Should a staffing arrangement where workers are dedicated full-time to one client be taxed as staff leasing services or as temporary help services?

Subject

Temporary Help Services — Vs. Staff Leasing Services

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1441D06

Plain-English summary

This is a follow-up letter in an ongoing back-and-forth between a taxpayer and the Comptroller's Tax Policy Division about whether a staffing arrangement between two entities (referred to as "ABC and DEF") and a limited partnership qualified as exempt staff leasing services under sec. 3.364, or something else.

The Comptroller's original concern was that ABC and DEF looked more like a service provider or independent contractor than a true staff leasing firm, because under sections c) through f) of the original contract, the staff leasing firms only shared "the details of the work done" -- they didn't have real control over the employment relationship itself.

The taxpayer then modified the contract so that both the staff leasing firms and the limited partnership shared responsibility for paying wages and payroll taxes, and (more importantly) shared the authority to hire, fire, discipline, and reassign the assigned employees, as well as to set employment and safety policies. The taxpayer also confirmed the assigned workers would be dedicated to the limited partnership -- not sent out piecemeal, by project, or on an as-needed basis -- while performing regular duties for ABC or DEF.

That distinction mattered because temporary placement of workers on a supplemental, as-needed basis is addressed separately, under sec. 151.057 of the Texas Tax Code, and would have to meet that section's own exemption requirements. Because these workers were dedicated rather than temporary, and because the revised contract gave both parties genuine joint control over the employment relationship, the Comptroller concluded the arrangement now conformed to sec. 3.364, and the staff leasing services described in sec. 3.364(a)(6) are exempt.

As with other letters of this kind, the opinion is expressly based on the facts presented and could change if the facts were different.

What this means for you

Staff leasing / PEO companies

If you operate a staff leasing (employee leasing/PEO) arrangement, this letter is a reminder that the exemption under sec. 3.364 depends on the substance of the contract, not just its label. To qualify, your contract should give you (jointly with the client) real authority over hiring, firing, discipline, reassignment, and setting employment/safety policies -- not just oversight of day-to-day task details. A contract that leaves you as a mere labor supplier sharing only "the details of the work" risks being treated as a taxable service arrangement instead.

Businesses using leased or temporary staff

Whether workers assigned to your business are treated as exempt staff leasing or as taxable temporary/supplemental help can depend on how they're used. Under this letter, workers who are dedicated to your operation on an ongoing basis (rather than sent out piecemeal, by project, or as needed) point toward staff leasing treatment under sec. 3.364, while as-needed supplemental placements are evaluated separately under sec. 151.057.

Accountants and tax professionals

When reviewing staffing contracts for sales tax classification, check the same elements the Comptroller checked here: (1) who has authority to hire, fire, discipline, and reassign workers; (2) who is responsible for wages and payroll taxes; (3) who sets employment and safety policies; and (4) whether the workers are dedicated to one client or supplied on a piecemeal/as-needed basis. Getting the contract terms to actually reflect joint employer control -- not just task-level supervision -- was what turned this arrangement from a concern into an exempt staff leasing service.

Common questions

Q: What made the Comptroller initially doubt this was a staff leasing arrangement?
A: Sections c) through f) of the original contract indicated the staff leasing firms would only have control over "the details of the work done," rather than control over the broader employment relationship (hiring, firing, discipline, reassignment, policies).

Q: What changes to the contract resolved the Comptroller's concern?
A: The contract was modified to give both the staff leasing firms and the limited partnership shared responsibility for paying wages and payroll taxes, and shared authority to hire, fire, discipline, and reassign the assigned employees, as well as to set employment and safety policies.

Q: Why did it matter that the workers were "dedicated" to the limited partnership?
A: Because temporary placement of workers on a piecemeal, project, or as-needed (supplemental) basis is addressed separately under sec. 151.057 of the Texas Tax Code, with its own exemption requirements. Since these workers were dedicated rather than supplied on that basis, the sec. 3.364 staff leasing analysis applied instead.

Q: What was the final ruling?
A: The contractual agreement conformed to the requirements of sec. 3.364 concerning staff leasing services, and the staff leasing services defined in sec. 3.364(a)(6) are exempt.

Q: Could this outcome change under different facts?
A: Yes -- the letter states the opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Statutes and rules:

• sec. 3.364 (staff leasing services)
• sec. 3.364(a)(6) (staff leasing services exemption)
• sec. 151.057 of the Texas Tax Code (temporary/supplemental help services)

Original ruling text

September 23, 1996

Dear ***:

Thank you for your taxability request of September 17, 1996, concerning the
application of sec. 3.364, concerning staff leasing services.

This request was to clear up concerns related with your request of August
27, 1996 and my previous response of September 13, 1996.

My original concern was that ABC and DEF was situated as a service
provider or independent contractor rather than a staff leasing firm.
Specifically Section c) through f) of the contracts indicated that the staff
leasing firms will actually have control of all aspects of employment other
than the details of the work done.

The contract has been modified to give both the staff leasing firms and the
limited partnership responsibility for payment of wages, payroll taxes, and
(more importantly) the authority to hire, fire, discipline, and reassign the
assigned employees as well as the setting of employment and safety policies.
The original contract was more limited a sharing of the details of the work.

In addition, you have stated that these assigned workers will be dedicated
to the limited partnership and not serving on a piecemeal, project, or as
needed basis for the limited partnership while performing regular duties for
ABC or DEF. You understand that the temporary placement of employees to
perform the same type of services on a temporary basis (supplemental) are
addressed under the provisions of sec. 151.057 of the Texas Tax Code. To
qualify for exemption on these temporary services, they must meet the
provisions for exemption in this section.

Given that the above contractual elements are present and accurately reflect
the essence of the leasing arrangement, the contractual agreement conforms
to the requirements of sec. 3.364 concerning staff leasing services. The
staff leasing services defined in sec. 3.364 (a)(6) are exempt.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division

NOTE: Previous Accession Number 9609795L