When were a property manager's repair and maintenance services exempt for permanently assigned employees, related corporations, rental property, and dollar-for-dollar reimbursements?

Plain-English summary

The letter analyzed three property-management arrangements. For a fixed lump-sum management fee, taxable goods or services representing 5% or more of the total generally made the entire charge taxable unless the taxable amount was separately stated. A related-corporation exemption under Tax Code § 151.346 might apply if the corporations filed, or legally could have filed, one consolidated federal return, but the letter lacked enough facts to decide that issue.

Rule 3.356(n)'s property-management employee exclusion required property held for rental, an employee permanently assigned to one owner's property or properties, and dollar-for-dollar reimbursement. It did not apply to the first arrangement because there was no dollar-for-dollar reimbursement and the employees were not permanently assigned to one client. Shared officers, directors, and ownership did not make three corporations one employer, and an employee could not be permanently assigned to two separate corporate owners at once. The rule's 5% threshold measured value in the bill, not employee time.

For two separately owned buildings, a supervisor's work at Building B was nontaxable if Building B's permanently assigned worker otherwise met the employee-exclusion requirements. For one owner with two rental properties, a worker permanently assigned to both qualified when the manager received dollar-for-dollar reimbursement. A substitute who remained permanently assigned to another owner's property did not qualify for the exclusion at the temporary location, and the property manager was not a temporary help service.

What this means for you

Ownership relationships and employee schedules were not enough by themselves. The exclusion turned on rental use, one owner's properties, permanent assignment, and exact expense reimbursement, while invoice presentation controlled the risk from mixed taxable and nontaxable work.

Common questions

Did common ownership make the manager's workers employees of all related owners? No. Did spending 95% of time at one building satisfy the 5% rule? No; that threshold measured the value of taxable services. Could one worker cover two properties? Yes, if both belonged to one owner and the other requirements were met. Was a substitute assigned from another owner's property exempt? No.

Citations and references

• Texas Tax Code § 151.346 (related-corporation services)
• Texas Tax Code § 151.057 (employee and temporary-help services)
• Rule 3.356(n), formerly subsection (m) (property-management employee exclusion and mixed-service threshold)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9110L1138C11

Original ruling text

October 22, 1991

Dear **:

Thank you for your recent letter. As I understand it, you had several
questions about the taxability of services provided by a property
manager, as follows:

Situation 1:

Corporation A owns an office building and Corporation B owns a
warehouse. A and B both have the same officers, directors, and
stockholder (sic). New corporation C is set up to manage the two
buildings. C has the same officers, directors, and stockholder as A
and B.

Corporation C services only these two buildings, and charges each
property owner a fixed monthly management fee for all services rendered.
The property owners pay no additional expenses and receive no itemized
breakdown of costs that comprise the monthly management fee. Corporation
C's services may include some repair and remodeling, and possibly
some real property services.

Questions:

1. Since Corporations A and B are charged a lump-sum management fee
   without a dollar-for-dollar determination of the maintenance/repairman
   payroll, is their payroll taxable under Rule 3.356 (m)(1)?

Answer:

Generally speaking, because the manager provides some taxable goods or
service, but bills the property owners a lump-sum fee without separately
stating the charges for the taxable goods or services, the manager
must collect tax on the total charge when the portion of the bill
attributable to taxable goods or services constitutes 5% or more of the
total bill. If the property manager separately stated a charge for
taxable services, then it would collect tax only on that separately-stated
charge. However, these are exemptions that may apply.

First, services that became taxable on or after October 1, 1987 that
are provided to Corporations A and B by related Corporation C are not
taxable under Tax Code Sec. 151.346 if the corporations in question
actually reported their income to the Internal Revenue Service on a
single consolidated return for the tax year in which the transaction
occurred, or if they could legally have done so. I have no facts to
indicate whether this exemption applies to services provided by C to A
and B.

Second, Rule 3.356 (n) (former (m)) sets out an exclusion, under
certain circumstances, for services provided by a property management
company to real property held by the owner for rental purposes. The
exclusion does not apply to services provided to real property held by
the owner for purposes other than rental. Services provided to an
owner's property or properties by a management company employee who is
permanently assigned to that one owner's property or properties are
considered tax-exempt employee services if the property management
company is reimbursed by the owner on a dollar-for-dollar basis.

This exclusion does not apply to the situation you set out, however,
both because there is no dollar- for -dollar reimbursement and because
management company employees are apparently not permanently assigned
to a particular client. Also, I have no facts to indicate whether the
warehouse and/or the office building are held out for rent by the owner.

2. Are the maintenance/repairmen working for only one investor since
   both corporations have the same officers, directors, and stockholder,
   thereby making their work tax-exempt under Rule 3.356 (m) (1)?

Answer:

Maintenance/repairmen who are employees of Corporation C are not also
considered employees of Corporations A and B solely because all three
corporations share the same officers, directors, and stockholder. The
three corporations are separate legal entities not only in theory, but
in fact and by law.

Further, Rule 3.356 (n) does not recognize that a corporate "family"
relationship among property owners and a property manager itself gives
rise to an employer-employee relationship between the management
company's employees and the property owners. Also, because A and B are
separate legal entities, an employee of C could not be considered to be
"permanently assigned" to both property owners, simultaneously. An
employee could be permanently assigned only to one owner or the other.

3. Are the maintenance/repairmen tax- exempt under Rule 3.356 (m)(3) if
   95% or more of their time is spent at only building A?

Answer:

The amount of time spent at one property vs. another does not affect
this answer. The "5%" provision in Rule 3.356 does not address the
amount of time maintenance/ repairmen spend at one property vs. another.
Rather, it provides that otherwise taxable services provided by a
property manager together with nontaxable services will not be subject
to tax if the value of the taxable services is 5% or less of the amount
charged by the manager for all service. (A proposed amendment to the
Rule has changed "less than 5.0%" to "5.0% or less").

Basically, since the properties in your example are owned by separate
corporations, the maintenance/repairmen are actually spending 100% of
the time dedicated to Corporation A at A's office building, and 100% of
the time dedicated to Corporation B and B's warehouse building.

Situation 2:

A management company manages building A and building B for two separate
clients. All payroll is reimbursed dollar-for-dollar. A full-time
maintenance/ repairman is assigned to each property. The
maintenance/repairman assigned to building A is performing taxable
services at building A; however, he also oversees the
maintenance/repairman permanently assigned to building B.

Question:

According to Rule 3.356 (m)(1), is the maintenance/repairman taxable at
building A and/or building B since his only taxable service is to
building A?

Answer:

The services provided by a property management company's employee are
not taxable when provided to rental property or properties belonging to
a single owner to whose properties the employee is permanently assigned
if the owner reimburses the manager on a dollar-for-dollar basis.

Keeping this in mind, if the property manager's employee at Building B
meets the requirements of the rule (such that he or she is considered
an "employee" of the owner of Building B), then a charge for
supervisory services provided at Building B by another employee of the
property manager would not be taxable, even if the permanently-assigned
employee at Building B were performing otherwise taxable services. The
result is the same as if the supervisor were overseeing work performed by
actual employees of Building B's owner.

Situation 3:

A management company manages building A and building B for one investor.
A single maintenance/repairman is employed to service A and B exclusively.

Questions:

1. Is this employee tax-exempt under Rule 3.356 (m) (1)?

Answer:

I assume the maintenance/repairman is permanently assigned to service
rental properties belonging to a single client (and not to multiple, if
related, entitles), and that the property manager is reimbursed for its
expenses on a dollar-for-dollar basis. If this is the case, then the
maintenance/repairman is considered to be the employee of the owner of
buildings A and B, for purposes of Rule 3.356 (n). Therefore, his or
her services would not be taxable.

2. If this employee is on vacation, would a substitute employee from
   another property performing a taxable service only during the vacation
   period be considered taxable?

Answer:

Assuming that the substitute employee continues to be "permanently
assigned" to another owner's property while also performing substitute
services at this owner's property, his "taxable" services would remain
taxable. For purposes of Rule 3.356 (n), an employee of a management
company can be considered to be "permanently assigned" to only a single
owner's property or properties at a time. When that person performs
taxable services at properties belonging to owners other than the one
to whose properties he is permanently assigned, the employee exemption
does not apply to services provided at those other properties.

Further, the substitute employee in your example would not be considered
a "temporary employee" because the property management company is not a
"temporary help service" as defined in enclosed Rule 3.356. The
statutory exemption in question covers only services provided by
employees or by a temporary help service. Tax Code Sec. 151.057.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further questions,
feel free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division