When a property owner pays a management company for workers, are the payments exempt wages, and is the management fee taxable?

Plain-English summary

The CPA firm Di Marco, Abiusi, Pascarella & Firnstein asked, on behalf of property owners, how sales tax applies when an owner uses a management company to supply and pay workers. In the described arrangement, the owner advertises for, interviews, and decides whom to hire, then fully controls the worker's schedule, duties, and pay. The management company handles all payroll: it prints the checks in its own name drawn on its own bank account (payment not contingent on the owner's reimbursement) and files the Form 941, W-2, etc. under its own name and ID. The owner reimburses the gross payroll plus a fixed mark-up.

The Department held:

• The workers are the management company's employees. The indicia — checks in the company's name, drawn on its account, paid regardless of reimbursement, and payroll reports under its ID — show the company is the employer.
• So the payments aren't exempt wages. Because the workers are the company's employees, the amounts the owner pays are not "wages … paid by an employer to an employee" under Tax Law § 1105(c)(5). They are payment for services one corporation renders another (citing 107 Delaware Associates and Stouffer Management Food Services), and the management fee is part of the company's sale.
• Taxability depends on what the worker does. The firm didn't say what services the workers perform, so the Department gave the rule:
  • If the worker performs a non-enumerated (exempt) service — for example, typing or bookkeeping — then the management fee and the charges for the individual are exempt.
  • If the worker performs a taxable § 1105(c) service — for example, painting — the company must collect sales tax on the entire amount, including the management fee.

What this means for you

If you supply workers through a management or staffing company: Once the workers are your employees (your payroll, your checks, your W-2s), your charges to the client are your sale — and the § 1105(c)(5) wage exclusion the client might otherwise use doesn't apply to what the client pays you.

Look at the service, not the label. Whether you must charge tax turns on what the worker does. Supplying a bookkeeper or typist (non-enumerated services) is exempt; supplying a painter or someone performing another taxable § 1105(c) service makes the whole charge — including your management fee — taxable.

The management fee follows the underlying service. You can't carve out the fee as a separate non-taxable charge when the worker performs a taxable service; it's part of the single taxable sale. (Compare the companion opinion TSB-A-89(26)S, where the same employee analysis made a country club's payments for grounds-maintenance workers fully taxable.)

Common questions

Q: The property owner interviews, hires, and controls the workers — aren't they the owner's employees?
A: Not here. Because the management company pays the workers from its own account and files their payroll reports under its own ID, the Department treated them as the company's employees, so the owner's payments aren't exempt wages.

Q: Is the management fee always taxable?
A: No. If the worker performs an exempt service like typing or bookkeeping, the fee and the charge for the worker are exempt. The fee becomes taxable only when the worker performs a taxable § 1105(c) service.

Q: If the worker paints (a taxable service), what's taxable?
A: The entire amount charged, including the management fee.

Citations and references

Statute:

• Tax Law § 1105(c) — tax on enumerated services
• Tax Law § 1105(c)(5) — excludes wages an employer pays its own employees for performing enumerated services

Cases cited:

• 107 Delaware Associates v. New York State Tax Commission, 64 NY2d 935
• Stouffer Management Food Services, Inc. v. James H. Tully, 98 Misc 2d 1128 (reimbursed costs, subsidy, and management fee are "sales")

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (27)S
Sales Tax
August 9, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890302A

On March 2, 1989 a Petition for Advisory Opinion was received from Di Marco, Abiusi,
Pascarella & Firnstein, CPA's, 4 Clinton Square - Suite 104, Syracuse, N.Y. 13202-1074.
The issues raised are: (1) whether amounts paid by a property owner to a management
company for employees provided by the management company are considered exempt wages; and
(2) whether any part of the service performed by the employees provided by the management
company is subject to sales tax.
The petitioner submits the following statement of facts as the basis for the requested
Advisory Opinion:
A property owner (PO) engages a management company (MC) to provide
various services to the PO. The primary service provided by the MC is that which is
payroll related. Specifically, if a PO needs to hire an employee, the PO provides the
MC with the job requirements and the MC locates the job applicants via newspaper
advertisements or similar methods. Responding job applicants are directed to the PO,
which interviews and makes the ultimate decision on whether or not to hire the job
applicant. If the job applicant is not hired by the PO, the applicant has no further
relationship to the PO or MC.
If the job applicant is hired, the employee reports to and his work schedule
is determined by the PO; the PO has full and complete authority over the employee,
including the wage rate of the employee. At this point, the MC is involved in that the
MC handles all payroll matters related to the PO's employee.
Specifically, the employee submits his time sheet to the PO manager, who
reviews it and approves it. The PO draws up a list of the payroll by employee for that
time period and submits the payroll sheet to the MC for payment. The MC has no
authority to alter the payroll sheet or deny payment to any individual employee. The
MC prints the employee payroll checks (the MC's name is on the check, not the PO)
and turns the checks over to the PO, who then distributes the checks to the
employees. The checks are drawn against the MC's bank account and payment is not
contingent upon reimbursement by the PO. Payroll reports (Form 941, W-2, etc.) are
filed under the MC's name and employer identification number. The PO reimburses
the MC the gross payroll amount plus a fixed mark-up to cover employer taxes and
fringe benefits.
Section 1105(c) of the Tax Law imposes a sales tax on a variety of services. Section
1105(c)(5) also excludes from sales tax, "Wages, salaries and other compensation paid by an
TP-9 (9/88)

-2­
TSB-A-89 (27)S
Sales Tax
August 9, 1989

employer to an employee for performing as an employee the services described in paragraphs (1)
through (5) of this subdivision (c) are not receipts subject to the taxes imposed under such
subdivision."
The individuals involved are employees of the management company. Indicia of this include
the facts that "... MC prints the payroll checks (the MC's name is on the check, not the PO) ... The
checks are drawn against the MC's bank ... payment is not contingent upon reimbursement by the
PO ... Payroll reports (Form 941, W-2, etc.) are filed under the MC's name..". The amount paid by
the property owner to the management company are not wages paid by an employer to its employees
but, the payment for services rendered by one corporation for another corporation. (See 107
Delaware Associates v New York State Tax Commission 64 NY 2d 935.)
Since the employees are employed by the management company, the management fee and
any other charges made by the management company are a part of the management company's sale.
"The amounts received from the corporate clients under the reimbursed costs, subsidy and
management fee arrangements are sales ..." (Stouffer Management Food Services Inc. v James H.
Tully, 98 Misc 2d 1128).
Petitioner did not indicate the nature of the services which the property owner obtains from
the individuals provided by the management company. If the management company provides an
individual who performs an exempt service such as typing or bookkeeping, its management fee as
well as its charges for the individual are exempt. However, If the management company provides
an individual who performs a taxable service pursuant to Section 1105(c), such as painting, it must
collect the sales tax on the entire amount charged including the management fee.

DATED: August 9, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.