NLA Versus IRS: Stalemate on Independent Contractor Dispute

Posted on March 1, 1990 by Scott Fletcher, LCT Editor/Publisher

Congratulations to the National Limousine Association on the presentation of some very informative workshops at their annual meeting in Alexandria VA/last January. The program, which was organized by John Thompson of Johnny’s Huntington Limousine of San Gabriel, CA, offered excellent might into insurance; marketing, shared rides, and a number of other topics in one of the workshops, Wayne Smith, executive director of the NLA, reviewed the association’s experience with the Internal Revenue Service concerning the classification of chauffeurs as independent contractors. This is a subject that has surfaced repeatedly in our pages over the past few years and each time the story is the same a limousine operator is randomly subjected to an employment audit by the IRS and charged with back taxes for failing to meet federal guidelines governing the use of independent contractors.

Smith explained that the NLA has retained a Washington law firm with extensive experience in tax law and has participated in the defense of limousine operators in Atlanta and Chicago who were recently audited and found liable for back taxes. In these cases, the NLA is seeking exemptions from the independent contractor guidelines under Section 530 of the 1978 Federal Tax Law by attempting to document that “substantial” numbers of limousine services in these metropolitan areas use independent contractors.

These test cases currently rest on whether or not the IRS validates NLA documentation which indicates that independent contractors are used by 78 percent of the industry in Atlanta and 80 percent of the industry in Chicago. The IRS must also accept that these percentages constitute “substantial” portions of the industry. Meanwhile, the IRS has offered to drop its claims for back taxes in these cases if the operators will “flip ever” to employees.

The implications of these test cases could affect as much as 60 percent of limousine operators nationwide who use independent contractors according to NLA estimates. Smith also explained that states such as California, Illinois, and New Jersey are auditing limousine companies to ensure they are correctly withholding workman’s compensation and unemployment compensation for chauffeurs.

So what are limousine operators doing about this taxing situation? Some await the outcome of the NLA’s efforts in the hope of continuing to use independent contractors. Some hope to avoid the use of “employees” by structuring chauffeurs as “franchisees”. Some are exploring a concept called Employee Leasing. And others are simply flipping thElr chauffeurs over to employees. As Smith pointed out, every operator in the state of Arizona has flipped over.

For those who have to face this dilemma, I would compare it to the question of whether or not to buy a 100-plus-inch stretch limousine. Federal laws are not yet specific on Elther of these issues, but they will both be resolved in the neat future and it is well worth studying how the outcomes could affect your business. More on these issues at the Limousine & Chauffeur Show in Las Vegas on March 4-7.

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