Butkovitz Uncovers Use of Unregistered Subcontractors Creates Loophole for Tax Enforcement

Audit Date: October 2, 2012
Audit Categories
  • Investigation
Controller: Alan Butkovitz

Executive Summary

For Immediate Release:
October 2, 2012

Contact: Harvey Rice

Butkovitz Uncovers Use of Unregistered Subcontractors
Creates Loophole for Tax Enforcement

City Controller’s investigation also found unsafe working conditions
at most sites visited

Review of City Tax Evasion at Construction Sites

Controller’s Report on the Underground Economy

PHILADELPHIA – City Controller Alan Butkovitz today released a report entitled, “Review of City Tax Evasion at Construction Sites” that found illicit business practices and unsafe working conditions at several construction sites around the city.

After receiving information that commercial and residential construction contractors were compensating workers by cash or check in order to evade reporting wage and business taxes, the City Controller’s investigators reviewed 23 separate active construction sites. This resulted in finding 96 conditions that violated tax laws or public safety ordinances, many of which are currently being reviewed as City Code amendments by Councilmembers Bobby Henon and James Kenney.

At 19 of the construction sites, sub-contractors were not identified on various permits issued by the Department of Licenses and Inspections (L&I), making it difficult to determine if they were appropriately licensed. At six sites, it could not be ascertained whether the contractors or sub-contractors had active business privilege licenses.

“Without a required business privilege license, the appropriate city business taxes cannot be properly filed and paid,” said Butkovitz. “We found instances where it’s very likely that general contractors are circumventing the collection of taxes by not properly identifying all of the workers on active job sites.”

“Our prior Study on the Underground Economy in Philadelphia estimated a direct cost to the city from lost wage taxes amounts to $2.1 million to $7.4 million,” said Butkovitz.

Workers at four separate sites verbally confirmed to the Controller’s investigators that they were getting paid in cash at the end of each day for their services. At one site, workers stated they were getting paid in check format, but a review of a payroll check did not indicate the withholding of any federal, state or city payroll taxes.

According to Butkovitz, second and third level contractors employ workers and pay them in cash or via check without the proper tax withholdings. These workers should be classified as independent contractors.

“Improperly classifying employees places the burden of wage tax payments on workers who may not be familiar with payroll tax laws and regulations,” said Butkovitz. “This practice only increases the likelihood that the appropriate taxes will not be remitted to all of the taxing authorities.”

Along with circumventing tax laws and collections, the Controller’s review revealed the existence of hazardous work conditions at most of the construction sites visited. A lack of compliance with the U.S. Department of Labor, Office of Safety and Health Administration (OSHA) standards included the following with respect to workers at:
-14 sites were not wearing required eye protection
-13 sites were not wearing required hard hats
-4 sites were not wearing required work boots
-6 sites were hanging perilously from either windows, roofs, or scaffolding, without the required safety harnesses

“L&I needs to immediately inspect the construction sites where we observed hazardous work conditions and issue appropriate violation notices,” said Butkovitz. “It also should develop and implement procedures to ensure accurate and timely reporting of all safety infractions encountered during construction site inspections to OSHA.”

Effective May 2012, City Council strengthened L&I’s permit application and disclosure process by amending certain sections of the Philadelphia Code, requiring contractors and sub-contractors to submit identifying information, such as their name, address, telephone number, current and valid business licenses, and the property owners’ name for each construction project.

Additional legislation within the last year has included the introduction of a resolution by Councilmembers Kenney, Henon and Mark Squilla to hold public hearings to review and investigate any illicit construction industry practices.

“I commend these Councilmembers for taking the initiative to review the current regulations and enforcement of the construction industry in Philadelphia,” said Butkovitz. “I urge City Council, as a whole, to move forward with this resolution and start discussing methods to improve tax compliance and safety with our city’s contractors.”