ELECTRONIC VERIFICATION OF EMPLOYEES' ELGIBILITY STATUS
ISSUE.
A taxpayer has an approved incentive act application filed on or after October 1, 2009, or an increase in research expenditures during a tax year ending on or after October 1, 2009, but did not begin electronically verifying (E-Verify) the work eligibility status of new employees at the time the employees were hired. Can the taxpayer verify the employees at a later date, and count those employees for purposes of qualifying for incentives under the Nebraska Advantage Act, the Nebraska Advantage Rural Development Act, the Nebraska Advantage Research and Development Act, or the Nebraska Advantage Microenterprise Tax Credit Act?
CONCLUSION.
No. Once taxpayers have filed an incentive application, they may not subsequently use E-Verify for employees hired in earlier months or years and count those employees toward qualifying for tax incentives under any of these tax incentive programs. Once the taxpayer begins using the E-Verify system, the taxpayer may qualify for tax incentives for new employees whose work eligibility is verified through E-Verify from that point forward, even if there are temporary lapses in verification. For the Nebraska Advantage Research and Development Act, if electronic verification was not performed for all newly hired employees hired during the tax year the qualifying research expenditures in Nebraska were made, the credit will not be allowed for that year.
DEFINITIONS.
E-Verify. E-Verify is a free, web-based system that electronically verifies the employment eligibility of newly hired employees. E-Verify allows participating employers to electronically compare employee information taken from the Employment Eligibility Verification, Form I-9, against the Social Security Administration’s and the Department of Homeland Security’s databases.
Incentive Acts. The incentive acts addressed by this revenue ruling are the Nebraska Advantage Act, the Nebraska Advantage Rural Development Act, the Nebraska Advantage Research and Development Act, and the Nebraska Advantage Microenterprise Tax Credit Act.
Taxpayer. Taxpayer means any business or individual business owner that can qualify for incentives under one of the incentive acts.
ANALYSIS.
The Nebraska Advantage Act, the Nebraska Advantage Rural Development Act, and the Nebraska Advantage Microenterprise Tax Credit Act. In the Nebraska Advantage Act, the applicable section is Neb. Rev. Stat. § 77-5722.01, which states as follows:
77-5722.01. Employees; verification of status required; exclusion.
(1) The Tax Commissioner shall not approve or grant to any person any tax incentive under the Nebraska Advantage Act unless the taxpayer provides evidence satisfactory to the Tax Commissioner that the taxpayer electronically verified the work eligibility status of all newly hired employees employed in Nebraska.
(2) For purposes of calculating any tax incentive under the act, the Tax Commissioner shall exclude hours worked and compensation paid to an employee that is not eligible to work in Nebraska as verified under subsection (1) of this section.
(3) This section does not apply to any application filed under the Nebraska Advantage Act prior to October 1, 2009.
E-Verify is currently the only electronic verification system for work eligibility status that meets the requirements of the various incentive acts. The Social Security Administration’s website may be used to verify a Social Security number, but it is not a verification of work eligibility status.
When a taxpayer applies for incentives under these incentive acts, the taxpayer must provide information showing it has registered to use the E-Verify system. If the application is approved, the taxpayer must sign an agreement with the state promising to increase employment, investment, or both, by certain levels. All incentive act agreements that relate to applications filed on or after October 1, 2009 require a taxpayer to make the electronic verification when new employees are hired.
Neb. Rev. Stat. § 77-5722.01 uses the term “newly hired employees,” a term that is not defined or used in any of the incentive acts. The use of this term in Neb. Rev. Stat. § 77-5722.01 implies that the verification must be conducted shortly after the new employee is hired. Employers who wish to use E-Verify must sign a Memorandum of Understanding (MOU) with the federal government which includes a provision stating that the “employer agrees to initiate E-Verify verification procedures for new employees within 3 employer business days after each employee has been hired . . .” The MOU also states that employers may not use E-Verify procedures for “any other use not authorized.”
The Nebraska Department of Revenue (Department) has determined that taxpayers cannot begin using E-Verify at a time significantly after filing the application (for example, the following year or during the qualification audit) and count those employees toward achieving the applicable employment levels. Allowing after-the-fact verifications would violate the language and intent of the incentive acts, the requirements of the agreements with the Department, and the express requirements of the taxpayer’s MOU with the federal government authorizing use of E-Verify.
The obligation to register for and use E-Verify begins at the time the application is filed. New employees hired before the application date do not need to be E-Verified to count toward achieving the applicable employment levels if they are hired after the end of the base year.
Once the taxpayer begins using the E-Verify system to “verify the work eligibility status of all newly hired employees employed in Nebraska,” the new employees whose work eligibility status was electronically verified will count toward determining eligibility of the taxpayer for incentives and the amount of those incentives. This is true even if there are temporary lapses in use. For example, if the personnel director is on vacation and a few new employees are hired and not verified until after the three-day period, those employees can be counted as new employees, and any wages earned after they have been verified for work eligibility using E-Verify will qualify for tax incentives.
This analysis and conclusion is applicable to benefits sought under the Nebraska Advantage Act, the Nebraska Advantage Rural Development Act (see Neb. Rev. Stat. § 77-27,188.03), and the Nebraska Advantage Microenterprise Tax Credit Act (see Neb. Rev. Stat. § 77-5908).
The Nebraska Advantage Research and Development Act. Because there is no employment threshold to be reached to qualify for benefits under this act, the statutory language is slightly different than that found in the other acts, as follows:
77-5808. Employees; verification of status required.
The Tax Commissioner shall not approve or grant to any person any tax incentive under the Nebraska Advantage Research and Development Act unless the taxpayer provides evidence satisfactory to the Tax Commissioner that the taxpayer electronically verified the work eligibility status of all newly hired employees employed in Nebraska. This section does not apply to any credit claimed in a tax year beginning or deemed to begin before January 1, 2009, under the Internal Revenue Code of 1986, as amended.
Taxpayers qualifying for benefits under this act do not sign agreements in advance of receiving the benefits. Taxpayers who have earned a federal research tax credit for activity that is in Nebraska qualify for the credit and claim it on the Nebraska income tax return for that year. Nevertheless, because this statutory section also uses the term “newly hired employees,” and because the E-Verify system requires verification within three business days of hire, the conclusion is the same under this program.
If the electronic verification was not performed for all newly hired employees hired during the tax year the qualifying research expenditures in Nebraska were made, the credit will not be allowed for that year. The taxpayer may earn the credit for the following year if it made qualifying research expenditures in Nebraska and electronically verified all newly hired employees hired during that year. Denial of the credit for the first year would change the start of the five-year period that the credit is allowable, but would not necessarily shorten the overall time period during which the credit may be earned.
If the taxpayer first qualified for tax credits under the Nebraska Advantage Research and Development Act before October 1, 2009, new employees hired before that date did not have to be electronically verified for the taxpayer to be eligible for credits. However, new employees hired by that taxpayer on or after October 1, 2009 must be electronically verified as work eligible for the taxpayer to continue to qualify for tax credits. If they were not, the taxpayer cannot qualify for tax credits for any tax year during which new employees were not electronically verified. This taxpayer may lose one or more of the five years the taxpayer is eligible to receive credits.
APPROVED:
Douglas A. Ewald
Tax Commissioner
October 24, 2011