Friday, April 29, 2011

Appellate Court Upholds Imposition of FICA Tax on Northern Mariana Islands Nonresident Workers

The U.S. Court of Appeals for the Federal Circuit has ruled that temporary work performed by Chinese nationals in the Commonwealth of the Northern Mariana Islands (CNMI) was subject to FICA tax. The decision upholds a U.S. Court of Federal Claims decision from Sept. 22, 2009 on this issue [Zhang v. United States, CA Fed Cir, 107 AFTR 2d ¶2011-688, 4/6/11].

The facts. Five Chinese citizens were employed as temporary contract workers in the CNMI. The workers and one of the employers filed a complaint seeking a refund of FICA taxes paid to the U.S. between 2004 and 2007. They claimed that FICA taxes were not due on wages paid to noncitizens and nonresidents of the CNMI.

The law. Code Sec. 3121(b) defines employment for FICA tax purposes as “any service, of whatever nature, performed by an employee for the person employing him, irrespective of the citizenship or residence of either within the United States.” Code Sec. 3121(e)(2) defines the term “United States” when used in a geographical sense to include Puerto Rico, the Virgin Islands, Guam, and American Samoa. The U.S. government argued that the CNMI is considered a part of the United States (“within the United States”) under Code Sec. 3121(b), due to its relationship with Guam in the 1976 “Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the U.S.” (the Covenant). The plaintiffs argued that work performed in the CNMI was not “within the United States.”

The ruling. The appellate court ruled that the workers and the employer were subject to FICA tax on the work performed in the CNMI. With respect to the employer, the court noted that, absent congressional amendment, it was undisputed that Section 606(b) of the Covenant imposed FICA taxes on employers in the CNMI.

While the appellate court agreed with the plaintiffs that the CNMI is not explicitly included in the definition of “United States” under Code Sec. 3121(e)(2), it pointed out that Section 606(b) of the Covenant states that “those laws of the United States which impose excise and self-employment taxes to support or which provide benefits from the United States Social Security System will ... become applicable to the Northern Mariana Islands as they apply to Guam” (see 48 USC 1801). Even though the Internal Revenue Code does not define the term “excise,” the court said that it was reasonable to conclude, based on the dictionary definition of the term, that it included FICA taxes. The appellate court noted that federal courts have given a broad interpretation to the term “excise” and it has included both the employee and employer portion of FICA taxes.

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