Was a property manager's payroll reimbursement nontaxable when it included fringe costs and an extra 1% that could become profit, and could prior invoices be refunded?

Plain-English summary

The property manager billed the retail-center owner for base pay, fringe benefits, unemployment taxes, medical insurance, and an extra 1% contingency. Any unused part of that 1% became the manager's profit.

That was not a true dollar-for-dollar reimbursement under Rule 3.356, so the charge for taxable services performed by the assigned employees was taxable.

The manager could not revise completed invoices and obtain a refund for tax already collected. For future invoices, dollar-for-dollar billing could be nontaxable only if the underlying services were nontaxable under Rule 3.356(m)(1) and records proved both permanent assignment to the property and the actual payroll reimbursement.

Common questions

Did the extra 1% prevent dollar-for-dollar treatment? Yes.

Were the taxable employee-service charges taxable? Yes.

Could completed invoices be renegotiated for a refund? No.

What records were required for future treatment? Evidence of permanent assignment and payroll records supporting the exact reimbursement.

Citations and references

• Comptroller Rule 3.356(m)(1).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9005L1022F03

Original ruling text

May 16, 1990

Dear ***:

Thank you for your letter regarding sales tax applicable to the
following fact situation:

FACTS: A property management company located in ***
manages a retail center in another Texas city. The management
company has employees permanently assigned to this single property.
The management company under its typical practices bills the owner
of the property for the direct payroll cost of those employees
assigned to the property. This direct cost includes their base
compensation plus employee fringe benefits, state unemployment
tax, federal unemployment tax, medical insurance and a 1 percent
additional amount to cover contingencies for additional medical
costs and other unspecified amounts. Any amount of this additional
1 percent not utilized to pay direct compensation related
costs is retained by the management company as additional profit
from the transaction. The management company has been collecting
sales tax from the property owner on the entire amount of this
labor charge.

In response to your specific questions, the reimbursement is not
a "dollar-for-dollar" reimbursement as contemplated in rule 3.356.
The charge to the property owner for taxable services provided by
the employees is taxable.

Invoices billing for services that have been performed cannot be
modified or renegotiated. Therefore, a sales tax refund is not
appropriate for prior billings that have been collected from the
property owner. The management company can, on future invoices,
bill on a dollar- for- dollar basis and not collect tax if their
records substantiate that THE services are not taxable as outlined
in rule 3.356(m)(1). Their records must include evidence
that THE employees are permanently assigned to the respective
property and payroll information to substantiate the dollar - for

• dollar reimbursement.

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 additional information, you may
call toll free at 1-800-252-5555 or the regular number 512/463-4600.
My extension is 3-4666. you may write to Tax Correspondence,
Comptroller of Public Accounts.

Sincerely,

Jo Ann Dieck
Tax Correspondence