When is a staffing or subcontractor arrangement exempt as a 'temporary employee' under Texas law, versus a taxable temporary help service?

Subject

Temporary Help Services — Providing Helpers When Permanent Employee Is Out Or To Supplement Employers Existing Work Force — Guidelines

Plain-English summary

This is an internal Tax Policy Division memo responding to an auditor's question about whether a taxpayer's workers ("TP") qualified as exempt temporary employees under Tex. Tax Code § 151.057, or whether their services were taxable.

Section 151.057 exempts a service performed by a temporary help service for an employer only when all four of these conditions are met:

1. The service is normally performed by the employer's own employees;
2. The employer (the business receiving the help) provides all necessary supplies and equipment;
3. The help is under the direct or general supervision of the employer to whom the help is furnished; and
4. The help supplements the employer's existing work force on a temporary basis.

The memo reviews a "Furniture Installation Service Agreement" between a company ("X") and a subcontractor ("Y OFFICE," referred to as TP). The agreement's own terms showed that TP's workers were employees of the subcontractor, on the subcontractor's payroll; the subcontractor had "entire charge, control and supervision" of its employees and the work; the subcontractor's workers wore the subcontractor's company name on their uniforms; and the subcontractor -- not X -- was responsible for furnishing and maintaining tools and equipment.

The Tax Policy Division disagreed with an earlier assessment (made by "ABC COMPANY," apparently another division or reviewer) that TP's employees qualified as exempt temporary X employees. While TP's workers were under the guidance of X's Project Coordinator, there was no evidence that X had its own employees doing the same installation work. Combined with the contract language on payroll, supervision, and tools, the memo concludes that three of the four § 151.057 requirements were not met, so TP's services for X were taxable services under Tex. Tax Code § 151.0101(a).

As with other STAR letters, the opinion is based on the facts presented and could change if the facts were different.

What this means for you

Businesses that hire subcontractors or staffing companies

If you bring in outside workers to perform a job, don't assume their charges are automatically tax-exempt as "temporary help." The exemption under § 151.057 requires all four conditions to hold at once: the work must be work your own employees normally do, you must supply the equipment, you must directly or generally supervise the workers, and the arrangement must be temporary. If the outside firm's own contract has its workers on its own payroll, under its own supervision, and using its own tools -- as in this ruling -- the exemption will likely fail.

Staffing and subcontracting firms

Review your service agreements for language that undercuts the § 151.057 exemption for your clients. Contract clauses stating that your personnel remain your employees, that you retain "entire charge, control and supervision," that your workers wear your company's branding, or that you furnish tools and equipment are exactly the kind of facts the Comptroller relied on here to find the services taxable.

Accountants and tax professionals

When evaluating whether a client's temporary-labor arrangement is exempt, check the underlying services agreement against all four § 151.057 requirements, not just whether the client's staff directs day-to-day work. This ruling shows that even meaningful on-site direction by the client (here, guidance from X's Project Coordinator) was not enough where the other three requirements -- same work performed by client's own employees, client-furnished equipment, and payroll/employment status -- were not satisfied.

Common questions

Q: What has to be true for a temporary help arrangement to be exempt from Texas sales tax?
A: Under Tex. Tax Code § 151.057, all four conditions must be met: the service must normally be performed by the employer's own employees, the employer must provide all necessary supplies and equipment, the help must be under the employer's direct or general supervision, and the help must supplement the employer's existing work force on a temporary basis.

Q: Why were TP's employees found to be taxable in this ruling?
A: The Comptroller found that at least three of the four requirements were not met: the workers were the subcontractor's own employees on the subcontractor's payroll, the subcontractor (not the client) had control and supervision of its employees and the work, and the subcontractor -- not the client -- furnished the tools and equipment.

Q: Does client supervision alone make a temporary worker's services exempt?
A: No. In this ruling, TP's employees worked under the guidance of X's Project Coordinator, but that alone did not satisfy the exemption because there was no evidence X had its own employees doing the same work, and the other requirements (payroll, tools, control) were not met either.

Q: Could this outcome change under different facts?
A: Yes. The memo states the opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Statutes:

• Tex. Tax Code § 151.057 (exemption for temporary employees/temporary help services)
• Tex. Tax Code § 151.0101(a) (definition of taxable 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/9609L1436A12

Original ruling text

DATE: September 5, 1996
TO: Lana Le, Dallas East Audit (2I55)
FROM: Eddie C. Washington, Tax Policy Division
SUBJECT: Temporary Employees
RE: *** (TP), Taxpayer No. *****

Texas Tax Code 151.057 states:

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.

(Emphasis added.)

This statutory provision is the codification of the
comptroller's policy set out in my letter of April 15, 1991, that ABC COMPANY
wanted to be part of your taxability inquiry. The recipient of the letter was
told: "If all four requirements are not met, these individuals do not qualify
as temporary employees and their charges would be taxable."

The following are excerpts from the "Furniture
Installation Service Agreement Between CORP X. (X)and Y OFFICE
(Subcontractor):

Section 7.0 (page 2) - All personnel shall be
employees of the Subcontractor on Subcontractor's payroll.

Section 8.0 (page 3) - Subcontractor shall be in the
relation of an independent contractor and is to have entire charge, control and
supervision of its employees and the work specified herein.

Section 10 (page 5) - Subcontractor's employees shall,
at all times while on X premises, wear matching shirts clearly and neatly
stating the Subcontractor's company name on the front.. and...on the front of
each jacket.

Section 15.0 (e) (page 7) - Any hand tools, power
tools, powered industrial trucks, forklifts, scissors lifts, etc. used during
construction, demolition, or rearrangement must be furnished and properly
maintained by the Contractor. Contractors are prohibited from operating
vehicles owned or leased by X.

Section 15.0 (j) (page 8) - Personnel protection
equipment must be provided and worn by Contractor's employees when warranted
by state, local, X or OSHA regulations or recommendations.

Section 21.0 (page 10) - Subcontractor shall furnish
all tools and equipment as identified in Appendix A.

I disagree with ABC COMPANY's assessment that TP's
employees qualify as temporary X employees under this agreement. Although TP's
employees are under the guidance of X's Project Coordinator, there is no
evidence that X has employees doing the same work being performed by TP's
employees. However, it is abundantly clear that three of the four requirements
are not met under this agreement. Thus, the services provided by TP's
employees for X that are taxable services as defined under Texas Tax Code
151.0101(a) are taxable.

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

NOTE: Previous Accession Number 9609682L