Federal-State Unemployment Compensation Program: Unemployment Insurance Program Letters Interpreting Federal Unemployment Insurance Law

[[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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