9th Circuit: FICA applies to all

The U.S. Court of Appeals for the Ninth Circuit has affirmed the district court’s ruling that temporary foreign workers in the CNMI and their employers are required to pay Federal Insurance Contributions Act taxes, which fund Social Security and Medicare.

The Ninth Circuit said Section 606(b) of the Covenant governing U.S.-CNMI relations provides that U.S. laws that impose excise taxes to support the Social Security system apply to the CNMI as they apply to Guam.

“Because FICA is a law that imposes an excise tax to support the Social Security system, it applies to the CNMI as it applies to Guam,” said the Ninth Circuit in a 25-page opinion last week.

In return, the Ninth Circuit said, FICA applies to all workers and their employers in Guam, regardless of their citizenship.

Therefore, the Ninth Circuit said, FICA applies to all workers and their employers in the CNMI, including the defunct Concorde Garment Manufacturing Corp. on Saipan and Chinese national, nonresident workers formerly employed at Concorde, regardless of their citizenship.

Concorde’s lawyer, Steven P. Pixley, said they are very disappointed with the Ninth Circuit’s decision to affirm the U.S. District Court for the NMI’s dismissal of their claim for reimbursement of Social Security payments made by former garment workers and their employer.

“We will be filing a petition for rehearing in the Ninth Circuit Court of Appeals,” Pixley said.

Colin M. Thompson is counsel for the over 400 Chinese workers in this case.

According to court records, Concorde filed Forms 941 “Employer’s Quarterly Tax Returns,” for the quarters ending March 31, 2006, June 30, 2006, Sept. 30, 2006, and Dec. 31, 2006. Concorde paid the amount due for the FICA taxes for those quarters. Concorde then filed a Form 843 “Claim for Refund,” requesting a refund for those quarters, asserting that its temporary contract workers in the CNMI were not subject to FICA taxes and that it therefore erroneously paid payroll taxes for those employees.

On Dec. 28, 2009, IRS refunded Concorde’s 2006 FICA taxes in the amount of $1,181,265.71.

In July 2011, Concorde and over 4,000 Chinese nationals formerly employed by Concorde and its affiliated companies sued the U. S. government to recover the remainder of the FICA taxes they had paid.

In 2011, the U.S. counter-claimed to recover the refund of Concorde’s 2006 FICA taxes, which it argued was erroneously issued. The U.S. government argued that Concorde’s claim was without legal basis and should not have been allowed.

U.S. District Court for the NMI Chief Judge Ramona V. Manglona then ruled that all workers and their employers in the CNMI are subject to FICA, regardless of the citizenship of either.

Concorde and its former Chinese national workers appealed, asking the Ninth Circuit to reverse the district court’s ruling.

Concorde and its former Chinese workers argued that the Covenant was intended to subject only CNMI citizens, not temporary nonresident foreign workers, to FICA taxes. They argued that even if FICA generally applies to all workers and their employers in the CNMI, employees are entitled to the FICA tax exemption for temporary nonresident Filipino workers in Guam.

The appellants also argued that even if the first two arguments are rejected, the employee portion of FICA does not apply because it is an income tax, and only excise and self-employment taxes that support Social Security apply to the CNMI.

The appellants asserted that the statutory basis for applying FICA to appellants is unconstitutionally vague.

FICA imposes an employer and an employee tax on wages “with respect to employment.”

In affirming Manglona’s ruling, the Ninth Circuit said the district court correctly held that appellants, who paid and received wages for services performed in the CNMI, are required to pay FICA taxes on those wages, even though employees are temporary nonresident Chinese nationals.

The Ninth Circuit said Covenant Section 606(b) is not limited to citizens or residents of Guam or the CNMI.

To begin with, the Ninth Circuit judges said, Section 606(b) does not mention citizenship or people, and that they see no reason to read those words into the Covenant.

Moreover, the Ninth Circuit judges said, even if they were to read references to geographic areas as references to people in those geographic areas, their reading would not be limited to citizens.

The Ninth Circuit said FICA applies to the CNMI as it applies to Guam—where nonresident workers are subject to FICA tax on employee wages because they performed work “within the United States,” regardless of whether they were temporary nonresident workers.

By its terms, the Ninth Circuit said, FICA never applies solely based upon a worker’s citizenship. Rather, it applies in two instances: (1) when work is performed within the United States, and (2) when work is performed by a U.S. citizen for an American employer.

The judges said there is no indication that FICA was intended to have such a limited effect within the CNMI.

“Indeed, because CNMI citizens became U.S. citizens under the Covenant—meaning they already must pay FICA taxes when working for an American employer—such an outcome would render Section 606(b) meaningless,” the judges said.

Appellants argued that even if FICA applies to nonresident workers and their employers in the CNMI, appellants fit within an exemption to FICA taxation that Congress created for certain nonresident workers in Guam.

But the Ninth Circuit said the exemption is expressly limited to Filipino citizens admitted to Guam under H-2 visas. The Ninth Circuit judges said this section of FICA exempts from the definition of employment any “service performed in Guam by a resident of the Republic of the Philippines, while in Guam on a temporary basis as a nonimmigrant alien admitted to Guam pursuant to a section of the Immigration and Nationality Act.”

“Pursuant to Covenant Section 606(b), then, Filipinos admitted to the CNMI under H-2 visas arguably would be exempt from FICA,” the judges said. However, the judges said, even if they overlook the fact that employees were not admitted to the CNMI pursuant to H-2 visas, the exemption remains plainly inapplicable because employees in this case are Chinese nationals.

“We need not decide whether the exemption would apply to Filipinos in the CNMI who were not admitted pursuant to H-2 visas but were instead admitted pursuant to the CNMI’s local immigration law,” the Ninth Circuit judges said.

This is a close question, said the judges, citing that during the relevant time period—2004 to 2007—the CNMI was not subject to the Immigration and Naturalization Act, and instead maintained the authority to create its own immigration laws.

Accordingly, the judges said, from 2004 to 2007, temporary workers entered the CNMI pursuant to the CNMI’s Nonresident Workers Act.

“Thus, although temporary nonresident Filipinos in the CNMI are the exact type of worker Congress sought to exempt from FICA, these workers do not technically satisfy all statutory elements of the exemption,” they said.

Moreover, the judges said, Filipinos were not the only temporary nonresident workers in Guam when the exemption was created.

In light of this demographic reality, the Ninth Circuit judges said, Congress’ decision to expressly limit the exemption to Filipinos, in part because of the nation’s unique political ties with the Philippines, suggests that the exemption was not meant to cover all nonresident workers in Guam.

In sum, the Ninth Circuit said, Congress singled out Filipinos for preferential treatment.

Because it is undisputed that employees in this case are not Filipinos, the exemption does not apply to them, the judges said.

The judges said FICA and Self-Employment Contributions Act apply in their entirety to the CNMI as they apply to Guam.

Appellants contended that even if FICA generally applies to the CNMI, the employee portion does not apply because it is an income tax, not an excise or self-employment tax.

In other words, the judges said, appellants read Section 606(b) as if it contains an additional limitation: “Those laws of the United States which impose only excise taxes and only self-employment taxes to support…the United States Social Security system will…become applicable to the [CNMI] as they apply to Guam.”

The judges said this is a misreading of the provision. They noted that Section 606(b) does not contain the limitation suggested by appellants, nor does it state that excise taxes apply in the CNMI as in Guam.

Instead, the judges said, Section 606(b) provides that those which impose such taxes apply in the CNMI as in Guam.

In short, the judges said, if a law imposes an excise tax to support Social Security, the law—not just that part of the law imposing an excise tax—applies in the CNMI as in Guam.

“Because FICA imposes an excise tax, it applies in the CNMI as in Guam. And because FICA subjects employees in Guam to taxation, it subjects employees in the CNMI to FICA taxes as well,” the judges said.

In Guam, they said, employees are subject to FICA, and thus the same holds true in the CNMI, regardless of whether that tax is an excise tax or an income tax.

The judges said it is the law containing the excise tax that applies to the CNMI as to Guam, not merely the “excise tax” itself.

The judge said appellants’ position is not frivolous, and they were justified in requesting a refund from the IRS. “But having a colorable argument that FICA taxes do not apply does not render the statute unconstitutionally vague,” the judges said.

“Moreover, it does not appear that appellants face any penalty. They simply must pay the tax,” the Ninth Circuit judges added.