What Can Brown Do To You: UPS Tax Lawyer Drops Dime on FedEx, Prompts Ohio to Reclassify Drivers as Employees, Resulting in $654k Tax Liability

Bloomberg News:  UPS Lobbyist Secretly Spurred Ohio to Demand Taxes From FedEx, by John Hughes:

A secret report from a lobbyist who represents United Parcel Service Inc. prompted an Ohio state investigation into employment practices of FedEx Corp., leading to a finding that FedEx owed back taxes and interest.

Kenneth Kies, a Washington tax lawyer and lobbyist whose firm has been paid $540,000 by UPS since 2002, sent Ohio officials a 562-page report in December 2006 alleging that FedEx misclassified truck drivers as contractors. A copy of the report, including a cover letter in which Kies asked for confidentiality, was released to Bloomberg News by Ohio officials.

"We took it and opened our own investigation," said Judi Cicatiello, Ohio's unemployment compensation deputy director. She said it was "very" unusual to get such detailed allegations. Her agency determined in May 2007 that the drivers were employees and FedEx owed $654,000 in taxes and interest. The company is appealing. The report is the first disclosure indicating that UPS may have played a role in prompting an investigation of FedEx's employment of 15,000 drivers as independent contractors. The strategy gives FedEx a cost advantage over UPS, whose 91,800 drivers are covered by a contract with the Teamsters Union. ...

Kies didn't return telephone calls to his Washington office. At the time of the report, Kies's Federal Policy Group, where he still works, was a part of Clark Consulting. UPS was one of about 50 clients including General Motors Corp. and General Electric Co. Some paid more than $1 million a year, compared with UPS's $80,000 fee for 2006, based on federal filings. UPS is the only package-delivery business among the firm's clients. ``We have seen an increase in the number of state investigations and have been trying to better understand what prompted these inquiries,'' FedEx spokesman Maury Lane said in a statement. ``We are surprised by today's report of UPS's apparently concealed involvement in this activity.'' ...

Kies [is] the former chief of staff for the Congressional Joint Committee on Taxation. ...

Companies reporting to authorities about rivals' practices "probably happens more often than you think," said Charles Elson, director of the John Weinberg Center for Corporate Governance at the University of Delaware in Newark.

Update:  For more, see Linda Beale and Joe Kristan.