Employment tax issues affect newspaper circulation departments.
Traditionally, newspaper delivery systems have been either buy-sell arrangements or delivery-for-fee systems. In buy-sell arrangements, home delivery agents purchase and take title to newspapers from the publisher and, in turn, sell them to consumers. The agents in a buy-sell system earn their profit by retaining the excess of the retail price over the wholesale price of the newspapers, less selling expenses. In a delivery-for-fee system, delivery agents earn their profit based on the number of units delivered. Today, many hybrid variations of these systems exist.
As early as the 1940s, Congress recognized the variety of delivery systems and that some did not involve an employment relationship between the newspaper publisher and delivery agents. Consequently, Congress created two statutory exceptions from the definition of employment covering newspaper sales arrangements. Sec. 3121(b)(14)(A) states that newspaper delivery services performed by individuals under the age of 18 are not included in the definition of employment. Sec. 3121(b)(14)(B) generally provides that services performed by individuals in and at the time of sale to the ultimate consumer, in which that individual's compensation is determined by retaining the excess of the sales price over the wholesale price, do not constitute employment. The IRS has sought to limit sharply the availability of this latter exception.
The Service has argued that a newspaper publisher sells newspapers prior to their delivery if the publisher solicits sales and collects subscriber payments. Delivery agents, the IRS asserts, merely deliver newspapers. Consequently, the Service analogizes the home delivery agent's services to those performed by a delivery person who delivers merchandise and is compensated on a "piecework" basis for each package delivered. As a result, the IRS contends the exemption provided by Sec. 3121(b)(14)(B) is not available, since the delivery agent's services are not being provided "at the time of sale."
Even if delivery agents cannot use the statutory exceptions, relief may be available under the "common law" definition of independent contractor. In Letter Rulings 9421029 (later revoked by Letter Ruling 9447027) and 9421044, the Service emphasized the following common-law factors in determining whether a delivery agent is an independent contractor. Does the agent:
1. establish the delivery route?
2. establish the time of paper pick-up and delivery?
3. hire, supervise and pay assistants?
4. perform services personally?
5. pay for all papers received, regardless of whether or not the customers pay for them?
6. pay all costs associated with operating a vehicle?
7. charge subscribers an additional delivery fee?
8. assume the risk of realizing a loss?
Because of the large variety of distribution systems, common-law factors critical to one publisher--such as those discussed in the two letter rulings--may not be as critical to another. Under the auspices of the Compliance 2000 program, the IRS has asked members of the newspaper industry to work with it to identify which of the 20 common-law factors are critical to the industry as a whole.
In response to concerns about the Service's application of the 20 common-law factors, Section 530 of the Revenue Act of 1978 was enacted. Although the legislative history reveals congressional intent that Section 530 should be liberally construed in favor of the taxpayer, many taxpayers have become concerned that the IRS has chosen to narrow the availability of Section 530. Rep. Nancy Johnson (R-Conn.), chair of the House Ways and Means Oversight Subcommittee, has called for hearings on this case.
The ISP's identification of delivery agents and rack agents as a significant issue may lead to a resolution of the classification controversy. However, in light of the significant differences among newspaper publishers, a solution acceptable to the entire industry may be difficult to find. In the interim, the Service's differing applications of the statutory exceptions of Sec. 3121(b)(14), the common-law factors and the relief available under Section 530 may affect fundamental relationships between newspaper publishers and delivery agents.
Newspaper publishers should review their distribution relationships to ensure that those relationships fit within the parameters of Sec. 3121 or establish a common-law independent contractor relationship.