Transcript of December 20, 2004, Public Meeting and Workshop
Transcription of the December 20, 2004, Public Meeting and Workshop, held pursuant to NRS 233B.061, to elicit comments from the general public and all interested parties on a proposed temporary regulation requiring remuneration paid for services rendered by members and managers of Limited-Liability Companies or partners of Limited-Liability Partnerships and Limited-Liability Limited Partnerships be reportable to the Unemployment Compensation Program and subject to contributions (tax).
Jones:Ready to begin? Good morning. I’d like to call this meeting to order. I’d first like to verify in Southern Nevada, can you hear us?
So. Nev.:Yes, we can.
Susich:I think they said yes.
So. Nev:Yes, we can.
Jones:Okay, great, thank you. I’d like to call this meeting to order. Good morning and welcome. My name is Cynthia Jones. I’m the administrator of the Department of Employment, Training and Rehabilitation. Employment Security Division. With me today is Mr. Tom Susich, legal counsel to the Division. The Employment Security Division of the Department of Employment, Training and Rehabilitation is conducting this public meeting and workshop pursuant to NRS 233B.061 to elicit comments from the general public and all interested parties regarding the adoption of a proposed temporary regulation that would establish the requirement that remuneration received for services rendered by members, managers and partners of Limited Liability Companies, Limited Liability Partnerships and Limited Liability Limited Partnerships be reportable to the Unemployment Compensation Program and subject to contributions or tax. Notice of this meeting was provided in compliance with NRS 244.020 and was mailed to all interested parties listed on the Employment Security Division mailing list. Notice of the meeting was posted at the principal office of the Employment Security Division in Carson City, Nevada, as well as numerous offices throughout the state. In addition, the notice was submitted to the Legislative Counsel Bureau, the Nevada State Library and all county libraries in the State and is posted on the websites of the Nevada Department of Employment, Training and Rehabilitation and the Legislative Counsel Bureau. An open public meeting was conducted on December 3, 2004, to elicit comments from small businesses and the general public on the proposed regulation pursuant to NRS 233B.0608 in order to prepare a Small Business Impact Statement in accordance with NRS 233B.0609. The Small Business Impact Statement has been prepared and has been posted on the Division’s website and is available at the hearing today. Written responses to questions posed at the meeting have been posted on the Division’s website and are available at today’s meeting as well. I would like to now turn over the workshop to Mr. Tom Susich who will provide an overview of the proposed regulation, after which the floor will be opened for discussion and public comment.
Susich:Thank you. My name is Tom Susich and I am an attorney who works for the Nevada Employment Security Division. Closer?
Jones:Yes.
Susich:Okay. Thank you. What I was asked to do by the Division some months ago is to work with the contributions office to examine the way limited liability entities are treated in comparison with other entities in the State of Nevada. And one of the things that became apparent was that limited liability entities, because of the way that they are reported for internal revenue purposes, were being treated somewhat differently than other entities in Nevada. And our concern was that we wanted a level playing field. We wanted everyone to be treated equally, regardless of the entity that was chosen by the business community for the business activities of that entity. So, we examined it. One of the things that we determined is that in some cases, members of limited liability entities are utilized as employees by those entities. And they are compensated for services which they perform for the entities. Our concern was that those individuals, like officers of a corporation, are employees of those entities, and therefore they should have the protection of unemployment insurance, like all employees in the State of Nevada. One thing we wanted to make clear though, is that we are not concerned about the activities of persons outside the State of Nevada. So, merely because a limited liability entity is registered in this state, or exists in this state, does not mean that that entity has to report employees. We are concerned about people that work in the State of Nevada and receive compensation or remuneration for services performed in the State of Nevada. And therefore, a company that just simply is on the books here does not have to report employees unless services are being performed here. At the meeting on December 3, 2004, various questions were asked by members of the public and they were very good questions. And we’ve attempted to respond to those questions in writing which I believe has been posted on the web and we also have copies of those responses available here today. I’m not going to go through all of those responses now. I assume that you have had an opportunity to review those and if there are any questions regarding those responses, we would be happy to field those questions today. If we are satisfied that we have sufficient information concerning this proposed regulation after today’s meeting, we’ll move toward adoption of a regulation in the near future and I can’t remember the date. It’s the 7th of January?
Jones:Yes.
Susich:January 7th. If, however, additional questions arise which require more review, then we will conduct further workshops as are necessary to make sure that this is a proper and fair regulation. So, with that general overview, I think I am prepared to field any questions that the public might have. Do you want to start here in Carson City?
Jones:Yeah. I’d like to open the floor to comment here in Carson City. Do we have anyone who would like to make comment?
Turner:My question is, do you want questions or do you want comments?
Jones:Both.
Turner:Okay. If I may? Thank you. My name is David Turner. I am a Certified Public Accountant. And today I am here representing both the Nevada Society of Certified Public Accountants, I serve on their tax committee, and the Nevada Taxpayers Association. I am a past chairman of its board and serve on its executive committee. Plus, I am in private practice as a Certified Public Accountant and I do business in the form of an LLC. And, I have another member of that LLC. I guess, the first comment I have is your regulation does not distinguish between single member LLCs, which for federal income tax purposes are not recognized. A single member LLC engaged in a trade or business would file a Schedule C as a sole proprietor for federal income tax purposes. And are they covered. My second issue is that multi-member LLCs are, by default, they can elect otherwise, treated as partnerships for federal income tax purposes. If they elect otherwise, they are treated as a corporation. And assuming the members qualify, they could be either a C or an S corporation. That’s by just filing a form and checking a box with the Internal Revenue Service. That’s a very different scheme of taxation than what existed before the advent of limited liability companies. Prior to that time, many entities were formed as limited partnerships. And, to achieve that status they needed to have a general partner. And those entities, in trying to limit liability, were put through a variety of tests by the Internal Revenue Service as to whether they more resembled a corporation than a partnership. And if they did, they were treated as a corporation for all purposes. With the advent of limited liability companies, and limited liability partnerships, and you checked the box which the Internal Revenue Service promulgated, they can now choose if they want to be a partnership, which is the default, or a corporation. And, once they make that choice, they are in all respects treated under the laws applicable to corporations if they choose corporations. Or if they choose partnership, they’re treated in all respects under the Internal Revenue Code as a partnership and taxed as partnerships. Partnerships pay guaranteed payments to their partners as compensation for services, in my case 100% of what I do is services on behalf of my firm. So, I presume reading your regulation that means 100% of what I earn from my firm would be subject, were this enacted, to unemployment tax. I’m not sure how that measure would apply. Is that what I’m paid? Physically take a distribution from my entity, which I can control. Or is it the time earnings that are credited to my capital account, which I have. If in fact, it is when earnings are credited to my capital account, those earnings, since they would be unemployment wages under Section 12, would become subject to the Modified Business Tax enacted in December of 2003 by our legislature. If all of my earnings are subject to that tax, that becomes an income tax which I think is prohibited by our constitution. So, that’s a problem in administering the Modified Business Tax. In reading 612.190, I had another concern. That I’m not sure under our statutory scheme of things, and I agree with your questions and answers that you put out that Nevada law controls our unemployment as opposed to federal law for the most part. We’re not subject to the Internal Revenue Code unless our legislature invoked it. But, I think they did. Under 190, subparagraph 3, which is wages do not include subparagraph E thereof, and I’ll read that. “The payment by an employing unit without deduction from the remuneration of the person in its employ of the tax imposed upon a person in its employ under Section 3101 of the Internal Revenue Code of 1954, with respect to services performed for the employing unit.” 3101 of the Internal Revenue Code is the statute that defines Social Security. LLCs and partnerships and limited liability partnerships are not subject to 3101 and the sections there under. 3101 specifically refers to 3121. They’re subject to self employment tax which is under 1401 of the Internal Revenue Code. The service started to address how active a member of an LLC had to be to be subject to self employment tax, which is the mirror of Social Security taxes in 1997. And they issued proposed regulations in that regard. Those regulations have not been adopted. There were a couple of hearings right after they were proposed. But they have not been adopted to date because it is a complex area as to how active a member of an LLC has to be before he becomes subject to self employment tax. If he was a limited partner he couldn’t be active at all. Because he would lose his status as a limited partner for liability purposes. So limited partners are not subject to self-employment tax. Members of LLCs, if they participate in the management or activities of the LLC can be. But that regulation has not been finalized. I guess my last comment is this is a pretty far-reaching change because of the inter-relationship the legislature placed on unemployment wages with the Modified Business Tax. The legislature, when it adopted the Modified Business Tax in the special session, provided information that the one source of information they had available to them to forecast the revenue that would be derived by that tax they received from the Employment Security Division. That was the wages reported under certain ______for financial institutions and wages for all other employers. They were able to then quantify the rate of tax they wanted to apply to those wages to raise a certain amount of revenue. To change that definition now, without going back to the legislature, I think is improper. I think this is so far reaching with regard of the overall administration of government and taxation in this state, that this should not be done through regulatory process. I think it should go back to the legislature, if it’s appropriate, to redefine what wages are for unemployment and accordingly the Modified Business Tax. Thank you.
Jones:Thank you, Mr. Turner.
Susich:Did you want any immediate response to your comments, Mr. Turner?
Turner:I’ll defer that to you. If you’d like to think about and
Susich:Well, I do want to thank you for pointing out the provision of NRS 612.190. I do think that is an interesting situation that we do need to look into in more detail. Certainly, we will do that. With regard to some of your other comments, the single LLC, the way that we’ve looked at this is we’re concerned about liability and as I pointed out I think in our responses, the statutes require that the person liable for paying the wages of an individual is the employing unit. Where you’ve got a combined entity where it’s a LLC and a single person, I assume under the law that that single person is avoiding liability or at least some liability for the conduct of that business by creating the LLC.
Turner:It would be the whole purpose probably.
Susich:Right. And so, the way that we’ve tried to look at it is who is liable for paying compensation to that individual. Is the person paying himself? Or is there an entity like a corporation that’s been created which bears the liability for those payments. And so, using that type of reasoning, I think that we’ve reached the belief that if there is an entity in existence that is liable for the payment of the compensation and the person receiving it is not the person liable, then that person is an employee of the entity. Now, I understand when you have a one person entity, that creates some confusion, but that would be our basic way of analyzing it and at least as I sit here today, I would think that that individual, if he’s compensated in Nevada for services performed in Nevada for that entity, then he is an employee of that entity. With regard to reporting all of your distributions, my understanding there is a limit on the amount of wages that are subject to the contributions, which is $22,000 . . .
Jones:$22,900 for tax year 2005.
Susich:So the first $22,900 of compensation.
Turner:I agree with that for unemployment purposes. That is not the number that’s reported for Modified Business Tax. And your reporting forms do not ask for the taxable portion of the wages. You start out requesting gross wages.
Susich:Okay. With regard to the Modified Business Tax, we do have Mr. DiCianno here. And I don’t know if you want to try to address Mr. Turner’s concerns or have any comments regarding them at this point. That really is outside of Employment Security Division’s jurisdiction.
DiCianno:Thank you. For the record, my name is Dino DiCianno. I am Deputy Director over Compliance. I did attend your meeting with respect to try to determine what the Small Business Impact would be. I indicated at that time that as it was written, this would also bring in all of these different types of limited liability companies, however you want to describe them. Single member or multi-member types. They could potentially be subject to the Modified Business Tax. As Mr. Turner had indicated, those who elect to file a corporation are currently subject to the Modified Business Tax and our part of the fee that comes to us from Employment Security Division. My concern is from an equity and fairness standpoint under the Taxpayers Bill of Rights. Currently, there are certain individuals that are paying us now. These individuals are not, it is my understanding, that they are not reporting those wages to you today, is that correct?
Susich:You’re talking about the LLCs?
DiCianno:The LLCs.
Susich:No.
DiCianno:That to me is problematic.
Susich:Just to answer that question, some are, some aren’t. That’s part of the problem is that we need to get this uniform so that they are all on the same playing field.
DiCianno:I would agree. I mean there needs to be some equity with respect to the taxation part of it. Whether they are or not taxed, I think that again is a policy issues. I cannot make that policy issue for you. That’s something that you’re going to have to rely upon the discussions that you have here today. Again, my only concern is that I don’t know what that impact is going to be. I do know, as this is currently written, it would subject them to the Modified Business Tax. What that amount will be, I do not know. If you have any other questions with respect to the Modified Business Tax, I would be more than happy to respond.
Susich:Okay, Mr. Turner, did you want to respond to that.
Turner:I only had one additional comment. And that was the response you provided in your Question 1 that you published. After considering suggestions of the public, the Employment Security Division had determined that the further definition of wages in the proposed regulation would simply result in confusion. So there is basically no guidance if we adopt this. If I’m an LLC and I own a rental house and there’s two members of the LLC and we’ve reached an arrangement where the other member will supervise all the maintenance that has to be done and since I’m an accountant, I’ll do all the accounting. I would guess that technically, some portion of the services provided by the person supervising the maintenance and some portion of the services I provide for the accounting are technically services performed for or on behalf of the LLC and should be subject to unemployment. There’s no guidance. The other side of it is we have professions that do nothing but services, attorneys, accountants, doctors, engineers, architects, etc., that conceivably 100% of what they do for or on behalf of their entities would fall under this definition. And that starts to look like an income tax, which concerns me.