Title 26 — Internal Revenue CodeRelease 119-73
§3305 Applicability of State Law
Title 26 › Subtitle Subtitle C— Employment Taxes › Chapter 23— FEDERAL UNEMPLOYMENT TAX ACT › § 3305
Summary
Employers cannot escape state unemployment taxes by claiming they work in interstate or foreign commerce, or because the work happens on land owned by the United States. A state may also require federal instrumentalities — and national banks — to pay into its unemployment fund, but only on equal terms: their rates cannot be higher than what other employers pay, contributions must be refunded for any year the U.S. Labor Secretary does not certify the state's program, and their employees must get the same benefits as everyone else. For crews of American vessels, the state where the ship's operating office is located may collect unemployment contributions from the employer and crew, and no other state can collect for that work. The same permission covers general agents of the Secretary of Transportation who run government-owned ships. If the Labor Secretary finds that a state's law breaks these conditions, employers who paid under this permission lose their credits against the federal unemployment tax for that year.
Full Legal Text
Title 26, §3305
Internal Revenue Code — Source: USLM XML via OLRC
(a)No person required under a State law to make payments to an unemployment fund shall be relieved from compliance therewith on the ground that he is engaged in interstate or foreign commerce, or that the State law does not distinguish between employees engaged in interstate or foreign commerce and those engaged in intrastate commerce.
(b)The legislature of any State may require any instrumentality of the United States (other than an instrumentality to which section 3306(c)(6) applies), and the individuals in its employ, to make contributions to an unemployment fund under a State unemployment compensation law approved by the Secretary of Labor under section 3304 and (except as provided in section 5240 of the Revised Statutes, as amended (12 U.S.C., sec. 484), and as modified by subsection (c)), to comply otherwise with such law. The permission granted in this subsection shall apply (A) only to the extent that no discrimination is made against such instrumentality, so that if the rate of contribution is uniform upon all other persons subject to such law on account of having individuals in their employ, and upon all employees of such persons, respectively, the contributions required of such instrumentality or the individuals in its employ shall not be at a greater rate than is required of such other persons and such employees, and if the rates are determined separately for different persons or classes of persons having individuals in their employ or for different classes of employees, the determination shall be based solely upon unemployment experience and other factors bearing a direct relation to unemployment risk; (B) only if such State law makes provision for the refund of any contributions required under such law from an instrumentality of the United States or its employees for any year in the event such State is not certified by the Secretary of Labor under section 3304 with respect to such year; and (C) only if such State law makes provision for the payment of unemployment compensation to any employee of any such instrumentality of the United States in the same amount, on the same terms, and subject to the same conditions as unemployment compensation is payable to employees of other employers under the State unemployment compensation law.
(c)Nothing contained in section 5240 of the Revised Statutes, as amended (12 U.S.C. 484), shall prevent any State from requiring any national banking association to render returns and reports relative to the association’s employees, their remuneration and services, to the same extent that other persons are required to render like returns and reports under a State law requiring contributions to an unemployment fund. The Comptroller of the Currency shall, upon receipt of a copy of any such return or report of a national banking association from, and upon request of, any duly authorized official, body, or commission of a State, cause an examination of the correctness of such return or report to be made at the time of the next succeeding examination of such association, and shall thereupon transmit to such official, body, or commission a complete statement of his findings respecting the accuracy of such returns or reports.
(d)No person shall be relieved from compliance with a State unemployment compensation law on the ground that services were performed on land or premises owned, held, or possessed by the United States, and any State shall have full jurisdiction and power to enforce the provisions of such law to the same extent and with the same effect as though such place were not owned, held, or possessed by the United States.
[(e)
(f)The legislature of any State in which a person maintains the operating office, from which the operations of an American vessel operating on navigable waters within or within and without the United States are ordinarily and regularly supervised, managed, directed and controlled, may require such person and the officers and members of the crew of such vessel to make contributions to its unemployment fund under its State unemployment compensation law approved by the Secretary of Labor under section 3304 and otherwise to comply with its unemployment compensation law with respect to the service performed by an officer or member of the crew on or in connection with such vessel to the same extent and with the same effect as though such service was performed entirely within such State. Such person and the officers and members of the crew of such vessel shall not be required to make contributions, with respect to such service, to the unemployment fund of any other State. The permission granted by this subsection is subject to the condition that such service shall be treated, for purposes of wage credits given employees, like other service subject to such State unemployment compensation law performed for such person in such State, and also subject to the same limitation, with respect to contributions required from such person and from the officers and members of the crew of such vessel, as is imposed by the second sentence (other than clause (B) thereof) of subsection (b) with respect to contributions required from instrumentalities of the United States and from individuals in their employ.
(g)The permission granted by subsection (f) shall apply in the same manner and under the same conditions (including the obligation to comply with all requirements of State unemployment compensation laws) to general agents of the Secretary of Transportation with respect to service performed by officers and members of the crew on or in connection with American vessels—
(1)owned by or bareboat chartered to the United States, and
(2)whose business is conducted by such general agents.
(h)Any State may, as to service performed on account of which contributions are made pursuant to subsection (g)—
(1)require contributions from persons performing such service under its unemployment compensation law or temporary disability insurance law administered in connection therewith, and
(2)require general agents of the Secretary of Transportation to make contributions under such temporary disability insurance law and to make such deductions from wages or remuneration as are required by such unemployment compensation or temporary disability insurance law.
(i)Each general agent of the Secretary of Transportation making contributions pursuant to subsection (g) or (h) shall, for purposes of such subsections, be considered a legal entity in his capacity as an instrumentality of the United States, separate and distinct from his identity as a person employing individuals on his own account.
(j)Any person required, pursuant to the permission granted by this section, to make contributions to an unemployment fund under a State unemployment compensation law approved by the Secretary of Labor under section 3304 shall not be entitled to the credits permitted, with respect to the unemployment compensation law of a State, by subsections (a) and (b) of section 3302 against the tax imposed by section 3301 for any taxable year if, on October 31 of such taxable year, the Secretary of Labor certifies to the Secretary of the Treasury his finding, after reasonable notice and opportunity for hearing to the State agency, that the unemployment compensation law of such State is inconsistent with any one or more of the conditions on the basis of which such permission is granted or that, in the application of the State law with respect to the 12-month period ending on such October 31, there has been a substantial failure to comply with any one or more of such conditions. For purposes of section 3310, a finding of the Secretary of Labor under this subsection shall be treated as a finding under section 3304(c).
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2015—Subsecs. (g), (h)(2), (i). Pub. L. 114–92 substituted “Secretary of Transportation” for “Secretary of Commerce”. 1976—Subsec. (g). Pub. L. 94–455, § 1903(a)(15)(A), struck out “on or after
July 1, 1953,” after “respect to service performed”. Subsec. (h). Pub. L. 94–455, 1903(a)(15)(B), struck out “on or after
July 1, 1953, and” after “as to service performed”. Subsec. (j). Pub. L. 94–455, §§ 1903(a)(15)(C), 1906(b)(13)(C), struck out “after
December 31, 1971,” after “for any taxable year” and substituted “to the Secretary of the Treasury” for “to the Secretary”. 1970—Subsec. (j). Pub. L. 91–373 added subsec. (j). 1960—Subsec. (b). Pub. L. 86–778, § 531(a), substituted “(other than an instrumentality to which section 3306(c)(6) applies)” for “except such as are (1) wholly owned by the United States, or (2) exempt from the tax imposed by section 3301 by virtue of any other provision of law,” and added cl. (C). Subsec. (g). Pub. L. 86–778, § 531(b), substituted “neither wholly nor partially” for “not wholly”. 1954—Subsec. (e). Act Sept. 1, 1954, repealed subsec. (e) which related to the Bonneville Power Administrator.
Statutory Notes and Related Subsidiaries
Effective Date
of 1960 Amendment Pub. L. 86–778, title V, § 535, Sept. 13, 1960, 74 Stat. 985, provided that: “The
Amendments
made by this part [part 3 (§§ 531–535) of title V of Pub. L. 86–778, enacting section 3308 and amending this section and section 3306 of this title] (other than the
Amendments
made by subsections (e) and (f) of section 531 [amending section 1361 and 1367 of Title 42, The Public Health and Welfare]) shall apply with respect to remuneration paid after 1961 for services performed after 1961. The
Amendments
made by subsections (e) and (f) of section 531 shall apply with respect to any week of unemployment which begins after December 31, 1960.” [The second sentence of section 535 was repealed by Pub. L. 89–554, § 8(a), Sept. 6, 1966, 80 Stat. 661.]
Effective Date
of 1954 AmendmentAct Sept. 1, 1954, ch. 1212, § 4(c), 68 Stat. 1135, provided that the amendment made by that section is effective with respect to services performed after Dec. 31, 1954. Applicability to Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives Pub. L. 86–778, title V, § 531(g), Sept. 13, 1960, 74 Stat. 984, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “Notwithstanding section 203(b) of the Farm Credit Act of 1959, section 3305(b), 3306(c)(6), and 3308 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], and section 1501(a) and 1507(a) of the Social Security Act [section 1361(a) and 1367 of Title 42, The Public Health and Welfare] shall be applicable, according to their terms, to the Federal land banks, Federal intermediate credit banks, and banks for cooperatives.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 3305
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73