that American
Indian tribes are not political subdivisions or agencies of a state
for federal employment tax purposes. For purposes of FUTA, Indian
tribes and their tribal activities are treated in the same way as
private employers. Although section 7871 of the Code provides that
an Indian tribal government is a State for certain enumerated
Internal Revenue Code purposes, these purposes do not include
federal employment taxes. Thus, service for a tribal government does
not qualify for the exception from the definition of ``employment''
under section 3306(c)(7). See Rev. Rul. 59-354, 1959-2 C.B. 24 and
Rev. Rul. 68-493, 1968-2 C.B. 426 (copies attached).
Section 3302(a)(1) of the Code provides that the taxpayer may,
to the extent provided in subsections (a) and (c), credit against
the tax imposed by section 3301, the amount of contributions paid by
the taxpayer into an unemployment fund maintained during the taxable
year under the unemployment compensation law of a State which is
certified as provided in section 3304 for the 12-month period ending
on October 31 of such year.
As stated above, for purposes of FUTA, Indian tribes and their
tribal activities are treated in the same way as private employers.
Thus, if a tribe is not contributing to a State unemployment fund,
it would be required to pay FUTA at the full rate. Because the
reimbursement option under section 3309 is not available to Indian
tribes, we have never addressed the question of whether
reimbursements made to a State unemployment fund by an Indian tribe
would reduce the amount of FUTA tax owed by the tribe. Section
3302(a) allows a credit for contributions paid by a taxpayer.
Section 3309 allows for reimbursements in lieu of contributions.
Given this language, it appears that Indian tribes would not be
allowed a credit for any reimbursements they made.
We hope this information is helpful. If we can be of further
assistance, please contact Jean M. Casey of my staff at (202) 622-
6040.
Sincerely yours,
Mary E. Oppenheimer,
Assistant Chief Counsel, Office of the Associate Chief Counsel
(Employee Benefits and Exempt Organizations).
[FR Doc. 96-12751 Filed 5-27-96; 8:45 am]
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