Washington, D. C. 20210






December 31, 2002




August 31, 2003











Office of Workforce Security




Tax Rate Manipulation - State Unemployment Tax (SUTA) Dumping

  1. Purpose. To alert states to “SUTA Dumping” activities in industries that tend to have high turnover of staff and high unemployment insurance (UI) costs, and to recommend possible approaches to curb this activity

  2. References. Employee Leasing: Implications for State Unemployment Insurance Programs, Final Report, KRA Corporation, issued August 31, 1996; Effect of Employee Leasing on the State of Georgia Unemployment Insurance Trust Fund (UTF), Final Audit Report No. 03-98-007-03-315, Office of Inspector General (OIG), issued December 9, 1998.

  3. Background. "SUTA Dumping" is a new term for an old activity that some employers have used to avoid high UI tax rates. Two types of SUTA Dumping transactions are discussed below:

    1. Purchased Shell Transactions. Company A, which is just starting in business, purchases an existing business that has a low/minimum tax rate. The low/minimum tax rate is transferred to Company A under state laws dealing with employer succession and transfer of experience. Once the experience is transferred and a low/minimum rate established, Company A begins operations.

    2. Affiliated Shell Transactions. An already established and operating company forms a number of additional corporations, obtains a UI account number for each, reports wages for a small number of individuals and pays state UI taxes on those wages until each additional corporation earns a minimum tax rate. Then the major portion of the original company’s employees is moved to a corporation with a minimum tax rate allowing it to effectively “dump” the higher tax rate earned by the original company and maintain a low UI tax rate.

    This type of UI tax rate manipulation, or “SUTA Dumping,” was documented in a study completed in August 1996, by KRA Corporation. The study, funded by the U.S. Department of Labor (Department), was entitled, Employee Leasing: Implications for State Unemployment Insurance Programs. It was again documented in October 1998 in the Department of Labor, OIG, Final Audit Report No. 03-98-007-03-315: Effect of Employee Leasing on the State of Georgia Unemployment Insurance Trust Fund.

    Both the KRA study and the OIG audit concluded that such manipulative activity could result in a loss of state UI tax revenue. This loss of revenue translates into a socialization of costs as all employers may pay increased taxes to offset the loss in unemployment funds. Both reports also concluded that these types of transactions could occur in industries other than employee leasing.

    The Department recently learned that “SUTA Dumping” has been detected in other industries that tend to have high turnover of staff and high UI costs, including temporary help, construction, and service organizations such as the hospitality industry. The Department has also learned that certain advisory companies are promoting this type of activity as a way of reducing expenses and increasing profits.

  4. Discussion. “SUTA Dumping” compromises experience rating systems by eliminating the incentive for employers to keep employees working and returning claimants to work as soon as possible, and unfairly shifts costs to other employers. In order to maintain the integrity of their experience rating systems and unemployment funds, states should promote legislation to deter UI tax rate manipulation schemes, ensure they are detected early, and immediately correct the problem when found.

    Examples that deter the use of “Affiliated Shell Transactions” can currently be found in several state laws:

    While California law makes the determination that the same employer is in existence and therefore maintains the same tax rate, Delaware and Texas require a transfer of experience when there is a continuity of ownership and management from the predecessor to the successor companies. Both of these approaches deter owners of a company that have formed additional companies, owned by basically the same individuals, from transferring all their employees into the company with the lowest tax rate and dumping the higher tax rate.

    Examples of provisions that may help deter “Purchased Shell Transactions” can also be found in state laws.

    In addition to the above, the Department recommends that, instead of simply correcting the files when discovered, states amend their laws to allow the imposition of penalties on companies found to be illegally manipulating tax rates. For example, state law could require assigning the maximum tax rate under state law for a specified period of time. Such a penalty could also be imposed on advisory firms promoting illegal schemes. If it is found to be a serious violation of law, a state may wish to consider criminal charges.

  5. Action Required. State Administrators are requested to provide copies of this advisory to the appropriate staff.

  6. Inquiries. Questions should be directed to the appropriate Regional Office.