Could staffing-agency workers doing art fabrication qualify as loaned employees, and when would the agency's charges avoid tax?

Plain-English summary

A staffing agency took over the employees of a multinational company's art department and furnished them back to that company. The user company could hire and fire, set hourly pay, and direct, supervise, and control the employees' work, while the staffing agency handled payroll and treated them as its employees for payroll-tax purposes.

California said an art worker might qualify as a loaned employee if the user company supplied the workplace, tools, and raw materials and paid the staffing agency at an hourly rate.

Those conditions alone did not necessarily remove tax from fabrication labor performed for a consumer. The charges would still be treated as taxable gross receipts unless the customer either had its own clear employees doing similar work or employed people capable of giving the loaned workers meaningful direction beyond merely describing the desired result.

What this means for you

Staffing agencies and customers

Contract labels and payroll treatment were not enough. The physical work arrangement, hourly billing, comparable in-house employees, and the customer's ability to direct the work mattered.

Accountants and tax professionals

Document who provides the premises, tools, and raw materials; how the agency charges; what similar work the customer's employees perform; and who gives substantive direction.

Common questions

Q: Did the opinion automatically treat the art workers as loaned employees?

A: No. It said they might qualify if the stated conditions were satisfied.

Q: Was hourly billing required?

A: Yes, under the opinion's stated loaned-employee test.

Q: Could fabrication-labor charges still be taxable?

A: Yes, unless the customer met one of the additional employee or supervision conditions described in the opinion.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.1800
• Original supporting opinion: 515.1800 PDF

Original ruling text

STATE OF CALIFORNIA

515.1800

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

November 30, 1987

Mr. F--- H--XXX --- --- Ave.
--- ---, CA XXXXX
Dear Mr. H---:
Your letter regarding special employees to Assistant Chief Counsel Gary Jugum dated September 30, 1987, has been referred to me for response. You state: “A contract staffing agency has indicated to me that a concern exists at to potential tax liability on their part. The firm has taken over all employees of the art department of a multi-national company and in effect ‘leases’ them back to the use company, charging the payroll rate plus a small percentage to cover profit and overhead. “The user company may hire and fire at will, set the hourly salary rates for the employees, and directs, supervises and controls the product and output of the personnel. The contract staffing agency merely acts as a payroll processing company, but treats the employees as its own for state and federal payroll taxes, withholding, FICA, etc. purposes. The purpose of this scheme is to enable the user company to escape including highly paid artistic personnel in pension, profit sharing, and benefit plans. In addition, if there is little or no need for the art department in the future, the use company would be under no obligation to give severance pay to the ‘leased’ personnel. “I would appreciate having your guidance in this area concerning any potential sales tax liability on the part of the employee-leasing company.” As Mr. Jugum explained in his letter to you dated June 1, 1987, when a “customer provides the premises where the work is done, tools used, and the raw materials, and if the charge is at an hourly rate, the person performing the [fabrication] work may qualify as a ‘loaned employee.’” If the “lease” arrangements satisfy these requirements, including the requirement that the user company pays the contract staffing agency an hourly rate for the “leased” employees, the person

Mr. F--- H---

-2-

November 30, 1987
585.0280

performing the work might qualify as a “loaned employee.” However, the charges made by the contract staffing agency with respect to fabrication labor for a consumer will be treated as taxable gross receipts unless 1) the customer has other persons who clearly are employees performing similar work, or 2) the customer employs persons who are capable of giving meaningful direction to the “loaned employees” beyond describing only the result desired. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Tax Counsel

DHL:ss