Are a professional recruiting firm's placement fees, and its separate contract-labor billings for secretarial/consulting help, subject to Texas sales tax?

Plain-English summary

A home-based professional recruiting firm (operating as a sole proprietorship or corporation, working frequently at customer sites) asked whether its charges required a Texas sales tax permit and reporting. The firm had two distinct revenue streams: "Placement Fees" charged to businesses when it successfully places a candidate, and separate bi-monthly "contract labor" billings for secretarial and consulting help.

The Comptroller split the answer cleanly. Placement/recruiting fees are not subject to sales tax — a headhunter's core service of finding and placing candidates isn't a taxable service under Texas law.

Contract labor billings are a different story. Tax Code § 151.057 excludes from tax a service performed by an actual employee for their employer, and also excludes a "temporary help service" that supplements a customer's existing workforce — but only when the work is normally done by the customer's own employees, the customer supplies all necessary equipment and supplies, and the customer directly or generally supervises the workers. Rule 3.356(a)(10) pins the "temporary help service" label to a specific Standard Industrial Classification group. If the firm's contract labor arrangement doesn't fit either the employee exclusion or the temporary-help-service exclusion, the labor charges are a taxable service, and the firm (or sole proprietor) needs a sales tax permit to collect and report tax on it — plus, as a corporation, it separately owes Texas franchise tax reports regardless.

What this means for you

Recruiting and staffing firms with mixed revenue streams

Don't assume your whole business is untaxed just because your core recruiting/placement fees are exempt. If you also bill out contract labor, secretarial help, or consulting staff, check that arrangement separately against the § 151.057 employee exclusion and the Rule 3.356(a)(10) temporary-help-service definition — customer supervision and customer-supplied equipment/supplies are the key facts.

Sole proprietors and small firms doing both placement and staffing

If your contract labor doesn't qualify as exempt "temporary help," you need a Texas sales tax permit to collect and remit tax on those charges, and if you're organized as a corporation, you also owe separate franchise tax reports.

Accountants and tax professionals

This letter is a clean illustration of how Texas taxes staffing-adjacent businesses: recruiting/placement itself stays untaxed, but contract labor is taxable by default unless it fits one of two narrow carve-outs (bona fide employee, or SIC-classified temporary help service under customer supervision with customer-supplied equipment).

Common questions

Q: Are recruiting or headhunter placement fees taxable in Texas?
A: No. Fees charged for professional recruiting/placement services are not subject to Texas sales tax.

Q: Is contract labor for secretarial or consulting work taxable?
A: It depends. If the arrangement qualifies as an employee's service to their employer, or as a "temporary help service" under Rule 3.356(a)(10) (customer-supervised, customer-equipped, filling in for the customer's own normal staff), it's not taxable. Otherwise, it's a taxable service requiring a sales tax permit.

Q: What does "temporary help service" require to be exempt?
A: The work must be normally performed by the customer's own employees, the customer must supply all necessary equipment and supplies, and the temporary personnel must be under the customer's direct or general supervision — and the provider must fall within the specified Standard Industrial Classification group.

Q: Can I rely on this letter for my own recruiting/staffing business?
A: No. This opinion is based on the facts presented, and other facts, though similar, may provide a different result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• Tex. Tax Code § 151.057 (services by employees; temporary help service exclusion)
• 34 Tex. Admin. Code Rule 3.356(a)(10) (temporary help service definition)

Subject

Job Placement/Recruiting/Recruitment/Headhunter Services — Charges And Fees

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9712357L

Original ruling text

December 30, 1997

Dear Ms. **:

This is in response to your request for a ruling on whether [COMPANY A's]
activities in Texas require you to register and file reports with the State.
Your fact situation and activities are restated below followed by my response.

Your understanding is that COMPANY A is not subject to Sales Tax at this time
due to the nature of business conducted by COMPANY A. You are writing this
letter for our review and/or documentation for confirmation that no further
action is necessary for filings associated with Texas State taxes. You are
asking us to review and identify any activities requiring a permit based on the
description below of COMPANY A.

COMPANY A is a professional recruiting firm for businesses. The customer pays
COMPANY A a "Placement Fee" for services. Additionally, the sole proprietor or
the Corporation provides contract labor for secretarial and consulting
services. Contract labor fees are billed bi-monthly and are based on contracted
cost. A key reason the corporation was formed is to ensure all income and
recruiting cost are traced for IRS filings. COMPANY A operates primarily from
"Home" and is frequently operating at customer sites.

Response: COMPANY A's fees for services as a professional recruiting firm are
not subject to sales tax.

COMPANY A's, or a sole proprietor's, fees for services of providing contract
labor for secretarial or consulting services may be taxable depending on the
type of service provided and whether the work is performed by an "employee".
"Contract labor" is not specifically defined in the Tax Code or Rules. However,
Texas Tax Code Section 151.057 Services by Employees, provides that:

A service performed by an employee for his employer in the regular course of
business, within the scope of the employee's duties, and for which the employee
is paid his regular wages or salary, or 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, is not taxable under this chapter.

Section (a)(10) of Rule 3.356 - Real Property Service, defines "Temporary help
service" as,

An individual, company, or corporation covered by Industry Group 7363, Group
736, Major Group 73 of the Standard Industrial Classification Manual, 1989, and
includes an individual, company, or corporation that supplies personnel on a
temporary basis to supplement a customer's existing work force. In the context
of this rule, such temporary personnel must perform a service that is normally
performed by the customer's own employees; the customer must provide all
supplies and equipment necessary; and the temporary personnel must be under the
direct or general supervision of the customer to whom the help is furnished.

Therefore, a taxable service performed by "contract labor" will be taxable if
it does not qualify as a service performed by a "temporary help" service or an
"employee" of the employer as those terms are defined in Section 151.057, and
Rule 3.356 (a)(10).

I am enclosing an edited copy of a letter ruling (fiche #9509L1368D04)
which addresses the taxability of several jobs performed by contract labor. If
your "contract" employees are performing taxable services, [COMPANY A]
corporation (or the sole proprietor) will be required to be permitted to
collect and report sales tax on these services. Additionally, as a corporation,
COMPANY A is required to file franchise tax reports.

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

I hope this information answers your questions. If you need additional
information, please 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. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division