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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – UBER, LYFT AND PROPOSITION 22 – A DISTINCTION WITHOUT A DIFFERENCE

By Robert S. Schriebman
2020

Introduction

Proposition 22 is now the law of the land. Uber and Lyft drivers are now considered independent contractors. App-based rideshare and delivery drivers will also be treated in the same way. They say that Proposition 22 (Prop 22) was the most expensive proposition in California history with over $240 million spent to bring these results about. Back in October 2020, the California Court of Appeals for the First District ruled against Uber in the case of The People vs. Uber Technologies, Inc. et. al. With the passage of Prop 22, this ruling is now moot.

While Prop 22 may solve Uber’s and Lyft’s issues with the EDD, it does not get them out of the woods as far as the IRS is concerned. The future is going to be interesting. While app-based drivers, etc. may be independent contractors for state tax purposes, they may still be employees for federal payroll tax purposes. And let me tell you the tax dollars involved between California and the IRS are significant. I foresee substantial federal tax litigation on the horizon.

You can label the contents of this article as my opinion or a rant on my part, but I have to speak my mind. What is the real difference between touching an app on your cell phone for services, or touching the screen a few more times on the cell phone to make a call? To me this is a distinction without a difference. Please let me explain.

Over my many years of practice, I have represented and continue to represent referral agencies. These referral agencies have been primarily offering nursing services and services for domestic workers who provide cooking, cleaning, and transportation services for their clients. Some of these workers are licensed to administer medications. In my opinion they do not operate substantially differently, in principle, from Uber or Lyft.

Under Prop 22 app-based rideshare and delivery drivers are independent contractors if the companies hiring them do not engage in the following activities:

  • Set their hours;
  • Make them accept specific assignments;
  • Prevent them from working for other companies.

Each and every referral agency that has crossed my desk never sets the hours of work for the people they administer to – the client. The client or the patient sets the hours and working conditions. No worker has ever been required to accept an engagement. On the contrary a nurse or a domestic worker is free to accept or reject any assignment. No referral agency that I have represented requires an exclusive relationship. Workers are free to work for any agency they please. Many are engaged through more than one agency.

Traditionally, if a client wishes to hire a part-time nurse or a part-time domestic worker, all that is required is a telephone call, where arrangements are made through the agency and the fee established. Sometimes the client pays the agency directly and other times the client pays the worker, and the worker works things out with the agency. The client can pay by whatever means is convenient.

What applies to nursing agencies and domestic agencies can also apply to agencies that provide tutors. Tutors however, have been given breaks under both AB-5 and AB-2257. Most tutors now qualify as independent contractors.

Prop 22, in essence, tells me that if I use an app on my cell phone or computer, I have hired an independent contractor, but if I use the telephone, the EDD tells me that I have an employer-employee relationship due to CUIC §§ 656 for a nursing registry and 687.2 for a domestic agency. Again, a distinction without a difference.

Conclusion

In 1998 and 1999 the US Senate Finance Committee held a series of hearings on IRS oversight. I was privileged to testify twice during these hearings and my testimony led to the creation of due process for the American taxpayer when it came to IRS collection procedures. The primary objective of these hearings was to create a system of fairness for taxpayers throughout the country; to create a level playing field, so to speak.

A distinction without a difference makes no logical sense. It is not fair to other businesses that, in principle, operate similarly. A distinction without a difference never creates a level playing field.

No tax system will survive unless it is based upon a premise of fairness. While Prop 22 may appear at first to be fair to app-based and delivery drivers, its essence and spirit must be applied to any other business that is essentially based upon a system of commercial matchmaking. Afterall, isn’t Uber and Lyft all about matchmaking?

***

Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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