Does a business intelligence firm's BPOL exemption for benefits paid to contract employees depend on how much control its clients exercise over those employees?

Subject

Exemptions : Staffing Firm - Extent of Client Control

Plain-English summary

A company that provides data and business intelligence solutions to enterprise customers was assessed Business, Professional and Occupational License (BPOL) tax for the 2016 through 2018 tax years after its locality denied the exemption it claimed for employee benefits paid to contract employees of staffing firms under Va. Code § 58.1-3732.4. The county concluded the Taxpayer was providing technical expertise, consulting, specialized, and information technology services for particular assignments and tasks, and therefore did not qualify as a "staffing firm" providing "temporary help services." The Taxpayer appealed to the Department, arguing the county had ignored evidence about the extent of control its clients exercised over its placed employees.

The Tax Commissioner explained that the exemption applies only if three conditions are met: there is an arrangement between the staffing firm and a client company, the arrangement is temporary (even a long contract counts as temporary if it has a definite termination date, even with automatic extensions), and the staffing firm's employees are assigned to support or supplement the client's existing workforce rather than merely complete a specific task. That third element turns on how much control the taxpayer retains over its employees working at client facilities -- a factual question that depends heavily on the contractual relationship.

The Taxpayer's general contract with a major client -- a "Master Services Consulting Agreement" providing for task-by-task consulting services detailed in separate Statements of Work (SOWs) -- would not by itself have been enough to prove the exemption applied, and if anything suggested task-based (non-qualifying) services. However, the Taxpayer also produced sample SOWs describing "staff augmentation" engagements in which its personnel worked at the client's places of business under the client's daily direction and oversight, compensated based on budgeted work hours, with descriptions resembling job descriptions. The same SOW forms, though, also included a project-based option under which the Taxpayer -- not the client -- would retain control over the assigned individuals.

Because the SOWs indicated the Taxpayer's clients were, at least for the staff-augmentation engagements, exercising the kind of control suggesting the Taxpayer was supporting or supplementing the client's existing workforce, gross receipts from those engagements would qualify for the exemption (to the extent paid as benefits to W-2 employees or 1099 non-employees who were nonetheless treated as employees, not independent contractors). Receipts from project-based engagements where the Taxpayer retained control would likely not qualify. Rather than resolve the exemption amount itself, the Tax Commissioner remanded the case to the county, instructing it to review any further contracts, SOWs, or similar documentation the Taxpayer could provide and to issue a new final determination revising the assessments accordingly, with a 90-day window for the Taxpayer to appeal again if it disputed the outcome of that review.

What this means for you

Staffing, consulting, and technology-services firms claiming the BPOL exemption

Whether your business qualifies as a "staffing firm" for BPOL purposes doesn't turn on how your business is classified overall, or even on the general terms of a master services agreement -- it turns on the specific terms of each engagement's statement of work, and in particular on how much day-to-day control the client (rather than your firm) exercises over the individual performing the work. A single master agreement covering many engagements can produce different exemption outcomes for different engagements.

Distinguishing "staff augmentation" from "project-based" work

Under this ruling, an SOW describing daily direction and oversight by the client, compensation based on budgeted hours, and duties resembling a job description tends to show the exemption applies. An SOW where the staffing firm itself retains control over the assigned individual, without client direction and oversight, tends to show it does not. The Tax Commissioner noted that "check-the-box" categories on a form distinguishing the two, while helpful, are not necessarily determinative -- the actual facts and circumstances of each engagement control.

What happens after a remand

A remand is not a final win or loss. Here, the county must review the additional documentation the Taxpayer provides, issue a new final determination, and revise the assessments based on which engagements qualify. If the Taxpayer disagrees with that new determination, it has 90 days from the date of the new determination to appeal again to the Department.

Common questions

Q: Did the Taxpayer win its appeal?
A: Not outright. The Tax Commissioner did not grant a full exemption or uphold the full assessment. Instead, the case was remanded to the county to determine, engagement by engagement, which of the Taxpayer's contracts qualified for the staffing-firm exemption based on the documentation provided.

Q: Why wasn't the Taxpayer's master consulting agreement enough by itself to prove the exemption applied?
A: The Master Services Consulting Agreement described services performed on a task-by-task basis, which by itself suggested the kind of task-based services the Department had previously found did not qualify for the exemption (citing P.D. 17-68). It was the more detailed sample Statements of Work, not the master agreement, that showed some engagements involved client-directed staff augmentation.

Q: What made some of the sample SOWs support the exemption?
A: Those SOWs described "staff augmentation" engagements where the individual provided by the Taxpayer worked at the client's place of business under the client's daily direction and oversight, was compensated based on a budgeted number of work hours, and had duties resembling a job description -- all signs the client was controlling the work rather than the Taxpayer.

Q: Does the exemption cover benefits paid to independent contractors?
A: No. Citing P.D. 09-29, the ruling confirms that only benefits paid to employees who receive a Form W-2, or to individuals treated as non-employees issued a Form 1099 but who are otherwise being supplied to support the client's workforce, can qualify -- benefits paid to independent contractors receiving a Form 1099 do not qualify.

Q: What must the county do now that the case has been remanded?
A: The county must review any contracts, SOWs, or similar documents the Taxpayer provides, determine the extent to which gross receipts from each engagement qualify for the exemption under the standards in this ruling, issue a new final determination, and revise the assessments accordingly.

Q: Can the Taxpayer appeal again if it disagrees with the county's new determination?
A: Yes. The ruling gives the Taxpayer 90 days from the date of the county's new final determination to file another appeal with the Department if it disputes the outcome of the county's review.

Citations and references

Statutes:

• Va. Code § 58.1-3703.1 (Department's authority to issue determinations on BPOL tax appeals)
• Va. Code § 58.1-3732.4 A (excludes employee benefits paid to contract employees from a staffing firm's gross receipts)
• Va. Code § 58.1-3732.4 B (defines 'staffing firm' and 'temporary help services')
• Va. Code § 58.1-3706 (BPOL tax business classifications; staffing firms are not a separate class)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-6

Original ruling text

February 2, 2021

Re: Appeal of Final Local Determination

Taxpayer: *

Locality: *

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the application for correction filed by you on behalf of * (the “Taxpayer”), with the Department of Taxation. You appeal assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by *** (the “County”) for the 2016 through 2018 tax years.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e ., the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

The Taxpayer describes its business as providing data and business intelligence solutions to enterprise customers. During the tax years at issue, the Taxpayer had a definite place of business in the County and was classified for BPOL tax purposes as a business service. Under review, the County denied the exemption from gross receipts the Taxpayer claimed for employee benefits paid to contract employees of staffing firms under Virginia Code § 58.1-3732.4.

The Taxpayer appealed to the County, contending that it qualified for the exemption because the its clients had control over the Taxpayer’s employees. In its final determination, the County concluded that the Taxpayer was providing technical expertise, consulting, specialized, and information technology services for particular assignments and tasks and thus did not qualify for the exemption. The Taxpayer appealed to the Department, contending that the County ignored relevant information and evidence pertaining to its client relationships.

ANALYSIS

Virginia Code § 58.1-3732.4 A provides that the gross receipts of a staffing firm do not include employee benefits paid to a contract employee “for the period of time that the contract employee is actually employed for the use of the client company pursuant to the terms of a PEO services contract or temporary help services contract.”

Accordingly, a business that is classified as a staffing firm may exclude wages, salaries, payroll taxes, payroll deductions, workers’ compensation costs, benefits, and similar expenses from its gross receipts. Virginia Code § 58.1-3732.4 B defines a staffing firm as “a person that provides PEO [professional employer organization] services or temporary help services.” [Insert added.] Because the Taxpayer does not assert that it was a PEO, it had to have provided temporary help services to qualify for the exemption.

Virginia Code § 58.1-3732.4 B defines temporary help services to mean “an arrangement whereby a staffing firm temporarily assigns employees to support or supplement a client company's workforce.” The Department has determined that because staffing firms are not a separate class of business as set forth under Virginia Code § 58.1-3706, a taxpayer may qualify for the exemption regardless of the business’ classification. See Public Document (P.D.) 17-68 (5/10/2017).

By reason of their character as legislative grants, however, statutes relating to exemptions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See DKM Richmond Associates, L.P. v. City of Richmond , 249 Va. 401, 407, 457 S.E.2d 76, 80 (1995). Virginia Code § 58.1-3732.4 sets forth unique treatment afforded to businesses engaging in professional employer organization services or temporary help services for purposes of BPOL taxation under which they are permitted to exclude benefits paid to or for the benefit of their employees providing services to a client company.

Within the statutory definition, there are three conditions that must be met in order for a business to be considered to be providing temporary help services. These conditions are:

An arrangement between the staffing firm and the client company,

The arrangement must be temporary, and

The staffing firm’s employees must be assigned to support or supplement a client company's workforce.

The first two conditions are met so long as the staffing firm and the client company have executed a temporary help services contract and that contract is temporary. Even if a contract lasts for an extended period of time, it would be considered temporary as long as it includes a definite termination date. This would be the case even if the contract includes automatic extensions. As for the third element, the Department has distinguished between employees being assigned to an office rather than being assigned to a task. See P.D. 17-68. For purposes of the statute, an employee assigned a task to be performed for a client would be considered to be supplying a new service. Employees assigned to a post at a client company would be supporting or supplementing an existing workforce. The determination as to whether a taxpayer qualifies as a staffing firm for purposes of the exclusion will depend on the amount of control the taxpayer retains over its employees who are working at client facilities. Such a determination is factual in nature and depends heavily on the nature of the contractual relationship.

The Taxpayer provided a contract styled as a “Master Services Consulting Agreement” (the “Agreement”) entered into between the Taxpayer and a major client. In the Agreement, the Taxpayer and the client agreed that the Taxpayer would perform certain consulting services on a task by task basis. The Taxpayer and the client also agreed that the terms of any specific engagement would be set forth in a “Statement of Work” (SOW). If this were the only evidence the Taxpayer provided, it would not have been sufficient to prove that the Taxpayer qualified for the exemption. If anything, the Agreement by itself suggested the Taxpayer may have been performing the type of task-based services that the Department concluded in P.D. 17-68 would not qualify for the exemption.

The Taxpayer, however, also provided several example SOWs. These documents set forth the specific terms of each engagement. In the first SOW, the Taxpayer agreed to provide a consultant to project manage certain business and development teams of the client. In the second SOW, the Taxpayer agreed to provide a data analyst to provide certain services to the Taxpayer on a number of projects. Each SOW was described as a “staff augmentation” engagement, in which the individual the Taxpayer was providing to the client would fulfill all obligations under the SOW at the daily direction and oversight of the client. The services would be rendered at the client’s places of business over a fixed period of time, and the Taxpayer would be compensated based on a budgeted number of work hours for the individual over that period. The description of the specific work to be done on these SOWs was also similar to a job description. The SOW forms, however, also listed a project-based option under which the Taxpayer would retain control over the individual(s) assigned to the project, without direction and oversight from the client.

DETERMINATION

In the Department’s opinion, the SOWs provided indicate that at least as to these engagements, the client was exercising the kind of control that would suggest that the Taxpayer was supporting or supplementing the client’s existing workforce.

Gross receipts derived from any such engagements would qualify for the deduction, provided employee benefits were paid to employees of the Taxpayer who received a Form W-2 or employees who were treated as non-employees and issued Form 1099s. Benefits paid to independent contractors who received a Form 1099 would not qualify for the exemption. See P.D. 09-29 (3/30/2009). The same example SOW forms, however, also contained a project-based option under which it appears the Taxpayer would retain control over the individual(s) assigned to the project, without direction and oversight from the client. Gross receipts derived from those engagements would likely not qualify for the deduction.

Therefore, I am remanding this case to the County with the instruction to review any documentation the Taxpayer is able to provide to determine the extent that gross receipts from the Taxpayer’s engagements qualified for the deduction under the standards set forth in this determination. In particular, the Taxpayer should provide any contracts, SOWs, or similar documents concerning its engagements. The County must then notify the Taxpayer of the results of that review by issuing a new final determination and revising the assessments accordingly. If the Taxpayer wishes to dispute the outcome of that review, the Taxpayer will have 90 days from the date of the new final determination in which to file an appeal with the Department.

The Taxpayer and the County should both be aware that although the Department concludes that gross receipts from the engagements described by the example SOWs provided with this appeal would qualify for the staffing firm exemption, the “check-the-box” categories distinguishing between a staff augmentation engagement and a project-based engagement on the Taxpayers SOW form, though helpful, may not be determinative in all instances. Ultimately, the facts and circumstances of each engagement must be examined in order to reach a final conclusion.

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3475.M

Related Documents

09-29

17-68