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U.S. DEPARTMENT OF LABOR
Employment and Training Administration
Washington, D. C. 20210

CLASSIFICATION

UI

CORRESPONDENCE SYMBOL

TEURL

ISSUE DATE

April 12, 1996

RESCISSIONS

None

EXPIRATION DATE

April 30, 1997

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 inconsistent 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.

    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. 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. 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)(1), 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 defined 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 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) P9718. 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, Sections 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 subdivisions 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 "political subdivision" is a Federal law term; it is not affected by the State's use of that term.

    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

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.