Could a shuttle company treat its drivers as independent contractors without contracts, tax forms, or payment records?

Plain-English summary

Virginia treated the shuttle operators as employees and upheld the estimated withholding-tax assessments because the company had no objective records supporting independent-contractor status. The drivers were paid by the trip, but the company had not registered for employer withholding or maintained employee records.

It produced no contracts, Forms I-9, W-4, VA-4, W-2, or 1099, and no individual driver or payment records. When the Department asked for more information, the company said it could not find documentation for payments during the audit period.

Without clear evidence showing an independent-contractor relationship, Virginia applied the employee definition and federal control factors. The assessment was presumed correct, and the auditor was allowed to estimate payroll and withholding from the information available.

What this means for you

• Calling or paying a worker as a contractor does not establish the tax classification.
• Keep written agreements, worker tax forms, payment ledgers, and records showing the actual control and business relationship.
• Missing payroll records allow Virginia to estimate withholding liability from available information.
• Failure to provide requested records can preserve an assessment and impair later court relief.

Common questions

Q: Why were the drivers treated as employees?
A: The company provided no objective evidence showing that they operated as independent contractors.

Q: Could Virginia estimate the payroll?
A: Yes. The company had failed to file and could not document payments, so the auditor made a reasonable estimate.

Q: What periods were upheld?
A: April 2007 through March 2012.

Citations and references

• Va. Code §§ 58.1-111, 58.1-205, 58.1-460, and 58.1-1826.
• 23 VAC 10-140-10; Treas. Reg. § 31.3121(d)-1.
• Virginia Public Document 99-294.

Subject

Taxpayer failed to provide records to support payment claims.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-83

Original ruling text

May 29, 2013

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will reply to your letter submitted on behalf of your client, * (the "Taxpayer"), in which you seek correction of the withholding tax assessments issued for the period April 2007 through March 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a shuttle service. Shuttle operators are paid by the trip. The Taxpayer did not register to remit Virginia employer withholding tax and did not maintain any employee records for the period at issue. Under review, the auditor concluded that the operators were employees of the Taxpayer, estimated the amount of the Taxpayer's payroll, and issued assessments for failing to withhold income tax. The Taxpayer appeals the assessments, contending its shuttle operators are independent contractors and not employees.

DETERMINATION

Virginia Code § 58.1-460 defines "employee" as, "[A]n individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages...." The Code of Virginia does not define "independent contractor" for withholding tax purposes. Nevertheless, Virginia has adopted the factors enumerated in Treas. Reg. § 31.3121(d)-1 to distinguish between an employee and an independent contractor for income tax withholding purposes. See Title 23 of the Virginia Administrative Code (VAC) 10-140-10 and Public Document (P.D.) 99-294 (9/9/1999).

The Taxpayer contends that the shuttle employees are independent contractors and, as such, no income tax withholding is required. The Taxpayer has been unable, however, to provide any objective evidence to support its claim. No contracts or forms ( i.e. , Form I-9, Form W-4 or Form VA-4) have been provided to document the relationship between the Taxpayer and the shuttle drivers. Further, the Taxpayer did not issue either a Form W-2 or Form 1099 to the drivers or maintain any records for individual shuttle operators. When requested to provide additional information in order to allow a thorough evaluation of this case, the Taxpayer responded that it was unable to find any documentation to support payments to drivers during the periods at issue. Because no clear and cogent evidence has been provided that would indicate that the shuttle operators acted in the capacity of an independent contractor, the operators who performed services for the Taxpayer are deemed to have an employee/employer relationship with the Taxpayer.

Under the provisions of Va. Code § 58.1-205, in any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the Taxpayer to show it was not responsible for withholding tax in Virginia. In this case, the Taxpayer has made assertions, but has provided no objective evidence to show that the shuttle operators were independent contractors.

In addition, Va. Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the assessment was attributable to a taxpayer's willful failure or refusal to provide the Department with necessary information as required by law.

Pursuant to Va. Code § 58.1-111, the Department has the authority to estimate the amount of taxes due, based on any available information, when a taxpayer fails to file a valid state tax return. According to the Department's audit report, the Taxpayer failed to provide records to support payments to shuttle drivers. The auditor, therefore, made a reasonable attempt to estimate the Taxpayer's withholding tax. Accordingly, withholding tax assessments issued for the periods April 2007 through March 2012 are upheld.

Updated bills will be issued shortly, which will include accrued interest. Payment of the outstanding balances should be made within 30 days of the bill date in order to avoid the accrual of additional interest.

The Code of Virginia sections and regulation cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5269843516.B