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Spain v. Montana Dept. of Revenue6/27/2002
Submitted on Briefs: February 14, 2002
Steven W. Spain, individually and doing business as Northwest Rocky Mountain Construction, Inc. (collectively Northwest), and Kenneth D. Ehret, individually and doing business as KDE Construction (Ehret), appeal from the Eighteenth Judicial District Court's order affirming the State Tax Appeal Board's determination that certain Northwest workers, including Ehret, were employees rather than independent contractors for purposes of state income tax withholding. We affirm.
We re-state the issues on appeal as follows:
(1) Did the District Court err in upholding the State Tax Appeal Board's determination that the Northwest workers in question were employees rather than independent contractors?
(2) Did the District Court err in holding that the Department of Revenue did not exceed its statutory authority in classifying Ehret as an employee?
(3) Did the District Court err in holding that ยงยง 15-30-203(1), MCA, and Rule 42.17.120, ARM, do not constitute a form of unconstitutional dual taxation?
FACTUAL AND PROCEDURAL BACKGROUND
Northwest is a Wyoming Subchapter S Corporation engaged in general contracting. It commenced operations in Montana in 1987. Steven W. Spain (Spain) is the president and sole shareholder of Northwest, and his wife, Kimberly Spain, is secretary-treasurer.
Ehret performed construction services for Northwest. On appeal, the parties dispute whether he performed the services as a Northwest employee or as an independent contractor. However, it is undisputed that, in 1988, Ehret applied for and received unemployment benefits. Subsequently, the Montana Department of Labor and Industry sought to have Northwest establish an unemployment insurance account, but Northwest refused. Ultimately, the Board of Labor Appeals determined that Ehret was a Northwest employee. Northwest appealed this determination, and on October 11, 1989, the District Court affirmed the Board of Labor Appeals' decision. It declared that Ehret and others "similarly situated" were not independent contractors for purposes of their employment with Northwest.
In December 1990, the Department of Revenue (DOR) conducted a computer cross match indicating that Northwest had reported wages to the Unemployment Insurance Division of the Department of Labor and Industry. However, no corresponding account could be found for Montana withholding tax purposes.
As a result, DOR agent Jeff Lapham (Lapham) conducted a field audit of Northwest covering tax years 1987-1991. He examined Northwest's corporate check register to obtain Northwest's earnings information and the specific dates and amounts of compensation paid to workers and compared this information with various workers' individual income tax returns. He also considered this one-paragraph Work Contract that Northwest workers were required to sign:
I, [Name of Worker], working as a Contract Laborer for Northwest Rocky Mountain Construction, am responsible for all insurance on myself and for all injuries occurring on the job.
I will file my own Social Security and Withholding Taxes. I will not hold Northwest Rocky Mountain Construc-tion or Steve Spain liable for any injuries or accidents that may occur. [Emphasis in original.]
While the workers signed the Work Contracts, Spain at times did not sign them. Based on his investigation, Lapham concluded that some of Northwest's workers were employees and some were independent contractors. With regard to those workers deemed employees, Lapham determined that Northwest had failed to report their income to the DOR for state wit
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