By: Debra Gersh-Hernandez
IT IS BEING called a watershed moment, one of the most significant legislative victories in memory, and a major bottom-line win for the newspaper industry.
It is an amendment in the recently enacted minimum wage law that finally firms up the independent contractor status of newspaper distributors and carriers who are direct sellers.
Newspapers, large and small, as well as their independent contractor distributors and carriers, have been hit with hundreds of thousands of dollars in legal fees and fines after Internal Revenue Service audits reclassified distributors and carriers as employees, rather than as independent contractors.
The newspapers and distributors argued that the IRS classification rules were arbitrary and unclear, leaving the status determination largely in the hands of the auditor.
But it was not only a losing audit and its fines and back taxes that stung financially. The legal fees and other expenses of defending or challenging the audit results could be a tremendous financial burden, even if the newspaper or distributor eventually won.
The IRS did not respond to a request seeking comment on this issue and the new law.
Although broader legislation to clarify the independent contractor issue in general is pending in both the House and Senate, this amendment to the Small Business Job Protection Act, signed by President Clinton on Aug. 20, specifically addresses newspaper distributors and carriers who are direct sellers.
A direct seller, in this context, is defined as someone who delivers or distributes newspapers or shoppers on a contractual basis and is paid based on output, not on an hourly rate.
Further, it applies whether the distributors operate under a buy-sell or an agency distribution system.
“The law provides specific language classifying carriers and distributors as independent contractors if certain criteria are met,” commented Newspaper Association of America president and CEO John F. Sturm. “This will make it very difficult for the IRS to continue its efforts to target publishers and distributors for audits, fines and litigation.”
Those IRS actions, Sturm added, “have led to time-consuming and costly audits and litigation. In some cases, the IRS has issued tax assessments to distributors as high as $300,000, a devastating amount for the primarily small-business people whose annual profit is in the $30,000 to $40,000 range.
Sturm told E&P that, “It strikes me ? and, I think, a lot of executives in the industry that I heard from ? that in terms of the bottom-line, immediate effect, this is probably the best thing that has happened to the industry from a legislative standpoint in anyone’s memory. This is going to save a lot of newspapers a lot of money in the future.”
Of the years of battles between the IRS and newspapers and distributors, Sturm said the new provision “should end all of that.”
“This should end the audits, it should end the requests for documents, it should save newspapers lots of money on accountants, on lawyers, on litigation, and all of that,” he added.
“While there still are some independent contractor problems to be solved, particularly stringers, that’s for the future,” Sturm commented. “The bulk of the contractors used by the industry and where the problem has always been focused with the [Internal Revenue] Service has been in this area.”
In addition, the three-part, direct-seller test “is pretty simple and unambiguous” compared to the 20-point test currently used by the IRS, Sturm pointed out.
“You do three things and qualify. If you qualify, that’s it. If you don’t qualify, or don’t want to, you’re still subject to the old law” and its safe-haven provisions, he explained.
“This is win, win, win all the way ’round. There is no downside to all of this. This is really a biggie,” Sturm remarked, noting also that it was relatively inexpensive for the association. “On a cost-benefit basis, this is like going to the moon for a thousand bucks,” he said.
This was the second attempt in the past 18 months to add the direct-seller language to legislation ? the first was in the budget bill that was vetoed last October ? but this bill had a great chance of being signed by the president.
“We always viewed it as a long shot,” Sturm said of finding the right bill to house the provision. “This was always out there. We rode it and kept at it.
“There were a lot of members of Congress who bought into this and really helped, both Republican and Democrat,” Sturm added.
Not surprisingly, the amendment’s success is considered a tremendous victory by the American Association of Independent Newspaper Distributors.
“We are absolutely ecstatic,” said AAIND president Clyde Northrop of Southwest Distribution in Washington, D.C.
“This is probably the watershed event of the last 30-odd years,” he said, suggesting that “every newspaper” likely will be affected.
“An issue like this, coming at a time when it’s coming, is so important, because margins are so thin in newspapering, managers cannot be forced into operating an employee work force when heretofore it was independent contractors.
“When the IRS would come in and do this, it was catastrophic. It put people out of business,” Northrop said.
Explaining that in many cases a distributor’s spouse and children are involved in the business, he added, “When your whole family is working for $35,000 a year and you have additional expenses of 20% to 30%, it’s over. Your business is over.”
Had the amendment not been adopted when it had, a year from now the “entire face of distribution” would have been changed by the effects of audits currently underway, according to Northrop, who started his distribution business 23 years ago and works as an independent contractor for the papers he delivers.
“This language gives back to each individual small businessperson the option of how to run their own business,” he said of the distributors and carriers. “If they run it with employees, fine, it’s their business. If they want independent contractors, they can do so without the fear of the [Internal Revenue] Service knocking on their door and putting them out of business.”
Northrop pointed out that, “What this language does is simply clarify for federal tax purposes that newspaper carriers and distributors are independent contractors. Insofar as we are concerned, at this moment, it will solve our problem.
“The problem was that classification was never known. It was up to the individual revenue agent how a distributor would be classified,” he explained.
While the issue remains to be resolved on the state level ? particularly in the targeted states of New York, Texas and California ? Northrop said he believes this puts distributors “over the hump.”
National Newspaper Association president and CEO Tonda Rush called the measure “a good step forward,” but said the NNA will continue to work on the independent contractor legislation in Congress.
“We’ve got a broader focus than carriers,” Rush said, citing stringers and other categories of contractors used by community papers as examples.
“All small businesses that got involved [with the legislation] strongly feel that Congress needs to take a broader look at how the IRS looks at the independent contractor issue,” she added, noting that whether Democrats or Republicans are in control after the next election, NNA expects “to see this show up again.”
Chicago lawyer Camille Olson, of Seyfarth, Shaw, Fairweather & Geraldson, not only has worked with newspapers and distributors in legal cases on this issue, but also worked with industry trade groups on the legislative side.
“I would definitely describe it as a very important victory for newspaper companies, as well as newspaper distributors,” she said.
“This should send a clear message that beginning with tax year 1996, the IRS should not attempt to reclassify any workers who perform services directly related to delivering newspapers or shoppers as employees,” she said of the law, which is retroactive to Dec. 31, 1995.
“I believe that the law is clear,” Olson added. “I believe that the legislative history should eliminate any doubt as to the broad scope of the exemption, and that Congress was very specific to include the legislative history in detail, so that the IRS would not misconstrue the direct seller exemption, as the newspaper industry has always taken the position.
“This is nothing but a clarification of the law,” she continued. “I believe that if anyone reads the legislative history, there can be no doubt it covers a large group of workers who provide services [such as] delivery, collection, solicitation services.”
That said, Olson also cautioned that there are a number of questions left open, including what will be the IRS approach to existing audits prior to enactment; what categories of workers will be included in the exemption; and will the policy come from IRS district offices or be made on a national level?
“There are a lot of questions that need to be answered to be sure everyone involved in newspapers understands how this affects the day-to-day management of workers,” Olson noted.
In addition, she warned that while this is a “wonderful, important victory,” it nevertheless “doesn’t provide a victory in every arena,” and state laws regarding independent contracts must still be factored into each relationship.
“We have to ensure that our managers who are responsible for independent contractor relationships understand that it is still very important that we are treating these workers as independent contractors for the purposes of a lot of other laws that don’t have this exemption ? unemployment, state minimum wage, a lot of different laws.
“We need to ensure that we don’t let up on ensuring that we are managing these individuals as independent contractors and slide into employee practices,” Olson commented.
?(This is probably the best thing that has happened to the industry from a legislative standpoint in anyone’s memory. This is going to save a lot of newspapers a lot of money in the future.”) [Caption]
?(-John Strurm, Newspaper Association of America president and CEO) [Caption]