Does a temporary staffing agency that places lawyers, paralegals, legal secretaries, file clerks, and data processors with law firms need a sales tax permit?

Subject

Temporary Help Services — Lawyers, Paralegal, Legal Secretaries, Data Processors Provided To Law Firms — Taxable And Nontaxable Services

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9307127L

Plain-English Summary

A taxpayer planning to start a temporary personnel agency serving the legal community asked the Comptroller whether the business would need a sales tax permit. The planned business would work as a standard temporary agency, providing lawyers, paralegals, legal secretaries, file clerks, and data processors to law firm clients, and charging those clients a fee covering payroll, benefits, administrative costs, and profit.

The Comptroller explained that temporary help services provide laborers who perform a mix of taxable and nontaxable tasks. Charges for nontaxable tasks are not taxed when those tasks are performed alone or billed separately from any taxable service. Charges for taxable services performed by a temporary help service are taxed unless the exemption in Tex. Tax Code Sec. 151.057 applies — an exemption that requires the service to supplement the employer's existing work force temporarily, be normally performed by the employer's own employees, have the employer provide the necessary supplies and equipment, and have the help under the employer's direct or general supervision. All four tests must be met.

Applying this to the taxpayer's planned business: fees for lawyers and paralegals are not taxable, because these are not currently defined as taxable services. Legal secretaries and file clerks are also generally not providing taxable services when performing general clerical or secretarial functions. Data processors, however, are performing a taxable service, so charges for data processors must be taxed unless the Sec. 151.057 supplemental-workforce criteria are met. If the company performs taxable data processing services (or sells other taxable items), it must obtain and maintain a sales tax permit.

The letter also addresses mixed billing: if the company provides both taxable and nontaxable services to the same client, the taxable charges must be separately stated from the nontaxable charges. If the charges aren't separately stated and the taxable portion is 5% or less of the total charge, the entire charge is treated as nontaxable. If the taxable portion is more than 5% of the total and isn't separately stated, the entire charge must be taxed. The Comptroller enclosed Rule 3.330 on data processing services and noted that data processing is only one of many taxable services, so the company should check the taxability of any other tasks it performs, and also sent an application for a sales tax permit in case the company provides taxable services beyond the temporary-help-services exemption.

What This Means For You

If you run (or plan to run) a temporary staffing agency

Whether you need a sales tax permit depends on the mix of services you place workers to perform. Under this letter, placing lawyers and paralegals is not taxable, and placing legal secretaries or file clerks doing general clerical/secretarial work is not taxable. But placing data processors is taxable, unless the placement meets all four tests of the Sec. 151.057 exemption (temporary supplement to existing work force, work normally done by the employer's own staff, employer supplies materials/equipment, and the help works under the employer's direct or general supervision).

If you bill clients for a mix of taxable and nontaxable placements

Separately state your taxable charges (like data processing) from your nontaxable charges (like lawyers, paralegals, and general clerical staff) on the bill. If you don't separate them, the whole charge is nontaxable only if the taxable portion is 5% or less of the total; otherwise the whole charge becomes taxable.

If you're a law firm client of a temporary agency

This letter reflects the agency's side of the analysis — the same taxable/nontaxable distinctions (taxable data processing vs. nontaxable legal/clerical placements) would apply to how the agency bills you.

Limits of this letter

The Comptroller notes this opinion is based on the facts presented, and different or additional facts could change the result. It applies specifically to the described mix of lawyers, paralegals, legal secretaries, file clerks, and data processors placed with law firm clients.

Q&A

Q: Does a temporary agency placing lawyers and paralegals with law firms need to charge sales tax on those placements?
A: No. The letter states the fee charged for a lawyer is not taxable and the fee charged for a paralegal is not taxable, because these are not defined as taxable services at this time.

Q: What about legal secretaries and file clerks?
A: Generally, legal secretaries and file clerks are not providing taxable services when they perform general clerical or secretarial functions.

Q: Are charges for temporary data processors taxable?
A: Yes. Data processors are performing taxable services, and charges for data processors must be taxed unless the criteria in Tex. Tax Code Sec. 151.057 are met.

Q: Does this agency need a sales tax permit?
A: If the company performs taxable data processing services (or sells other taxable items) for its clients, it must obtain and maintain a sales tax permit.

Q: What happens if a bill mixes taxable and nontaxable services without separating the charges?
A: If the taxable service charges are 5% or less of the total charge, the total charge is considered nontaxable. If the taxable charges are more than 5% of the total and aren't separately stated, the entire charge must be taxed.

Q: Is there an exemption that could make the data processing charges nontaxable?
A: Possibly — Tex. Tax Code Sec. 151.057 provides an option for taxable services performed by a temporary service to supplement an employer's existing work force temporarily, where the work is normally performed by the employer's own employees, the employer provides the necessary supplies and equipment, and the help is under the employer's direct or general supervision. All four tests must be met for the exemption to apply.

Original ruling text

July 12, 1993

Dear **:

Thank you for your letter asking whether a temporary personnel agency geared
towards the legal community is required to have a sales tax permit.

You stated that you plan to begin a business that will be run as a standard
temporary agency providing lawyers, paralegals, legal secretaries, file clerks,
and data processors to lawyers (your clients). You will charge the law firms a
fee covering payroll, benefits, administrative costs, and profit.

Temporary help services provide laborers that perform various tasks. Some of
these tasks are taxable and some are not. Of course, the charge for nontaxable
tasks or services performed by a temporary help service is not taxed when the
nontaxable services are performed alone or are billed separately from any
taxable service.

The charges for taxable services performed by a temporary help service should
be taxed unless the provisions of 151.057 apply. In this subsection the sales
tax statute provides an option for taxable services that are ". . . performed
by a temporary service for an employer to supplement the employer's existing
work force on a temporary basis, when the service is normally performed by the
employer's own employees, the employer provides supplies and equipment
necessary, and the help is under the direct or general supervision of the
employer to whom the help furnished . . ." All four of these statutory tests
must be met in order for the exemption to apply.

In relation to your business, the fee charged for a lawyer is not taxable; the
fee charged for a paralegal is not taxable. These services are not defined as
taxable services at this time. Generally speaking, legal secretaries and file
clerks are not providing taxable services when they perform general clerical or
secretarial functions.

Data processors are performing taxable services. The charges for data
processors must be taxed unless the criteria discussed in the fourth paragraph
of this letter apply. If your company performs taxable data processing services
for (or sells other taxable items to) your clients, you must obtain and
maintain a sales tax permit.

If your company provides a combination of taxable and nontaxable services to a
particular client, the charges for the taxable services must be separately
stated from the charges for the nontaxable services. If the charges are not
separately stated to the customer, and the amount charged for the taxable
service(s) is five percent (5%) or less of the total charge, then the total
charge is considered nontaxable. If the charges for the taxable services are
more than 5% of the total charge and are not separately stated to the customer,
the total charge must be taxed.

I have enclosed Rule 3.330 regarding data processing services . I should point
out that data processing is one of many taxable services. If your company
performs any other tasks for your clients, you should inquire into the
taxability of those services. I have also forwarded under separate cover, an
application for a sales tax permit in the event you provide taxable services
that do not qualify as temporary help services.

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

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

Sincerely,

Tax Administration Division