Ezel / Tax Rulings / TX
TX 8805L0903F06 Sales and/or Use Tax (State,Local,MTA) 1988-05-27

What portion of a Texas payroll-service charge was taxable when the provider also handled employee pay and employer obligations?

Short answer: The payroll provider's total service fee was taxable. But amounts the employer supplied solely to pay employee salaries, the employer's Social Security share, workers' compensation, and similar obligations were not part of the taxable fee when they were only pass-through charges.

Apply this to your situation

This page answers the general question as of 1988. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1988
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

Texas said the payroll company's service fee was taxable. Money the employer supplied solely to fund employee wages, its Social Security share, workers' compensation, and similar obligations could be excluded if those amounts were only passed through.

What this means for you

Payroll providers should distinguish their compensation from client money handled solely to satisfy payroll liabilities. The letter does not cite a numbered provision and is historical guidance.

Common questions

Is the payroll-service fee taxable? Yes. Are employee wages part of the taxable fee? No, if they are true pass-through amounts. Does the same apply to employer Social Security and workers' compensation? Yes, under the stated facts.

Citations and references

The letter gives the fee-versus-pass-through treatment but cites no specific Tax Code section or Comptroller rule.

Source

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller May 27, 1988

Dear ***:

Thank you for your letter concerning your payroll service. You
asked on what portion of your fee you should collect sales tax.
The total charge to your customer for your service is taxable.

If I understand your description of your operations, the employer
gives you an amount of money with which you are to pay the employ-
ees' salaries and the employer's share of Social Security taxes,
Workman's Compensation, etc. If these are pass-through charges
only, then only your fee for providing the service is taxable.

This opinion is based upon the facts you presented. If there are
additional or different facts, this opinion may change.

Please feel free to contact me if you have any additional questions.
You may write me, call toll-free 1-800-531-5441 from anywhere in the
United States or phone 512/463-4685.

Sincerely,
Julie Pesl
Tax Policy Division

Get today's answer for your situation

You just read a 1988 ruling on this question. Ezel checks current Texas tax law and answers your specific situation, with citations.

Opens in Ezel Pro. Every answer cites the authority it relies on.