If a company leases its employees to an affiliated business partnership through a staff leasing arrangement, are the otherwise-taxable services performed by those leased employees exempt from Texas sales tax — even if the leasing company turns out to be exempt from state licensing because of common ownership?

Plain-English summary

A corporate group planned to restructure a limited partnership's ownership: an affiliate of a new investor ("Company A") would join as a partner in an existing limited partnership, current partners' ownership would be diluted (to roughly 69-70%), and another Company A affiliate would join the LLC serving as the partnership's general partner. To give the partnership's employees access to Company A's employee benefit plans, the plan was to move those employees to a Company A affiliate ("Lessor"), which would then staff-lease them back to the partnership under a formal staff leasing contract.

The complication: Lessor intended to get licensed as a staff leasing company with the Texas Department of Licensing and Regulation, but Texas Labor Code § 91.001(14)(C) exempts a staff leasing arrangement between commonly-owned affiliates (over 33⅓% common ownership) from that licensing requirement entirely — and depending on how the reorganized capital accounts and net-income shares shook out, Company A's affiliate might end up owning more than that 33⅓% threshold, potentially triggering the exemption instead of requiring the license.

The Comptroller ruled that it doesn't matter which way it goes: both scenarios exempt the leased employees' otherwise-taxable services from sales tax. If Lessor is formally licensed and otherwise meets Rule 3.364's requirements, the exemption applies. And if the Texas Department of Licensing and Regulation instead determines Lessor doesn't need a license because of the common-ownership exception, the exemption still applies — because Rule 3.364(a)(5) defines "staff leasing company" broadly enough to include a business that offers staff leasing services but is exempt from Labor Code Chapter 91 licensing, not just one that's actually licensed under it.

Terminology update: a STAR-added note flags that effective August 28, 2016, the Tax Code's reference to "staff leasing services" was renamed to "professional employer organization" and/or "professional employer services," tracking a 2013 Labor Code change (83rd Legislature, Senate Bill 1286) — this 2000 letter predates that renaming.

What this means for you

Corporate groups restructuring around a staff leasing arrangement

If you're moving employees to a leasing affiliate to access shared benefit plans, and there's uncertainty about whether your leasing entity will end up licensed or exempt-from-licensing based on final ownership percentages, this letter confirms the sales tax exemption for the leased employees' services doesn't turn on that distinction — either licensed status or the common-ownership licensing exemption gets you to the same exempt result, as long as Rule 3.364's other requirements are met.

Companies using intra-group staff leasing

Confirm your leasing company's status (licensed vs. exempt-from-licensing under Labor Code § 91.001(14)(C)) doesn't change your sales tax exposure on the leased employees' services — both paths under current guidance (as renamed for PEOs after 2016) lead to exemption.

Accountants and tax professionals

This is a useful precedent for complex reorg fact patterns where an ownership percentage threshold (33⅓% under Labor Code § 91.001(14)(C)) determines a licensing question rather than the tax question — the Comptroller confirmed the tax exemption holds regardless of which side of that licensing line the entity falls on. Also flag the 2016 terminology shift to "professional employer organization"/"professional employer services" when researching current law.

Common questions

Q: Are services performed by staff-leased employees taxable in Texas?
A: The otherwise-taxable services performed by properly staff-leased employees for the client business are exempt from sales tax, when the leasing arrangement meets Rule 3.364's requirements.

Q: Does the leasing company need to be licensed for the tax exemption to apply?
A: Not necessarily. Rule 3.364(a)(5) defines "staff leasing company" to include both licensed businesses and businesses that offer staff leasing services but are exempt from the Labor Code Chapter 91 licensing requirement — either way, the sales tax exemption for leased employees' services can apply.

Q: What is the ownership threshold that can exempt a staff leasing arrangement from licensing?
A: Common ownership exceeding 33⅓% between the leasing company and the entity receiving the leased employees, under Texas Labor Code § 91.001(14)(C).

Q: Is "staff leasing" still the correct legal term today?
A: No. Effective August 28, 2016, the Tax Code's terminology changed to "professional employer organization" and/or "professional employer services," following a 2013 Labor Code amendment (Senate Bill 1286).

Q: Can I rely on this letter for my own reorganization?
A: No. This opinion is based on the facts presented; additional or different facts may change the opinion.

Citations and references

Rules and statutes:

• 34 TAC Rule 3.364, including subsection (a)(5) (definition of "staff leasing company")
• Tex. Labor Code § 91.001(14)(C) (licensing exemption for staff leasing among commonly-owned affiliates)

Note: STAR flags that "staff leasing services" was renamed "professional employer organization"/"professional employer services" effective 08/28/2016, per Labor Code changes effective 09/01/2013 (83rd Legislature, Senate Bill 1286).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005602L

Original ruling text

NOTE: Effective 08/28/2016, the Tax Code's reference to "staff leasing services" was changed to "professional employer organization" and/or "professional employer services" per related changes made to the Labor Code effective 09/01/2013 by the 83rd Legislative Session (2013), Senate Bill 1286.

May 11, 2000

Dear **:

Thank you for your recent letter concerning staff leasing services.

You wanted us to address the applicability of Comptroller's Rule 3.364 to a

proposed transaction by Company A's affiliates which involve an existing

limited partnership engaged in business in Texas ("Partnership B"). At present,

Partnership B's partners are affiliates of two energy companies that are

unrelated to Company A ("Present Partners"). In the near future, an affiliate

of Company A ("Company A Partner") will be admitted as a partner to Partnership

B, the ownership interests of the Present Partners will be reduced, the limited

partnership agreement will be amended and Partnership B's name will be changed.

In addition, another affiliate of Company A will become a member of the limited

liability company ("LLC") that is the general partner of Partnership B. Based

solely on the transfer of the Partnership B interests and the LLC membership

interest, the Present Partners' ownership will be approximately 69-70% after

the transaction is consummated. However, due to amendments to the partnership

agreement and certain capital account adjustments, Company A Partner may have a

capital account of more than 33 1/3% and, depending on the price of oil and

other factors, may receive more than 33 1/3% of Partnership B's net income. In

addition, Company A Partner and other Company A affiliates may in the future

acquire additional interests from the Present Partners.

To provide the present Partnership B employees with access to Company A's

employee benefit plans, it is proposed that the Partnership B employees be

moved to a Company A affiliate ("Lessor"), and thereafter a staff leasing

contract be executed between Lessor and Partnership B. Lessor will apply for a

staff leasing company license with the Texas Department of Licensing and

Regulation (the "Department"). While it is anticipated that a license will be

issued, the Department could determine that a license is not required based on

the exemption from licensing for an entity that provides services solely to a

person related to the service provider by common ownership and a determination

that the Company A entities have an ownership interest in excess of 33 1/3%

(Texas Labor Code Section 91.001(14)(C)).

You ask that I assume, for the purpose of this request, that Lessor will meet

all of the licensing requirements with the possible exception of the 33 1/3%

exception found in Texas Labor Code Section 91.001(14)(C).

1. If Lessor qualifies as a staff leasing company, is licensed, and otherwise

meets the requirements of Rule 3.364, are the otherwise taxable services

performed by the leased employees for Partnership B exempt from sales tax?

Response. Yes.

2. If the Texas Department of Licensing and Regulation determines that Lessor

is not required to be licensed based on the 33 1/3% exception found in Texas

Labor Code Section 91.001(14)(C), but Lessor otherwise meets the requirements

of Rule 3.364 regarding shared employees, etc., are the otherwise taxable

services performed by the leased employees for Partnership B exempt from sales

tax?

Response. Yes. Rule 3.364 (a)(5) defines "staff leasing company" as a

"business that offers staff leasing services and is licensed under the Labor

Code, Chapter 91, or a business that offers staff leasing services but is

exempt from the licensing requirements of the Labor Code."

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