Can a Texas data center count third-party staffing agency employees toward the 20-qualifying-job requirement needed to keep its data center sales tax exemption, and what counts as the required 'shared employment responsibilities'?

Plain-English summary

To keep the Texas data center sales tax exemption, a qualifying data center must create at least 20 qualifying jobs within five years of certification (Tax Code § 151.359(d)(2)(A)). One way to meet that requirement is to staff positions through a third-party employer, but only if the job counts as a "qualifying job" under Rule 3.335(a)(7)(B)(i) — which requires a written contract establishing "shared employment responsibilities" between the data center and the third-party employer. The term wasn't defined anywhere in Rule 3.335, leaving companies without a clear standard.

A company operating an existing data center, and building a newly certified one next door, planned to staff both full-time employees and contract employees through third-party employers. It didn't have individual five-year employment agreements with each contract worker, but intended each position itself to last at least five years. Its contracts with third-party employers spelled out specific responsibilities (like "career mentoring and performance reviews") and designated which party was the "activity owner" (accountable for completion) versus "activity supporter" (providing assistance) — for every task, the company was either one or the other. Some contracts also called for the company and the third-party employer to jointly develop "policies and procedures for oversight."

The Comptroller filled the definitional gap by borrowing the Professional Employer Organization (PEO) standard from Labor Code Chapter 91 (which requires written contracts between PEO licensees and their client businesses). It adopted Labor Code Section 91.032's framework and defined "shared employment responsibilities" for data center purposes as requiring the data center and the third-party employer to share: (1) the right to direct and control the assigned employees; (2) the right to hire, fire, discipline, and reassign them; and (3) the right to direct and control employment/safety policy adoption and workers' compensation claims handling — while the data center always retains ultimate responsibility needed to run its business, meet fiduciary duties, or satisfy licensing/regulatory requirements. The Comptroller noted Rule 3.335 would be amended to incorporate this new standard.

Applying that standard to the facts presented, the Comptroller declined to give an affirmative ruling — without reviewing the actual contracts, it couldn't confirm the company's specific division of labor (activity owner/supporter designations, joint policy development) satisfied the new shared-employment-responsibilities test.

What this means for you

Data centers staffing through third-party employers or staffing agencies

Don't assume any contract that divides up HR-related tasks between you and a staffing vendor automatically counts toward your 20-qualifying-job exemption requirement. Your contract needs to affirmatively establish shared rights across all three PEO-style dimensions: direction/control of the workers, hire/fire/discipline/reassignment authority, and joint control over employment/safety policy and workers' comp handling — not just a general division of "who's responsible for what."

Staffing agencies and Professional Employer Organizations serving data centers

Model your data-center client contracts on the Labor Code Chapter 91 PEO framework directly, since the Comptroller has now explicitly imported that statutory standard (Section 91.032) into the data center exemption context. A contract built around PEO norms is likely to be evaluated favorably; a generic staffing agreement without shared-control provisions may not be.

Accountants and tax professionals

This ruling is significant less for its specific outcome (an inconclusive non-ruling on this taxpayer's contracts) than for establishing the actual legal standard — before this ruling, "shared employment responsibilities" had no defined content in Rule 3.335 at all. Cite this ruling for the definitional framework, and expect Rule 3.335 itself to eventually incorporate it by amendment.

Common questions

Q: Does this ruling confirm the taxpayer's third-party contract employees count toward the 20-job requirement?
A: No. The Comptroller adopted a legal standard (borrowed from the PEO statute) but explicitly declined to confirm whether this taxpayer's actual contracts satisfied it without reviewing them directly.

Q: What exactly must a contract with a third-party employer include to create "shared employment responsibilities"?
A: Per this ruling, the data center and third-party employer must share the right to direct/control assigned employees, the right to hire/fire/discipline/reassign them, and the right to direct/control employment and safety policy and workers' compensation handling — while the data center keeps ultimate authority needed for its own business, fiduciary, or regulatory obligations.

Q: Where does this "shared employment responsibilities" standard come from?
A: The Comptroller adopted the requirements of Texas Labor Code Section 91.032, which governs Professional Employer Organizations, applying that same framework to the data center qualifying-job context.

Q: Can another data center rely on this ruling?
A: No. This is a private letter ruling binding only on the Comptroller as to this taxpayer and these facts, and cannot be relied upon by any other taxpayer — though the newly adopted legal standard itself is expected to be incorporated into a future Rule 3.335 amendment.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.359(d)(2)(A) (20-qualifying-job requirement)
• Tex. Tax Code § 151.3595 (qualifying large data center projects)
• 34 Tex. Admin. Code Rule 3.335(a)(7)(B)(i) (qualifying job staffed by third-party employer)
• Tex. Labor Code §§ 91.031, 91.032 (Professional Employer Organizations)
• 34 Tex. Admin. Code Rule 3.1 (Private Letter Rulings and General Information Letters)
• 34 Tex. Admin. Code Rule 3.10 (Taxpayer Bill of Rights; detrimental reliance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201510541L

Original ruling text

October 27, 2015

Re: Private Letter Ruling #150970241

Dear *****:

This letter is issued in accordance with Rule 3.1, Private Letter Rulings and General Information Letters, in response to your correspondence dated March 17, 2015, requesting guidance on the comptroller’s interpretation of “shared employment responsibilities” as set out in Rule 3.335, Property Used in a Qualifying Data Center; Temporary State Sales Tax Exemption. Detrimental reliance relief is permitted in accordance with Rule 3.10, Taxpayer Bill of Rights.

Facts Presented:

***** (Taxpayer) currently has an existing data center and plans to build a new data center adjacent to its existing facility. The new data center has been certified as a qualifying data center.

Taxpayer plans to hire contract employees as well as full-time employees to work at the qualified data center. Taxpayer will not have five-year employment agreements with each individual contract employee, but Taxpayer intends that each permanent employment position will exist for at least five years.

Agreements between Taxpayer and the third-party employers set forth general employment responsibilities and designate whether Taxpayer and/or the third-party employer are responsible. For example, one general contract with a third-party employer provides a number of employment responsibilities, such as responsibility for “career mentoring and performance reviews” and then indicates whether Taxpayer or the third-party employer is the “activity owner” or accountable for its successful completion. The activity supporter is the party obligated to provide support and assistance in the completion of the indicated task. For all employment-related tasks, Taxpayer is either the activity owner or the activity supporter. Other agreements with third-party employers indicate that Taxpayer and the third-party employer will work together to establish “policies and procedures for oversight.”

Taxpayer and the third-party employers “share” certain responsibilities in that Taxpayer provides the place of employment and assists and supports other employment-related activities, depending on the specific contractual agreements.

Ruling and Analysis:

Taxpayer requests a ruling that the division of labor between Taxpayer and its third-party employers is sufficient to constitute shared employment responsibilities such that Taxpayer may count these third-party contract employees towards the 20-person job requirements in Tax Code Section 151.359(d)(2)(A).

Certification as a qualifying data center requires, as relevant to this request, the creation of a minimum 20 qualifying jobs between the date of certification and the five-year anniversary of such certification.

A qualifying job is defined to include a new employment position staffed by a third-party employer if a written contract between the third-party employer and the qualifying owner, operator, or occupant (collectively the parties) provides for shared employment responsibilities between the parties. See Rule 3.335(a)(7)(B)(i).

The term “shared employment responsibilities” is not defined in Rule 3.335. For guidance in defining this term, we will look to Chapter 91 of the Texas Labor Code. Chapter 91 of the Labor Code applies to Professional Employer Organizations and requires a written contract between licensees and their clients. See Labor Code Section 91.031.

The requirements of Labor Code Section 91.032 are adopted for application to the shared employment relationship between qualifying data centers (including qualifying large data center projects) and third-party employers with whom the data centers contract for purposes of creating the qualifying jobs required pursuant to Tax Code Section 151.359 and Tax Code Section 151.3595. Rule 3.335 will be amended to incorporate the guidance provided herein.

The term “shared employment responsibilities” means the third-party and the qualifying owner, operator, or occupant of a qualifying data center or qualifying large data center project (individually or jointly as set out in the applicable contract):

• share the right of direction and control of third-party employees assigned to the qualifying data center;

• share the right to hire, fire, discipline, and reassign third-party employees assigned to the qualifying data center;

• share the right of direction and control over the adoption of employment and safety policies and the management of workers’ compensation claims, claim filings, and related procedures for third-party employees assigned to the qualifying data center; and

• notwithstanding the above, the qualifying data center retains sole responsibility for the direction and control of third-party employees as necessary to conduct the data center’s business, discharge any applicable fiduciary duty, or comply with any licensure, regulatory, or statutory requirement.

Based on the facts presented, and without reviewing the specific contracts, we cannot give an affirmative determination that the division of labor between Taxpayer and its third-party employers is sufficient to constitute shared employment responsibilities such that Taxpayer may count these third-party contract employees towards the 20-person job requirements in Tax Code Section 151.359(d)(2)(A).

If you have any questions about this private letter ruling, please email us at https://www.window.state.tx.us/taxhelp/ and reference Private Letter Ruling #150970241.

Sincerely,

Tax Policy Division

Indirect Taxes