Combating SUTA Dumping


D. Larry Crumbley, Ph.D., CPA, Cr.FA, MFFA, FCPA

Fred R. Gamin, Esquire


We Come to You!


Some tax shelter strategies pushed by major public accounting firms involve avoiding unemployment insurance taxes (e.g., SUTA dumping).


Essentially, SUTA dumping is a tax evasion plan used by some employers to lower their UI tax rate in order to avoid paying higher UI taxes. By engaging in tax rate manipulation those employers pass their UI tax liability to the other employers in the state. The SUTA Dumping Prevention Act of 2004 was signed into law on August 9, 2004. States were required by January 1, 2006, to (1) prohibit practices that allow employers to pay lower state unemployment taxes than their unemployment experience otherwise allows, (2) develop procedures to detect such schemes, and (3) impose penalties on employers and financial advisers for knowingly violating or trying to violate the state laws. Essentially, the law requires experience rating to be transferred when employees move from one business unit to another owned or controlled by the same employer.


Although SUTA dumping started at least a decade ago, some CPA firms and advisers began in the late 1990s to advise clients to transfer employees from one entity that has experienced high layoffs to a new entity with little or no layoff history. Eventually, the old entity could be eliminated. One CPA firm's sales pitch suggested "state unemployment tax savings between $6.4 to $7.2 million over the next five years."


SUTA dumping losses have been huge. California estimated its 2003 losses at $100 million. Michigan estimates its losses at $60 million to $90 million a year, and Colorado estimates losses in excess of $40 million. One company, Kelly Services, would have saved $30 million annually by engaging in SUTA dumping.1 The 2004 act deterred some of the SUTA dumpers, but "cases are getting bigger and harder," says David L. Clegg, deputy chair of the North Carolina Employment Security Commission.2 Carl T. Camden, president and CEO of Kelly Services, says that some companies are turning to employee-leasing firms to avoid SUTA taxes and some are forming separate corporations for each of its deals.3 Kelly Services Vice President Matt Harvill is given credit for helping outlaw that practice by giving a 90-minute presentation to a half-dozen Labor Department officials in Washington in February 2002, explaining how companies were evading unemployment taxes.4


The state of North Carolina has been out front in cracking down on SUTA dumping. In May 2003, North Carolina became the first state to make the practice a felony, carrying a presumptive sentence of six months incarceration along with harsh civil penalties. North Carolina recovered more than $9 million in several antidumping actions and had more than 200 other suits by October 2005.5 Recently, North Carolina settled an antidumping claim for more than $8 million.


Dr. Crumbley and/ or Fred Gamin (or both) can present a one-day seminar on how to combat SUTA dumping. See a more complete article at attachment which appeared in State Tax Notes. Contact Dr. Crumbley.




1 "Many Bills Falling Short at Protecting State Trust Funds, Workers, and Employers," National Employment Law Project.


2 A. B. Crenshaw, "Unemployment Taxes Evaded,", June 15, 2005.

3 Ibid.

4 Michael Schroeder, "Kelly Services Fights to Close Costly Tax Loophole," The Wall Street Journal, Aug. 4, 2004.

5 Greenberg Trauring LLP, "State Anti-SUTA Dumping Legislation and Enforcement Proceedings on the Rise," GT Alert, October 2005.




Updated: June 26, 2006