How does Texas distinguish nontaxable employee/temporary-help labor from taxable 'contract labor'?

Subject

Contract Labor Vs. Employee Or Temporary Help Service Labor — How Texas Draws The Line

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1269C04

Plain-English Summary

A taxpayer asked the Comptroller for a definition of "contract labor" as opposed to "employee labor." The Comptroller's response is that "contract labor" is not itself defined anywhere in the Tax Code or the Rules. Instead of defining that term directly, the letter explains the two ways labor can qualify as nontaxable, and anything that doesn't fit either category is, by elimination, taxable "contract labor."

The two nontaxable categories described in the letter are:

1. Employee services under Tax Code Section 151.057. A service is not taxable if it is performed by an employee for his or her employer, in the regular course of business, within the scope of the employee's duties, and paid as regular wages or salary — or if it is performed by a temporary help service supplementing the employer's existing workforce on a temporary basis, where the service is normally performed by the employer's own employees, the employer supplies all necessary equipment, and the employer directly or generally supervises the help.

2. Employee labor for real property repair/remodeling under Rule 3.357(c)(6). No sales tax is due on wages paid by an employer to an employee who repairs, remodels, or restores real property belonging to and used by that employer. A person counts as an "employee" here if the employer pays the person's salary, withholds federal taxes, pays employment-related benefits (like health insurance), and directly controls the work performed.

The letter also quotes Rule 3.356(a)(10)'s definition of "temporary help service": an individual, company, or corporation covered by Industry Group 7363 (Group 736, Major Group 73 of the 1989 Standard Industrial Classification Manual) that supplies personnel on a temporary basis to supplement a customer's existing workforce — where the personnel perform work normally done by the customer's own employees, the customer supplies all necessary equipment, and the customer directly or generally supervises the temporary personnel.

Bottom line stated in the letter: a taxable service performed by "contract labor" is taxable specifically because it does not qualify as either a "temporary help service" or an "employee" under Section 151.057, Rule 3.357(c)(6), and Rule 3.356(a)(10).

What This Means For You

If you supply workers to another business: Whether those workers' labor is taxable turns on control and supply of equipment, not on labels. Under this letter, labor is nontaxable only if (a) it's performed by a true employee paid regular wages/salary in the regular course of the employer's business, or (b) it's a temporary-help arrangement where the customer/employer supervises the workers, supplies the equipment, and the work is the kind normally done by the customer's own staff.

If you use outside labor for real property repair or remodeling: The wages-only exemption in Rule 3.357(c)(6) applies only when the worker is a genuine employee of the property owner/user — meaning that owner pays the salary, withholds taxes, provides benefits, and directly controls the work. Labor that doesn't meet that test is not covered by this specific exemption.

If you're trying to classify a "contract labor" arrangement: This letter frames the analysis as a process of elimination — check the arrangement against the Section 151.057 employee/temporary-help test and the Rule 3.356(a)(10) temporary-help-service test. If it fails both, the letter states it is taxable contract labor.

Q&A

Q: Does the Texas Tax Code define "contract labor"?
A: No. The letter states directly that "contract labor" is not specifically defined in the Tax Code or Rules.

Q: When is labor performed by an employee not taxable?
A: Under Tax Code Section 151.057, as quoted in the letter, when the employee performs the service for their employer in the regular course of business, within the scope of their duties, and is paid regular wages or salary.

Q: What makes a "temporary help service" arrangement nontaxable?
A: Per Section 151.057 and Rule 3.356(a)(10) as quoted, the service must supplement the employer's/customer's existing workforce on a temporary basis, be work normally performed by the employer's own employees, and the employer must supply all necessary equipment and directly or generally supervise the temporary personnel.

Q: What is the sales tax treatment of wages paid to an employee doing real property repair or remodeling work?
A: Per Rule 3.357(c)(6) as quoted in the letter, no sales tax is due on the wages or salary paid by an employer to its employee who repairs, remodels, or restores real property belonging to and used by that employer — provided the worker meets the letter's employee criteria (salary paid, taxes withheld, benefits provided, direct control exercised).

Q: If labor doesn't fit the employee or temporary-help-service definitions, what happens?
A: According to the letter, a taxable service performed by "contract labor" will be taxable if it does not qualify as a "temporary help service" or an "employee" under Section 151.057, Rule 3.357(c)(6), and Rule 3.356(a)(10).

Original ruling text

October 29, 1993

Dear ***:

Thank you for your letter requesting information defining contract labor
(as opposed to employee labor). RESPONSE: "Contract labor" is not specifically
defined in the Tax Code or Rules.

However, Texas Tax Code Section 151.057 Services by Employees, provides
that:

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, or a service performed by a
temporary help 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 all supplies and equipment
necessary, and the help is under the direct or general supervision of the
employer to whom the help is furnished, is not taxable under this chapter.

Section (c) (6) of Rule 3.357. Labor Relating to Nonresidential Real Property
Repair, Remodeling, Restoration, Maintenance, New Construction, and Residential
Property provides an exemption for employee labor as stated below:

No sales tax is due on the wages or salary paid by an employer to an
employee who provides the labor to repair, remodel, or restore real property
belonging to and used by the employer. A person will be considered the employee
of the employer if the employer pays the person's salary, withholds applicable
federal taxes from the employee's salary, pays employment-related benefits,
such as health insurance, etc., and exercises direct control over the work
performed by the person.

Finally, section (a)(10) of Rule 3.356 - Real Property Service, defines
"Temporary help service" as, An individual, company, or corporation covered by
Industry Group 7363,Group 736, Major Group 73 of the Standard Industrial
Classification Manual, 1989, and includes an individual, company, or corporation
that supplies personnel on a temporary basis to supplement a customer's existing
work force. In the context of this rule, such temporary personnel must perform a
service that is normally performed by the customer's own employees; the customer
must provide all supplies and equipment necessary; and the temporary personnel
must be under the direct or general supervision of the customer to whom the help
is furnished. Therefore, a taxable service performed by "contract labor" will
be taxable if it does not qualify as a service performed by a"temporary help"
service or an "employee" of the employer as those terms are defined in Section
151.057, Rule 3.357 (c)(6) and Rule 3.356 (a)(10).

If you have other questions or need more information, you may call me at
1-800-531-5441, extension 3-4502. The regular number is 512/463-4502. You may
also write to Tax Administration Division at the above address.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9311036L