Were reimbursements between two restaurant corporations for shared employees' wages and payroll taxes subject to Texas sales tax?

Plain-English summary

Two restaurants were owned by different corporations. Employees stayed on one corporation's payroll while helping the other, which reimbursed the lending corporation for wages and payroll taxes.

Direct wages paid by an employer to its own employee were not taxable. But one corporation's reimbursement to another for services was the sales price of those services, including the wage and payroll-tax components. Tax therefore depended on the work performed. Taxable and nontaxable services had to be separately stated; otherwise the total was presumed taxable. Because the request did not describe the employees' exact work, the Comptroller did not give a final taxable-or-nontaxable answer.

The letter identified two possible exceptions. The temporary-employee treatment required all four facts: employees temporarily supplemented an existing workforce, performed work normally done by the receiving employer's employees, used supplies and equipment provided by that employer, and worked under its direct or general supervision.

The intercorporate-services exemption applied to qualifying affiliated entities under 26 U.S.C. § 1504 and only to taxable services that became taxable after September 1, 1987.

What this means for you

Calling a payment a wage reimbursement did not control. The actual service, separate statement, supervision, equipment, duration, and corporate relationship determined the treatment described here.

Common questions

Were ordinary wages paid by an employer to its own employee taxable? No.

Was an intercompany wage reimbursement automatically nontaxable? No.

What happened if taxable and nontaxable services were not separately stated? The total was presumed taxable.

Did the letter decide these restaurants' final tax result? No, because the actual employee services were not described.

Citations and references

• 26 U.S.C. § 1504 — affiliated-group standard referenced for the intercorporate-services exemption

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9009L1043B09

Original ruling text

September 4, 1990

Dear **:

I am responding to your letter questioning whether sales or use tax is due on
contracted wages and payroll taxes. I apologize to you for the delay in
providing this response.

You stated that you have two restaurants in the state of Texas that are owned
by different corporations. You often have a need to provide the services of the
employees from one restaurant to help out at the other restaurant. In order to
maintain independent reporting of the two corporations, the employees remain on
the payrolls of the respective restaurants. The receiving restaurant
(Restaurant B) will reimburse the lending restaurant (Restaurant A) for the
"contracted" wages and payroll taxes.

You are partially correct in your understanding that wages are not subject to
sales or use tax. This is true When an employer is paying an employee wages for
the work the employee performs for his employer, regardless of the fact that
the work performed is for taxable or nontaxable labor or services.

However, an amount paid (including contracted wages and payroll taxes) to one
entity (Restaurant A, Inc.) by another entity (Restaurant B, Inc.) for
service(s) performed is the sales price of the service(s) rendered. The
taxability of this sales price is determined by the service(s) performed. If
the labor or service is taxable, then the sales price paid (including but not
limited to amounts for wages and payroll taxes) is taxable. If the labor or
service rendered is not taxable, then the sales price is not taxed.

It is possible that one employee performs taxable labor or service and another
performs nontaxable labor or service: In this instance, the "wages" for each
must be separately stated and taxed accordingly. If taxable and nontaxable
labor or service(s) are not separately stated, then the total amount is
presumed taxable. You did not explain the exact services which the employees of
Restaurant A perform for Restaurant B; therefore, I cannot provide a definite
"taxable" or "not taxable" response.

There are two possible exceptions to this response that may apply in your
situation. The first is an exemption provided for temporary employees and the
second is the intercorporate services exemption.

In order for Restaurant A to qualify as providing temporary employees to
Restaurant B, and thereby having no tax due on these reimbursed "contracted"
wages and payroll taxes, all of the following criteria must be met. (Employer
is synonymous with Restaurant B.)

*the employees must supplement an existing workforce on a temporary basis,

• 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.

The intercorporate services exemption applies to certain service transactions
among qualifying affiliated entities. An affiliated entity includes an entity
that would be classified as a member of an affiliated group, at least one of
which is a corporation, under 26 U.S.C. Section 1504. The only taxable services
that qualify for this exemption are those that became taxable after September
1, 1987.

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

You may also write to Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence