Does a Professional Employer Organization (PEO) that becomes the employer of record for its clients' workers, handles payroll/withholding/workers' comp, and leases those employees back to the clients, owe Utah sales or use tax on the payroll-cost reimbursements or its service fee charged to clients?

Plain-English summary

A company organizing itself as a Professional Employer Organization (PEO) asked the Utah Tax Commission whether its charges to client businesses were subject to Utah sales tax. Under the PEO's model, it would become the formal "employer of record" for each client's existing workforce: those employees would move onto the PEO's payroll and benefit programs, and the PEO would handle payroll taxes, withholding, workers' compensation, and group health insurance — then lease those same employees back to the client. In exchange, the client would reimburse the PEO for all payroll/tax/benefit costs, plus pay an additional service fee (separately itemized on invoices).

Critically, the PEO drew a sharp contrast with a traditional "temp agency": under this PEO's model, the client retained total day-to-day control — hiring, firing, wage rates, raises, training, and supervision all stayed with the client. Each leased employee worked for only one client (the one whose dedicated workforce they already were), and if the client ended the PEO relationship, the employees would simply continue working for the client directly rather than being reassigned elsewhere by the PEO. The Commission agreed this arrangement is a "shared employer" or co-employer relationship, not a temp-staffing or labor-broker business, and found that neither the payroll-cost reimbursement nor the service fee is subject to Utah sales tax. The Commission did add one separate note: even though the charges to clients aren't sales-taxable, the PEO itself remains subject to Utah's corporate income/franchise tax on its own income from operating the business.

What this means for you

Companies structuring or considering a PEO/employee-leasing arrangement in Utah

This ruling supports treating PEO service fees and payroll-cost reimbursements as outside Utah's sales tax base — but the facts mattered: a genuine co-employment relationship where the client keeps supervisory/hiring/firing control and the leased workers are the client's own dedicated staff (not a rotating pool assigned to different clients) is what distinguishes this from a taxable staffing arrangement. If your leasing model looks more like a traditional temp agency (workers rotate among multiple clients, and the agency controls hiring/firing/wage-setting), this ruling's reasoning may not extend to you.

PEOs and employee-leasing businesses operating in Utah

Don't assume that just because your service charges aren't sales-taxable, your business itself is exempt from other Utah taxes — this ruling explicitly notes the PEO remains subject to Utah's corporate income/franchise tax on its own income, separate from the sales tax question about client charges.

Accountants advising clients entering a PEO relationship

If a client is evaluating whether to outsource its workforce to a PEO, this ruling is a useful (though dated) data point that the payroll reimbursement and service fee shouldn't trigger Utah sales tax liability for either party, provided the arrangement is structured as genuine co-employment rather than temporary staffing.

Common questions

Q: If our PEO reimburses itself for payroll costs and charges a service fee, do we need to collect Utah sales tax on either amount?
A: Not under this ruling's facts — the Commission found neither the payroll/benefits reimbursement nor the service fee subject to Utah sales tax, based on a genuine co-employment/leasing arrangement where the client retains day-to-day control over the employees.

Q: How is this different from a temp staffing agency, for tax purposes?
A: This ruling emphasizes several distinguishing facts: the client (not the PEO) controls hiring, firing, wages, and training; each employee works for only one client rather than rotating among several; and if the client relationship ends, the employees stay with the client rather than returning to the PEO's pool. A traditional temp agency, by contrast, controls those functions and reassigns workers across multiple clients.

Q: Does the PEO avoid Utah tax entirely under this ruling?
A: No — the ruling is limited to sales tax on client charges. The Commission specifically noted the PEO itself remains subject to Utah's corporate income/franchise tax on its own income from the business.

Citations and references

No specific Utah Code or Administrative Rule sections were cited in this ruling's text; the Commission's analysis rested on the co-employment facts presented and a general reference to Utah's corporate franchise tax provisions applying to the PEO's own income.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-176.htm

Original ruling text

96-176

Response
December 30, 1996

Request

UT. State Tax Commission

XXXXX, S/U Tax Officer

210 N 1950 W

Salt Lake City UT 84134

Dear XXXXX:

To ensure proper compliance with the laws of your state, a formal written letter of determination is requested on whether there are sales and use tax implications in the following transactions:

COMPANY is a Professional Employer Organization formed to provide employment services to affiliated businesses (hereinafter "clients" ) looking, for ways to reduce labor costs, paperwork and other administrative burdens of having employees COMPANYwill enter into long-term employee leasing agreements with its clients. The client's employees will then become employees of COMPANYand will be on COMPANY's payroll and participate in COMPANY's benefit programs COMPANYwill, in turn, lease the employees back to the client COMPANYwill be responsible for payment of payroll taxes, employer withholding taxes, workers' compensation premiums, obtaining group health care insurance for its employees, and preparing and filing necessary tax returns and other documents. In exchange for its services. COMPANY will be reimbursed for all monies disbursed for payroll, employment and withholding taxes, workers' compensation premiums, or other employee benefit payments relating to the leased employees, plus an additional percentage as a service fee. COMPANY's invoices will separately itemize the service fee amount

Although on COMPANY's payroll, the clients will continue to supervise the leased employees. Clients will retain total control over the hiring, firing, wage rates and salary increases of employees. Clients will also be responsible for training employees and directing their day-to-day activities. If a client terminates COMPANY's services, the employees will continue to work for the client, presumably on the client's payroll, and will terminate their employment with COMPANY. If a client terminates an employee, the employee will not continue to work for COMPANY. No COMPANY leased employee will work for more than one client, and COMPANY will not maintain an inventory of temporary employees to send out to its clients on an as needed basis. COMPANY will not operata a temporary service or labor broker type business. The employees involved will be the regular, dedicated work forces of COMPANY's clients. While COMPANY will be the employer of record and will assume significant employer/employee responsibilities, this arrangement will create a snared employer or coemployer environment with its clients.

In all of the above respects, COMPANY is very different from a temporary services agency ("Temp Agency"). Temp Agencies typically hire employees who are available to work for any client of the agency on a day-to-day basis. Temp Agencies control the hiring, firing, wage rates and training of their employees. Temp Agencies set the hourly rates at which employees with specific skills are provided to their clients. The employees of a Temp Agency may work for many different clients during a pay period. If a particular client terminates its relationship with the Temp Agency, the agency's employees remain with the agency and work for its other clients.

Based on the facts stated above, I am requesting an opinion as to whether COMPANY be required to collect the state's sales (or gross receipts) and use tax on:

1 ) The reimbursement amount received from its clients for payroll, employment and withholding taxes, and other employment benefit;

2) The amount received from its clients for the service fee; or

3) Both amounts, 1 & 2 above?

If you need additional clarification of the facts or questions above, please feel free to contact me at #####. Your response in this matter is greatly appreciated and should be addressed to my attention at:

XXXXX

Sincerely

NAME

ADDRESS

CITY, STATE, ZIP

Advisory opinion - sales tax on employee leasing contracts

Dear XXXXX,

We have received your request for an advisory opinion pertaining to the application of sales tax to your company's employee leasing contracts. We find that the charges to your clients for payroll reimbursements and service fees are not subject to sales tax.

Although you mentioned that COMPANY is responsible for payroll taxes and withholding taxes, please be aware that COMPANY is also subject to Utah's corporate income tax provisions. If you have specific questions about filing your Utah return, please contact our Customer Service Division at #####.

For the Commission,

Joe B. Pacheco,

Commissioner