Rev. Rul. 56-129

The Internal Revenue Service has been requested to determine the status, for purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act taxes and Collection of Income Tax at Source on Wages (chapters 21, 33, and 24, respectively, subtitle C, Internal Revenue Code of 1954), of individuals performing services as `dealers' in the distribution of bakery goods for a company under the circumstances described below. Also, in the event such `dealers' are held to be its employees, advice has been requested relative to the method to be used in computing the wages paid to such individuals for purposes of the above taxes.

The company is engaged in manufacturing bakery products which are distributed through so-called `dealers.' The `dealers' devote their full time to distributing the company's products and receive as remuneration for their services the difference between the prices they pay the company and the prices they charge customers for the products. Under the terms of the contracts entered into between the `dealers' and the company, the company agrees to sell to the `dealers' and the `dealers' agree to purchase from the company bakery goods and wares for resale within such territory as may be agreed to from time to time between the parties. The `dealers' agree to furnish suitable vehicles to be used in selling the goods; to procure and pay for adequate insurance in order to protect the company from any liability for use of the vehicles; and to refrain, upon the termination of the agreement, for a period of one year, from selling bakery goods for others in the territory where they sold company goods. The contract is not assignable by the `dealer' without the company's consent, but it may be terminated by either party at any time upon proper notice.

The `dealers' apply to a sales manager for assignments of routes. They are given certain training in the work by a route supervisor, who also renders assistance to the `dealers' at company expense, counsels with them whenever he deems it necessary for the good of the business, and is responsible for collecting amounts due the company. Weekly and monthly customers are billed on the company's billheads and remittances in most cases are made direct to the company and credited to the `dealers'' accounts, while daily accounts are collected by the `dealers.' The company advises the `dealers' of telephone orders received and of new customers transferring into their territories, and they serve these and other customers designated by the company, as well as those obtained through their own efforts. The company furnishes route sheets, cards, baskets, and lists without charge to the `dealers.' In addition to furnishing their own trucks which bear the company's name, the dealers pay all expenses incurred in distributing the company's products and do not account to the company for such expenses. The `dealers' are included in the company's group insurance plan and deferred profit-sharing plan. They do not hold themselves out to the public as available to do work of a similar nature for others and they do not perform services for others.

The company has, in the past, regarded its `dealers' as employees and has computed their `wages,' for purposes of both the Federal Insurance Contributions Act and the income tax withholding, on the basis of a selling price markup of thirty percent of cost less an estimated total selling expense of fourteen percent, resulting in an amount reported as `wages' of sixteen percent of the individuals' gross sales. However, an audit of the `dealers' income tax returns showed that their estimated `wage' figures average about twenty percent below the actual profit realized from operation of the routes, and thus the employee tax and the employer tax under the Federal Insurance Contributions Act and the income tax required to be withheld are not being collected on the twenty percent differential, and the individual's wage credits are understated by the same twenty percent.

Section 3121(d)(2) of the Federal Insurance Contributions Act defines an employee as any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. The rules for determining whether, under the usual common law rules, an employer-employee relationship exists are found in section 408.204(c) of Regulations 128, applicable to the provisions of the Internal Revenue Code of 1954 by virtue of Treasury Decision 6091, C.B. 1954-2, 47.

Although the dealers are required to furnish their own trucks in rendering their services for the company, their investments are only one of the factors to be considered in determining whether they are subject to the direction and control prescribed by the applicable regulations. It is entirely possible for an individual who has invested in a truck to use his vehicle while engaged in the employment of another. Thus, the presence of an investment factor, in and of itself, does not warrant classification of the `dealers' as independent contractors. Also, while the relationship of employer and employee usually implies the payment by the employer of `wages' for services rendered, and in the instant case the amounts received by the `dealers' are not actually paid by the company, the arrangement is such that payment may properly be ascribed to the company. The amounts received by the `dealers,' representing the difference between the wholesale and retail prices, less authorized deductions, constitute their compensation. The effect of the contract involved is substantially the same as if the `dealers' turned over to the company all of the retail price collected by them, less cost of gasoline and other authorized expenses, and the company returned to the `dealers,' as their compensation, the sum remaining after deducting the wholesale price of the products.

In view of all of the facts present in this case, it is held that the company exercises or has the right to exercise such control over its `dealers' in the performance of their services as is necessary under the usual common law rules to establish the relationship of employer and employee. Accordingly, liability for the Federal employment taxes, including the income tax withholding under section 3402 of the Code, is incurred by the company with respect to `wages' of the dealers.

Since all of the remuneration of the `dealers' does not fall under the control of the company so as to be actually paid by the company, a method of computing the wages of the `dealers' similar to that stated in Mimeograph 6787, C.B., 1952-1, 192, should be adopted, notwithstanding the fact that the `dealers' are employees under the usual common law rules rather than under the statutory definition contained in section 3121(d)(3)(A) of the Federal Insurance Contributions Act.