When did Texas treat temporary workers as a customer's employees rather than as a contractor performing taxable services?

Plain-English summary

Tax Code section 151.057 excluded services performed by an employee for an employer in the regular course of business. Temporary help could fit that exclusion even when the customer did not withhold payroll taxes, but only if the service was normally performed by the customer's own employees, the customer supplied all necessary equipment and supplies, and the customer directly or generally supervised the workers.

The submitted contracts generally failed those tests because the contractors retained supervision or supplied tools and equipment. The contractor's total billings were taxable, although separately identified nontaxable services could remain nontaxable.

Planned and emergency equipment maintenance was taxable tangible-personal-property repair under Rule 3.292. Qualifying real-property maintenance could be nontaxable under Rule 3.357. One agreement to improve realty was controlled separately by the contractor rules in Rule 3.291.

The letter could not fully classify one construction-management agreement because the underlying maintenance agreement describing the actual work was not provided.

Common questions

Did calling workers independent contractors settle the tax result? No. The actual supervision, supplies, equipment, and nature of the work mattered.

What three conditions supported employee treatment? The customer's employees normally did the work, the customer supplied the inputs, and the customer supervised the help.

Was every charge under the failed contracts taxable? Total billings were taxable, but separately identified nontaxable services could be excluded.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8906L0946F04

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

June 13, 1989

Dear ***** :

Thank you for your letter of June 2, 1989, concerning your clients'
(Contractors') sales tax liabilities under the various contracts submitted.

The question you present is whether or not any of the services that the
temporary employees perform for your clients are taxable. The services
performed under these contracts may range from construction (building new
structures), construction project management, and plant operations to
janitorial (real property services), real property repair and maintenance
(non-residential), and repair, restoration, remodeling, and maintenance or
tangible personal property.

Section 151.057 of the Texas Tax Code excludes from the tax "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..."

We initially defined an employee to be a person working for an employer
who withholds payroll (withholding and social security) taxes from the
employee's earnings. The term "employee" is now defined to include temporary
employee provided by a temporary help
service working for an employer who does not withhold payroll taxes
provided the following criteria are met:

• 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.

Section II of Agreement "A" specifies that:

Contractor shall be an independent contractor with respect to all work
performed
hereunder and neither contractor nor those employed by Contractor to
perform
such work shall be deemed the...employees of Company in the performance
of such work
or any part thereof..."

The Contractor assumes full responsibility for supervising and directing
its own employees. (Emphasis added.)

Section VII of Agreement "A" states "Company...shall have authority to
designate the work to be performed...to inspect such work...relative to the
executive of the work. The direction of the work by Contractor's employees
shall be under the exclusive
control of Contractor."

Services to perform "planned and emergency equipment maintenance" are
taxable as repairs under Rule 3.292 - Repair, Remodeling, Maintenance, and
Restoration of Tangible Personal Property. Routine facilities maintenance and
turnarounds are not taxable if these services qualify as "maintenance on real
property" as that term is defined in section (a)(3) and documented in section
(c)(2) of Rule 3.357 - Real Property Repair and Remodeling.

The Contractor and its employees are not considered your client's
employees because the criteria previously set out are not met. The total
charges or billings made by Contractor under this contract are taxable.
Charges for non-taxable services will not be taxable if the charges are
separately identified in the billings to your client.

The contractor and its employees in Agreements "A", "C", "D", "E", "F",
and "G" are not considered your clients employees because all of the criteria
previously set out is not met. The following is a chart listing the article or
section in each agreement that
contain the provision that does not comply with the supervision and
supplies and equipment criteria:
Contractor Contractor to
Agreement Supervision Not an Employee Furnish Tools
"A" Art.II Art.II N/A
"C" Art.I Art.II Art.X
"D" Art.II Art.III Art.XI
"E" Art.II Art.III Art.VII
"F" Art.I Art.II Art.X(D)

Agreement "G" is a contract to improve realty. The issue whether or not
the contractor is your client's employee does not arise under this agreement.
Rule 3.291 - Contractors controls.

Agreement "B" appears to be a construction management contract entered
into between the "Contractor" and your client. The contract appears to allow
your client to reimburse the "Contractor" for expenses incurred in performance
of the contract. This agreement's title infers that this is a "maintenance"
contract; however, the actual scope of the "Contractor's" duties or work
pertains to "the Maintenance Agreement executed March 6, 1989..." which was not
provided. If Agreement "B" requires the "Contractor" to perform administrative
functions such as vendor (maintenance service provider) compliance, performing
the owner's (your client's) obligations, etc., under the contract referred to
in paragraph 1 of Agreement "B", the issue whether or not the contractor
is your client's employee does not arise.

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

If you have any questions or need more information, you may call
toll-free 1-800-252-5555, ext. 3-4683. The regular number is 512/463-4600.
You may write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence