SBA caught in cross-fire over Blackwater's guards

Washington Business Journal (2007-11-05) Kent Hoover

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Kent Hoover Washington Bureau Chief

The Small Business Administration has found itself in the middle of the controversy over Blackwater USA, the private security firm that's under fire for its actions in Iraq.

Rep. Henry Waxman, D-Calif., has questioned whether Blackwater is evading U.S. taxes by classifying its armed guards in Iraq, who are under contract to the State Department, as independent contractors instead of employees. Businesses do not have to pay payroll taxes or withhold income taxes for independent contractors.

Waxman, who chairs the House Oversight and Government Reform Committee, noted that Dyn Corp and Triple Canopy, two other companies that provide security services to the State Department, classifies its guards as employees.

Plus, the Internal Revenue Service ruled in March that Blackwater's classification of a security guard working in Afghanistan as an independent contractor was "without merit," Waxman said. The IRS warned its ruling "may be applicable to any other individuals engaged by the firm."

In response, Blackwater cited an SBA "official finding" that "Blackwater security contractors are not employees." The independent contractor model better suits its needs, it said.

This reference to the SBA troubled Sen. John Kerry, D-Mass., who chairs the Senate Small Business and Entrepreneurship Committee.

"The SBA must explain to the American people what role they may have played in helping Blackwater avoid paying $31.8 million in taxes," Kerry said Oct. 23. "The SBA should not be involved in tax-related decisions."

It turns out the SBA finding cited by Blackwater had to do with whether one of its affiliates qualified as a small business.

Competitors of Blackwater affiliate Presidential Airways protested the awarding of a small business set-aside contract for helicopter replenishment services. The SBA, applying IRS criteria, determined that Blackwater's personnel were independent contractors, not employees, and therefore the company qualified as a small business because it didn't exceed the 1,500-employee threshold for its industry.

In an Oct. 24 letter to Kerry, SBA Administrator Steven Preston wrote, "SBA's size determinations are solely for the purpose of ascertaining eligibility for our small business programs and have no applicability to tax liability matters."

Kerry now contends Blackwater "erroneously and inappropriately relied on an SBA size determination for the classification of its workers." He asked the Senate Finance Committee to investigate Blackwater, citing the committee's concerns about the gap between the amount of taxes that should be paid to the government and the amount actually collected.

"Misclassification of workers is a contributing factor" to the tax gap, he wrote in an Oct. 26 letter to committee leaders.

Kerry also sent a letter to Erik Prince, chairman of Blackwater's Mc Lean, Va.-based parent company, the Prince Group, asking why Blackwater "relied on or referenced an SBA size determination for classifying its workers for tax purposes." Kerry also wants Blackwater to explain the chain of command for its workers deployed in Iraq and Afghanistan, and the status of any IRS audits of Blackwater and any related companies.

For more information, see sbc.senate.gov