When is help provided by a temporary help service exempt from Texas sales tax as a 'temporary employee,' even if the assignment lasts an extended period?

Subject

Temporary Employee Performing Services For Employer Vs. Performing Taxable Services — Guidelines

Plain-English summary

A taxpayer asked the Comptroller to clarify what "temporary" means for purposes of the temporary help service exemption, since neither the law nor a rule defines the word. The taxpayer's concern was assignments that run for an extended period -- for example, bringing in a temporary help service to enter data for a new software rollout that the regular staff can't finish in time, or using a temporary help service to cover a transition period after a company reduction in force. The taxpayer argued that, under a dictionary definition of "temporary" as "not permanent," the exemption should apply even to these extended-duration assignments.

The Comptroller's response didn't adopt a bright-line time limit. Instead, it explained that -- absent a written contract spelling out the parties' relationship -- the agency has historically applied common-law tests for an employer/employee relationship, which were codified in Tax Code 151.057 (effective October 1, 1989). That statute exempts a service performed by a temporary help service for an employer to supplement the employer's existing workforce on a temporary basis, when the service is normally performed by the employer's own employees, the employer provides all necessary supplies and equipment, and the help is under the direct or general supervision of the employer receiving the help.

From that, the Comptroller distilled three requirements for the exemption to apply:

1. The agreement must be for furnishing temporary employees, not for identifiable services -- the help must supplement an existing workforce doing work that workforce already performs day-to-day. If the customer has no staff regularly doing that work, or is understaffed, the contract is presumed to be for taxable services rather than temporary employees.
2. The help must be under the direct or general supervision of the customer, including the customer's right to ask that an unsatisfactory temporary worker be replaced.
3. The customer must provide all the supplies and equipment necessary to perform the work.

For the taxpayer's specific examples, the Comptroller said it would need to look at the actual contract between the parties (if one exists) or the specific facts to determine whether the personnel involved qualify as "temporary" employees. The letter also notes the opinion is based on the facts presented and that other, similar facts could produce a different result.

What this means for you

Businesses that bring in temporary staffing during crunch periods or reorganizations

Simply calling help "temporary," or using it for an extended stretch (a big data-entry project, a reduction-in-force transition), does not by itself secure the exemption. What matters is whether the three-part test is met: the workers supplement your existing staff doing work your staff normally does, you supervise them, and you supply their equipment and supplies. A written contract describing the arrangement in these terms strengthens the case for exemption.

Staffing agencies and temporary help services

Whether your services to a client are exempt "temporary help" or a taxable service depends on the client's contract and facts -- not simply on how long the assignment lasts. If your workers are performing identifiable, self-directed services rather than filling in for the client's own regular staff under the client's supervision and using the client's equipment, the arrangement is more likely to be treated as a taxable service.

Accountants and tax professionals

When advising on the temporary help service exemption under Tax Code 151.057, look past the word "temporary" itself and apply the three-part common-law-derived test: (1) supplementing an existing workforce doing work that workforce normally performs, (2) direct or general supervision by the customer, and (3) the customer supplying equipment and supplies. Absence of a written contract does not defeat the exemption, but it does mean the analysis falls back on these facts-and-circumstances tests.

Common questions

Q: Does "temporary" have a fixed time limit under Texas sales tax law?
A: No. The letter states that neither the law nor a rule defines "temporary," and the Comptroller's response focuses on the three-part test in Tax Code 151.057 rather than any specific duration.

Q: Can temporary help still qualify for the exemption if the assignment runs for an extended period, like during a reduction in force?
A: The ruling doesn't rule that out, but it also doesn't confirm it automatically. The Comptroller says it would need to review the contract or specific facts of each situation to determine whether the exemption applies.

Q: What are the three requirements for the temporary help service exemption?
A: (1) The agreement is for furnishing temporary employees who supplement an existing workforce doing work that workforce already does day-to-day, not for identifiable services; (2) the help is under the customer's direct or general supervision, including the right to request replacement of unsatisfactory workers; and (3) the customer provides all necessary supplies and equipment.

Q: What happens if the customer doesn't have staff already doing that kind of work, or is understaffed?
A: The letter states that in that situation, the contract will be presumed to be for services, not for temporary employees, meaning it would not qualify for the exemption.

Citations and references

Statutes:

• Tax Code 151.057 (effective October 1, 1989) -- exempts a service performed by a temporary help service for an employer to supplement the employer's existing workforce on a temporary basis, subject to the three-part test described above.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9610053L

Original ruling text

October 28, 1996

Dear **:

This is in response to your request for clarification regarding "temporary"
employees. You were unable to find anywhere in the law or a rule where
temporary is defined. Normally, this interpretation is not a problem, except
in situations that calling for help for an extended period of time.

You give as examples when temporary help would be used for an extended period
as follows:

when a new software program is going to be used that requires entry of a large
data base The job is too big for the employees to timely complete so a
temporary help service is brought in to help.

another example is when a company makes a reduction in force and finds that it
needs to use a temporary help service during the transition period.

Webster defines temporary as not permanent. It would seem that the exemption
in 151.1057 would apply even when the help is provided for an extended period
of time because it is not permanent.

Response: I am enclosing edited excerpts from microfiche #9310L1262D11, which
sets out our policy, and the common law test that we follow, on temporary help
service as follows:

Absent a written contract that defines the parties' relationships, we have
historically operated under variations of common law tests for an
employer/employee relationship to determine whether a "temporary" employee's
services were exempt.

These tests were codified in Tax Code 151.057, effective October 1, 1989, as
follows, to exempt:

. . . a service performed by a temporary help service for an employer to
supplement the employer's existing work force on a temporary basis, when the
service is normally performed by the employer's own employees, the employer
provides all supplies and equipment necessary, and the help is under the direct
or general supervision of the employer to whom the help is furnished . . . .

In other words, in order to qualify for the exemption for temporary help
services the following requirements must be met:

The agreement must be for furnishing temporary employees, and not for
identifiable services. That is, the help must supplement an existing work force
on a temporary basis, and the functions must be a type that are done by that
work force on a day-to-day basis. If the customer does not have a staff to
regularly provide these services or is understaffed, then the contract will be
presumed to be for services and not for temporary employees.

The help is under the direct or general supervision of the customer. This
includes the customer having the right to ask that a temporary helper be
replaced if his/her performance is not satisfactory.

The customer must provide all supplies and equipment necessary to perform the
services.

Emphasis added.

In the examples that you give, we would need to look at the contract between
the parties (if one exists) or the related specific facts to determine if the
personnel hired are considered "temporary' employees".

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division