Crew One Productions, Inc. v. State

• Decision Date: 25 February 2004
• Docket Number: No. M2003-00585-COA-R3-CV.,M2003-00585-COA-R3-CV.
• Citation: 149 S.W.3d 89
• Parties: CREW ONE PRODUCTIONS, INC. v. STATE of Tennessee.
• Court: Tennessee Court of Appeals

149 S.W.3d 89

CREW ONE PRODUCTIONS, INC. v. STATE of Tennessee.

No. M2003-00585-COA-R3-CV.

Court of Appeals of Tennessee, at Nashville.

November 5, 2003 Session.

February 25, 2004.

Application for Permission to Appeal Denied by Supreme Court September 13, 2004.

Paul G. Summers, Attorney General and Reporter, Michael E. Moore, Solicitor General and Heather C. Ross, Senior Counsel, for the appellant, State of Tennessee.

Willis Jackson, Knoxville, Tennessee, for the appellee, Crew One Productions, Inc.

OPINION

DAVID R. FARMER, J., delivered the opinion of the court, in which ALAN E. HIGHERS, J., and HOLLY M. KIRBY, J., joined.

This is an employment tax case. The State of Tennessee appeals the determination of the Tennessee Claims Commission that Crew One Productions is not liable for Tennessee employment tax by virtue of a federal safe harbor provision known as section 530. We reverse, holding Tennessee is not bound by the federal safe harbor provision.

Crew One Productions, Inc. ("Crew One") coordinates technical staffing for concert and entertainment events in Chattanooga and Nashville, Tennessee, and Atlanta, Georgia. In 1998, the Tennessee Department of Labor and Workforce Development ("DLWD") conducted an audit of Crew One to determine Crew One's compliance with Tennessee's Employment Security Law. DLWD initially limited its audit to 1998, the year Crew One indicated it had begun to employ people in Tennessee. The DLWD determined Crew One' stage hands were employees and not independent contractors, and that Crew One accordingly was liable for Tennessee state employment taxes. The DLWD assessed taxes of $9,409.43.

Crew One requested a redetermination. It argued that it had obtained section 530 relief from federal employment taxes pursuant to the Federal Revenue Act of 1978, and was entitled to a parallel exemption from state employment taxes. DLWD determined that the federal section 503 provision did not bind the state. Upon further investigation, DLWD discovered that Crew One had begun employing personnel in Tennessee in 1995. DLWD accordingly determined that Crew One was liable for past employment taxes, plus interest, for the years 1995 through 1999. This totaled $48,164.53. The DLWD continues to assess Crew One for employment taxes.

On May 2, 2000, Crew One filed a complaint for recovery of state employment taxes and determination of liability in the Tennessee Claims Commission. Crew One initially requested a factual determination that the workers at issue were independent contractors. The State contends that Crew One withdrew this request, and that the parties stipulated that the only issue before the Commission was whether section 530 applies to Tennessee state taxes. Crew One submits that it did not stipulate that its workers were not independent contractors.

Following a trial on January 9, 2003, the claims commission found in favor of Crew One. The Commission interpreted Tennessee Code Annotated § 50-7-104(b) as requiring the state to apply federal tax law. It accordingly held Crew One was not liable for Tennessee state employment tax. The commissioner thus entered judgment for Crew One, ordering the State to return all funds paid under protest by Crew One and awarding Crew One post judgment interest of ten percent. The State now appeals.

Issue Presented

The parties present the following issue for review by this Court:

Whether the Tennessee Claims Commission erred in holding that the State is required under Tenn.Code Ann. § 50-7-104(b) to relieve an employer from state employment tax liability if the employer has obtained Section 530 relief from federal employment tax liability.

Standard of Review

Our review of a direct appeal from the claims commission is governed by the Tennessee Rules of Appellate Procedure. Tenn.Code Ann. § 9-8-403(a)(1) (1999); Beare Co. v. Tennessee, 814 S.W.2d 715, 717 (Tenn.1991). The issue presented in this appeal is an issue of law. Thus, our review is de novo with no presumption of correctness afforded to the trial court. Guy v. Mut. of Omaha Ins. Co., 79 S.W.3d 528, 534 (Tenn.2002).

Section 530

Section 530 is a safe harbor provision found at 26 U.S.C. § 3401 Note.¹ Section 530 protects an employer from employment tax liability resulting from retroactive reclassification of its workers as employees by the IRS where the employer had a reasonable basis to treat its workers as independent contractors. Thus, even where a worker may be determined to be an employee under the common law test, if the employer had a reasonable basis to treat the worker as an independent contractor, section 530 shields the taxpayer from federal employment tax liability for those tax periods. H.R. Conf. Rep. No. 100-1104, vol. II (1988). The section provides:

(a) Termination of certain employment tax liability. —

(1) In general. — If —

(A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and

(B) in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer's treatment of such individual as not being an employee, then for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.

(2) Statutory standards providing one method of satisfying the requirements of paragraph (1). — For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer's treatment of such individual for such period was in reasonable reliance on any of the following:

(A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer;

(B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or

(C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged.

(3) Consistency required in the case of prior tax treatment. — Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 1978, if the taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977.

(4) Refund or credit of overpayment. — If refund or credit of any overpayment of an employment tax resulting from the application of paragraph (1) is not barred on the date of the enactment of this Act [Nov. 6, 1978] by any law or rule of law, the period for filing a claim for refund or credit of such overpayment (to the extent attributable to the application of paragraph (1)) shall not expire before the date 1 year after the date of the enactment of this Act [Nov. 6, 1978].

(b) Prohibition against regulations and rulings on employment status. — No regulation or Revenue Ruling shall be published on or after the date of the enactment of this Act [Nov. 6, 1978] and before the effective date of any law hereafter enacted clarifying the employment status of individuals for purposes of the employment taxes by the Department of the Treasury (including the Internal Revenue Service) with respect to the employment status of any individual for purposes of the employment taxes.

(c) Definitions. — For purposes of this section —

(1) Employment tax. — The term `employment tax' means any tax imposed by subtitle C of the Internal Revenue Code of 1986 [formerly I.R.C. 1954, section 3101 et seq. of this title].

(2) Employment status. — The term `employment status' means the status of an individual, under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).

(d) Exception. — This section shall not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work.

(e) Special rules for application of section. —

(1) Notice of availability of section. — An officer or employee of the Internal Revenue Service shall, before or at the commencement of any audit inquiry relating to the employment status of one or more individuals who perform services for the taxpayer, provide the taxpayer with a written notice of the provisions of this section.

(2) Rules relating to statutory standards. — For purposes of subsection (a)(2) —

(A) a taxpayer may not rely on an audit commenced after December 31, 1996, for purposes of subparagraph (B) thereof unless such audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer,

(B) in no event shall the significant segment requirement of subparagraph (C) thereof be construed to require a reasonable showing of the practice of more than 25 percent of the industry (determined by not taking into account the taxpayer), and

(C) in applying the long-standing recognized practice requirement of subparagraph (C) thereof —

(i) such requirement shall not be construed as requiring the practice to have continued for more than 10 years, and

(ii) a practice shall not fail to be treated as long-standing merely...