Appeal from the United States District Court for the Northern District of California Samuel Conti, Senior District Judge, Presiding D.C. No. 3:08-cv-04206-SC
The opinion of the court was delivered by: Silverman, Circuit Judge:
Argued and Submitted July 11, 2011-San Francisco, California
Before: Procter Hug, Jr., Barry G. Silverman, and Susan P. Graber, Circuit Judges.
Opinion by Judge Silverman
Blue Lake Rancheria, an Indian tribe, seeks a refund of Federal Unemployment Tax Act taxes paid by Mainstay Business Solutions, an employee leasing company wholly owned by the Tribe. Section 3306(c)(7) of Title 26 of the United States Code excepts from the definition of "employment"- and thus exempts from the payment of employment tax- "services performed in the employ of an Indian tribe, or any instrumentality" of a tribe. We hold today that this exception does not apply where a tribe is merely a "statutory employer" -in essence, nothing more than a paymaster. The exception granted by § 3306(c)(7) applies only where a tribe is the common-law employer. However, undisputed facts show that Mainstay was, indeed, the common-law employer of the workers at issue here and, therefore, was entitled to the special tax treatment Congress saw fit to grant to Indian tribes.
Blue Lake Rancheria is a 53-member, federally recognized Indian tribe located in Humboldt County, California. In May 2003, the Tribe established Mainstay Business Solutions as a for-profit business owned by and operated for the benefit of the Tribe. Mainstay provided employee leasing and temporary staffing for small- and medium-sized businesses located in California, Hawaii, and Nevada. Mainstay contracted with each of its clients to hire the client's employees as its own and then "lease" those employees back to the client. The client supervised the leased employees on a day-to-day basis, but Mainstay paid their wages, provided benefits, and performed other human resources functions. According to Mainstay, this arrangement allowed the client to free itself from H.R. responsibilities and focus on its business, and resulted in better benefits for employees. During the years at issue in this case (2003 and 2004), Mainstay paid wages for approximately 39,000 workers.
Mainstay reported and paid $722,047.77 in FUTA taxes for 2003 and $1,283,892.86 for 2004. Mainstay later filed claims for refunds with respect to these tax payments, asserting that, as a tribally owned business entity, it was exempt from FUTA tax liability under 26 U.S.C. § 3306(c)(7).*fn1 Having received no formal response from the IRS regarding the refund claims, the Tribe filed suit in the Northern District of California. The complaint sought a full refund of the FUTA taxes paid by Mainstay for 2003 and 2004 ($2,005,939), plus statutory interest.
The Tribe and the United States filed cross-motions for summary judgment. The district court granted the United States' motion for summary judgment and denied the Tribe's motion. The court held that § 3306(c)(7)'s exception for services performed "in the employ of" an Indian tribe applies only where the tribe is a common-law employer. The court further held that the Tribe failed to present facts sufficient to establish that Mainstay was the common-law employer of the workers in question.
The Tribe now appeals. We have jurisdiction under 28 U.S.C. § 1291.