Kelly Services Fights To Close Costly Tax Loophole

Wall Street Journal

August 4, 2004

By Michael Schroeder

IN A RARE DISPLAY of a corporation lobbying to close a corporate tax loophole, Kelly Services Inc. is helping to end a practice that shaved many companies' tax bills and cost state treasuries more than $1 billion over the past decade.

President Bush is expected to sign legislation this month to outlaw the tax dodge, which allowed companies to slash the taxes they pay to state unemployment trust funds. Kelly, a Troy, Mich., staffing-services agency, put together the federal and state lobbying campaign to outlaw the tax dodge, arguing that it improperly enriched competitors and short-changed state governments. The firm also became an informal adviser to state governments that wanted to crack down on the practice through administrative means.

Kelly benefited from the post-Enron Corp. environment in Washington, where lawmakers are eager to demonstrate they can be tough on corporate wrongdoing, and accounting firms and consultants are reluctant to fight publicly for tax- avoidance schemes, even ones that are legal in some states.

At issue is the State Unemployment Tax Act, or SUTA, a federal law that along with another statute directs each state to set up unemployment funds with taxes collected from employers. The unemployment taxes that each state levies vary, but generally a company with a high layoff rate during economic downturns, such as Kelly, pays about 4% of taxable employee wages a year; companies with little turnover can pay less than 1%. States use the revenue to pay unemployment benefits.

Accounting firms such as Deloitte & Touche LLP have advised companies in some states to take advantage of a loophole, through a scheme called SUTA dumping. Transferring employees from one unit that has experienced sizable layoffs to a new unit with no layoff history, could reduce a firm's unemployment-tax bill. Over time, the first unit would be eliminated, and with it the high turnover rate that boosted unemployment taxes. Deloitte didn't comment on the matter.

The Securities and Exchange Commission is looking at SUTA dumping as part of its investigation into accounting issues at Switzerland's Adecco SA, the world's largest temporary-staffing firm, according to people familiar with the probe. The SEC is examining whether Adecco's U.S. unit used the practice illegally to misrepresent its financial statements, these people say. An Adecco spokeswoman declined to comment. The SEC wouldn't confirm or deny the investigation.

Peter Moffitt, vice president of Barnett Associates Inc., a Garden City, N.Y., unemployment-tax planning firm, argues that legislation to shut down SUTA dumping could stifle legitimate company reorganizations and mergers where SUTA tax planning comes into play, and will create a costly paperwork-compliance burden for states. But he says he backed out of a debate with a Kelly executive at a national conference on unemployment in St. Louis, Mo., in May because he feared being tarred as a tax-dodger. "We were a voice crying in the desert," he says.

Although SUTA dumping started about a decade ago, Kelly Services says it didn't affect business much during the '90s boom. But when layoffs began to rise during the 2001 recession, Kelly's president, Carl Camden, worried that competitors were using the tax edge to underbid Kelly for contracts. Mr. Camden says he rejected proposals by accountants that could have slashed the company's unemployment taxes by $30 million because Kelly considered the practice unethical.

A letter to Kelly's chief executive in late 2001 from accounting firm Arthur Andersen LLP, particularly offended the company. In the letter, Andersen chastised a Kelly vice president for violating the staffing company's "fiduciary responsibility to your shareholders" by refusing to engage in SUTA dumping, according to Mr. Camden. Rather than try its hand at SUTA dumping to save on unemployment taxes, Kelly decided to lobby to outlaw the tax loophole. (Andersen collapsed after it was criminally charged for it role in the Enron scandal.)

If the practice were outlawed, Kelly figures, unemployment trust funds would be replenished from all companies having to pay their fair share, and states might be able to lower unemployment-tax rates. The campaign started in Feb. 2002, when Kelly Vice President Matt Harvill gave a 90-minute presentation to a half-dozen Labor Department officials in Washington, detailing how companies were evading unemployment taxes, in many cases illegally. Within four months, the Labor Department issued an advisory to the states to be on the lookout for unemployment-tax abusers.

Kelly also pushed for federal legislation to outlaw SUTA dumping. Kelly's Washington lobbying firm, Piper Rudnick LLP, set up a dozen meetings with lawmakers or their staff members, where Kelly officials explained the issue and suggested legislative changes. Last year, Kelly paid Piper Rudnick $80,000. In addition, Kelly enlisted Strategic Services on Unemployment and Workers Compensation, a Washington trade group known as UWC, to advise lawmakers on the legislation.

At a House Ways and Means subcommittee hearing in mid-2003, Kelly executives and a North Carolina official testified about SUTA abuses. The Government Accountability Office, a research arm of Congress, also testified that a preliminary report showed 14 states had identified a total of $120 million in lost tax revenue from dumping. Overall, the Labor Department estimates, SUTA dumping may be costing state coffers more than $1 billion annually.

"It was so outrageously wrong, that it became overwhelmingly apparent that something had to be done," says Rep. Wally Herger, the California Republican who is chairman of the subcommittee. He credits Kelly for alerting him to the problem. Kerry redoubled efforts to help states learn how to detect SUTA dumping and to encourage them to pass legislation barring the practice. After Kelly's president, Mr. Camden, spoke at an August 2003 national conference for state unemployment-insurance tax officers, a dozen states called Kelly for help. Oregon invited Kelly officials to meet with its tax department to discuss legislation. Opposition to the federal bill was muted. The National Association of Professional Employer Organizations, quietly approached the subcommittee to ask, "How can we keep this from passing this year," according to a Capitol Hill staffer. Nothing can be done, the group was told. Milan Yager, Napeo's executive vice president, says he had questions about the original bill's language, but that his organization supported passage. On July 14, the House unanimously passed its bill. Two ideological opposites, Sens. Don Nickles (R., Okla.) and Ted Kennedy (D., Mass.), introduced the same House bill language, which also passed the Senate unanimously a week later. President Bush is expected to sign the law, which requires states to pass legislation prohibiting SUTA dumping, into law within two weeks.

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