States Target Carriers on Driver Classification

Reclassification is a nationwide effort by the federal government and states to challenge the treatment of workers as independent contractors rather than employees. Even President Obama has called attention to this “problem” by stating that the federal government is losing vast sums because of misclassification. By treating workers as contractors rather than employees, businesses avoid the obligation to pay various taxes (e.g., FICA) and required participation in insurance programs (e.g., worker’s comp and unemployment). As a result, both the feds and states are auditing businesses, reclassifying contractors as employees, and making assessments to recover previously unpaid employee related taxes and charges, together with penalties and interest. Since trucking companies frequently use owner operators, who they classify as independent contractors, they are a target for these audits.

The state of Washington has been very aggressive in auditing trucking companies and reclassifying owner operator contractors as employees. These audits are conducted by the Washington Employment Security Department and focus on the specific terms and conditions of the equipment lease being used. If the equipment lease does not contain all of the correct (“magic”) words and provisions, then the owner-operator contractors are reclassified and an assessment made.

However, even if a carrier’s equipment lease may have been deficient for purposes of the audit period, it can be changed going forward. That is, a carrier may be required to pay an assessment for the past audit period, but is free to change its written equipment lease and operations to properly classify the owner operator drivers as contractors and thereby avoid reclassification in the future. Washington’s administrative rules specifically state what terms and conditions must be in an equipment lease and followed on a day to day basis in order for a carrier to properly classify its owner operators as contractors.

Similarly, the federal law is fairly well settled in regard to what is required to properly classify owner operators as contractors. The “tests” are known, although not always easy to apply. There is never a guaranty that the feds or states will accept a carrier’s classification of owner operators as contractors, and there is always a risk that they will reclassify a carrier’s contractors as employees. The only way to avoid all risk is to treat all workers as employees. However, if a carrier is willing to assume the risk of an audit and possible reclassification, then there are specific contractual terms and conditions and methods of operation that can be implemented to minimize that risk.

Washington Business and Occupation Taxes

Q:  My Oregon based motor carrier business received a notice from the State of Washington Department of Revenue saying that my business “may now have tax reporting responsibilities in Washington State” because of a new law expanding collection of  its Business and Occupation tax.  We do occasionally enter Washington to pick up and deliver freight, but have no terminal in Washington.  Am I subject to this new tax?

A:  The Washington State Legislature enacted tax package 2ESSB 6143 earlier this year, which expanded Washington State’s ability to collect Business and Occupation (“B&O”) tax.  Part of this bill removed the “physical presence” requirement and enacted an “economic nexus” evaluation to determine whether a business is subject to the Washington B&O tax.

However, this new evaluation affects only those subject to the B&O Tax because of service and royalty income, whether or not the business is located in Washington.  In order to be subjected to the new “economic nexus” standard, a business must have income from “apportionable activities” which include royalties, professional services and other service related activities as defined by Washington law (WAC 458-20-19402).

According to Washington law, “Trucking and Transportation” services are generally classified under the Urban or Motor Transportation Public Utility Tax classification (WAC 458-20-180 and WA Tax Classifications for Common Businesses).  Because most trucking and transportation services are outside of the scope of the new Washington legislation, the evaluation has not changed for most motor carriers based outside of Washington .

Of course, as with any law, the specific facts and circumstances of how and where a motor carrier operates and which types of services it offers will determine whether it is subject to this expanded B&O taxation from the State of Washington.

With that said, due to the current economic climate, states are reaching further than they have in the past to gather tax revenue.  Under current law, states are allowed to tax interstate motor carriers if there is an “economic nexus” with that state – a vague and all too often undefined term that allows states to collect taxes from businesses with only a slight connection to their state.  Recently, two states (Nebraska and New Mexico) have begun attempts to collect taxes from carriers that traverse its roads, but do no other business in the state.

The American Trucking Association has pressed for Congressional intervention on this issue.  House Resolution 1083 would prohibit state taxation of an out-of-state entity unless such entity has a physical presence in the taxing state.  However, there has been no action on this Bill since February of 2010. Until such a bill is passed, it will be necessary for all motor carriers to carefully evaluate what states they are subject to taxation in, or risk increased taxes, penalties, interest, or even seizure of company property.