sales and use tax challenges with highly skilled temporary...
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Sales and Use Tax Challenges With Highly Skilled Temporary
Workers: Varying States' Treatment of Professional Services
WEDNESDAY, JULY 13, 2016, 1:00-2:50 pm Eastern
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2
July 13, 2016
Sales and Use Tax Challenges With Highly Skilled Temporary Workers
Katherine Gauntt, Engagement Manager
Experis, Atlanta
Chandra Ford, Tax Manager
Allegis Group, Hanover, Md.
The information contained herein is general in nature and based on
authorities that are subject to change. Applicability to specific situations
is to be determined through consultation with your tax adviser.
4
AGENDA
1. Evolution of Temporary Work
2. Types of Employment Services
3. Nexus and Sales/Use Tax Basics
4. Application of Sales Tax to Employment Services
5. Audit Defense
5
EVOLUTION OF WORK
1990s to present
6
SOURCE: https://americanstaffing.net/staffing-research-data/2015-asa-staffing-industry-economic-analysis/charts-figures/
Temporary work become commonplace in the 2000s…..
7
Manufacturing jobs declined and the service economy grew…
8
SOURCE: http://www.pewresearch.org/fact-tank/2015/05/11/millennials-surpass-gen-xers-as-the-largest-generation-in-u-s-labor-force/
…the Gen Xers and millennial workforce grew…
9
…while remote work became possible through advances in technology…
10
TYPES OF EMPLOYMENT SERVICES
11
PERMANENT PLACEMENT OF WORKERS
IN HOUSE RECRUITMENT
PROFESSIONAL EMPLOYMENT
ORGANIZATIONS (PEO)
EMPLOYMENT SEARCH FIRMS
RECRUITMENT OUTSOURCED
PROVIDERS (RPO)
Permanent placement services offered by employment firms has evolved.
1990s 2000s Present
12
TEMPORARY WORKERS
Labor pools have evolved to highly skilled temporary workers on demand.
LABOR POOLS (MANUFACTURING)
STAFF AUGMENTATION
TEMPORARY STAFFING
MANAGED SERVICE
PROVIDERS
(MSP)
1990s 2000s Present
13
1980s-1990s Low Skill Labor Pools
>Factory Workers
> Secretarial
2000s Low Skill Labor Pools
to Skilled Workers
> Licensed Trades
> Technology Workers
> Supervisory
2010s Skilled Workers
to Professional Workers
>Technology
> Finance
> Engineering
> Medicine
Companies have outsourced human resources functions to concentrate on core
competencies. The labor needs of the employer have changed
from physical and low skilled labor to highly skilled knowledge based
labor. The skills level of the worker has evolved to meet this
demand while newer technologies facilitate
efficient delivery of labor and services.
Companies can now engage the best
talent available for specific
needs to create greater
efficiencies.
14
NEXUS AND SALES TAX BASICS
15
Fundamental Concepts of Sales Tax
FIRST RULE – There is an
exception to everything.
16
Fundamental Concepts of Sales Tax
Nexus
• Sufficient presence in a tax jurisdiction to create a legal requirement to collect
sales tax.
Application of Tax
• Tangible Personal Property (TPP) is taxable unless a specifically excluded by law.
• Services are nontaxable unless specifically identified as taxable by law.
Tax Base
• Sales price or tax base includes any product or service integral to a sale unless
excluded by law. (e.g. Freight)
Exemptions or Exclusions from Sales Tax By State
• An exclusion is based upon the legal status of the buyer and excludes tax from
sales of taxable or nontaxable goods to that entity. e.g. non-profit organizations
• An exemption is granted to specific products if criteria based upon the nature of
the sale (e.g. resale) or the nature of the product (e.g. prescription drugs) is met
17
Quill is still law
Quill Corp. v. North Dakota (1992)
Supreme Court found sufficient physical presence to establish nexus if:
the temporary or permanent presence of a single resident employee in the state
(Standard Pressed Steel Co. v. Department of Revenue of Washington (1975)
419 US 560);
the use of independent brokers, who were residents of the state, to solicit sales
(Scripto, Inc. v. Carson (1960) 362 US 207); and
the presence of advertising sales offices in the state, with activities unrelated to
the mail order business (National Geographic Society v. California Board of
Equalization (1977) 430 US 551).
18
NEXUS-Now versus Then
Twentieth Century Sales Tax Nexus
equaled
PHYSICAL NEXUS
New Millennium Sales Tax Nexus
equals
PHYSICAL NEXUS or
“CLICK-THROUGH” NEXUS or
ECONOMIC NEXUS or
AFFILIATE NEXUS
19
But…the states have enacted other types of nexus
Click Through Nexus Legislation or Policies
• AZ, AR, CA, CT, DC, GA, HI, IA, KS, LA, MD, ME, MI, MN, MO, ND, NJ,
NM, NV, NY, NC, PA, RI, SD, TN, UT, VT, WA
Affiliate Nexus
• MI (eff. 10/1/2015) Seller is presumed to be engaged in business if it or any
other entity (i) sells a similar line of products under similar business
name;(ii) uses trademarks, service marks are trade names substantially
similar; (iii) shares management , business systems, business practices, or
employees; (iv) engages in intercompany transactions to establish or
maintain a marketplace. Rebuttal presumption available.
• 2016 Affiliate Nexus Legislation passed in ID, MN, OK (expanded), and RI.
20
Economic Nexus - – Alabama challenges Quill
Ala. Reg. 810-6-2-.90.03, eff. January 1, 2016 - ( for sales of $250k or more)
Remote seller is presumed to have nexus if (1) Maintains, occupies, or uses an
office, place of distribution, …. or other place of business in Alabama; (2) Qualifies
to do business or registers with Alabama to collect the tax levied by the regulation;
(3) Employs or contracts any representative, agent, ….or installer operating in
Alabama; (4) Benefits from (i) banking, financing, debt collection...or from
authorized installation, servicing, or repair facilities, (ii) Catalogs or advertising
resulting in sale; (iii) Franchisees; or,(5) Solicits orders..by means of a
telecommunication or television shopping system.
21
APPLICATION OF THE TAX
22
Temporary Services vs. Services
• Temporary Services are defined by the service recipient’s right to direct,
supervise, and control the work the worker does as well as how the work is
done.
• Consulting Services are defined by a predetermined task or project where the
service provider controls the employee’s means and methods of providing
that service. Generally, there are deliverables or outcomes the service provider
must meet.
• Permanent Placement Services is defined as a staffing firm bringing together
job seekers and potential employers for the purpose of establishing a permanent
employment relationship. (ASA)
• Professional Services are generally performed by individuals with specials skills
and knowledge requiring specialized training, education and/or accreditation
23
Temporary Services vs. Professional Services
26 CFR 31.3401(c)-1 – Employee
§ 31.3401(c)-1 Employee.
(b) Generally the relationship of employer and employee exists when the person for whom
services are performed has the right to control and direct the individual who performs the
services, not only as to the result to be accomplished by the work but also as to the details and
means by which that result is accomplished. That is, an employee is subject to the will and
control of the employer not only as to what shall be done but how it shall be done. In this
connection, it is not necessary that the employer actually direct or control the manner in which
the services are performed; it is sufficient if he has the right to do so. The right to discharge is
also an important factor indicating that the person possessing that right is an employer. Other
factors characteristic of an employer, but not necessarily present in every case, are the
furnishing of tools and the furnishing of a place to work to the individual who performs the
services. In general, if an individual is subject to the control or direction of another merely as
to the result to be accomplished by the work and not as to the means and methods for
accomplishing the result, he is not an employee.
24
Bright Line Tests to Determine Service What are you buying/selling?
True object of the underlying transaction
• a service recipient who wishes to receive the services of a temporary or part-
time employee
• a service recipient who wishes to receive a specific service
Means and Methods test (Darling v. Burrone Bros., Inc., 162 Conn. 187 (Conn. 1972))
What is to be done
How it is to be done
When a project is complete, are the workers reassigned to a new project or task?
25
APPLICATION OF THE TAX
Taxation of Employment Services
NOTE: We will focus on “temporary services” going forward.
26
Criteria for Taxation of Temporary Workers
1. Source of Compensation for the Worker
Objective measure based on who pays worker. By definition, employer does
not pay worker if worker is “temporary worker.”
2. Client Supervision and Control
Subjective measure based on limited state specific criteria. Generally
dependent upon state code, rulings and administrative guidance if available.
27
DEFINITION OF “CONTROL” – FEDERAL LAW
Under federal law, “control” is determined by the “totality of the circumstances
… the focus [is] on who has the right—the employer or the employee—to
control the work process.”
Tests for “control”:
• Common law test is based upon who has the right to control the work process
and is generally applied under federal tax law associated with wages and
retirement.
• Economic realities test is based upon whether an individual is economically
dependent upon a business for continued employment and is applied under
federal law associated with discriminatory practices.
Factors such as supervision, method of payment (hourly versus fixed fee), skill
level, duration of the work, who supplies tools and the extent to which the
work is incorporated into the business may also be considered in evaluating a
worker relationship and the degree of control.
28
Basis of Tax States Taxing
Employment Services
Citation
1. Employment Services
are Taxable Services
CT, IA (permanent
placement only) PA,
OH
Conn. Gen Stat. §.12-
407(a)(37)(C); Iowa Code
§423.2.6.a ;. 5739.01(B)(3)(k)-(l),
Ohio R.C.; 72 PS §7202
2. Sales of all services
taxable without specified
exemption
SD, WV §10-45-4, SDCL; § 10-45-12.1,
SDCL; WV Reg. §. 110-15-8;
W.Va. Reg. Sec. 110-15-33.
3. Employment Services
subject to Gross Receipts
Tax
DE (for receipts
>$1mm/mo), HI, NM,
DE Publication-Basic License
and Gross Receipts Information
(Sept. 20, 2000); Haw Rev Stat
§. 237-13(6); 3.2.1.18 NMAC;
4. Service performed by
temporary worker is a
taxable service.
(Underlying Service)
Depends on state law.
Generally involves
actions upon TPP (e.g.
installation, repair,
maintenance)
State Specific Citations.
5. Employment Services
subject to Excise Tax
Based upon Business
Activity (Underlying
Service) Classification
AZ, WA Sec. 42-5061(A)(1),(2),
A.R.S., RCW 82.04.290
Understanding the Basis of Taxing Employment Services
29
States that Specifically Tax
Employment Services
CONNECTICUT
PENNSYLVANIA
OHIO
30
CONNECTICUT- Definition of “Employment Services”
Connecticut places more emphasis on provider type when taxing
employment services. “Employment services” provide permanent placement
services, whereas “personnel services” employ and pay temporary or part-
time workers to perform temporary work. Both are taxable services in
Connecticut. Conn. Gen. Stat. §12-407(a)(37). Connecticut Reg. Sec 12-426-27(b).
31
CONNECTICUT-Taxation of Highly Skilled Workers Providing Professional Services
Definition of “professional services” as services:
• rendered by a member of a generally acknowledged professional occupation
requiring a degree, license or specialized training, including, but not limited
to, the medical, legal, accounting and actuarial professions;
• acting in such member’s professional capacity, and
• that are commonly associated with such profession. Conn. Gen. Stat. §12-
407(2)(i)(J)-1(c)(3).
However, Connecticut’s definition of “sale” includes management advisory
services and human resource management services and specifically excludes
these services from the “professional services” definition when rendered by
accountants or actuaries.
32
PENNSYLVANIA - Definition of “Employment Services”
Pennsylvania defines taxable “help supply” services (Pennsylvania’s term for
“employment services”) as the “providing of an individual by a vendor to a
purchaser whereby the individual is an employee of the vendor and the work
performed by the individual is under the supervision of the purchaser.” An
“employee” is defined as a “person who is paid for his work or services by a
vendor, including persons on the payroll or independent contractors.” In both
instances, the service of providing temporary workers itself is the target of
the taxation as long as control is exerted over the worker by the client
company and wages are paid by the employment services firm. Pennsylvania,
Reg. Sec. 60.4 (a).
33
PENNSYLVANIA – Determining the Tax Base
Pennsylvania provides three options with which to determine tax base for employment
services.
1. Gross Fee Method: Total Fee
2. Service Fee Method: Gross Margin by Transaction, or
3. Average Employee Cost or Average Service Fee Method :Average Gross Margin
PA Reg. §60.4(c)(2)
This scheme can create considerable conflict between the employment services provider
and the client company. Essentially, Pennsylvania puts the provider in the position of
1. minimizing its audit risk by imposing tax on the highest possible amount,
2. assuming audit risk by having to defend an “average fee,” or
3. charging the minimal amount of sales tax by disclosing its profit margin and worker
pay to the client company and any competitors with access to invoice data.
Sellers of other TPP or taxable services do not face similar customer service dilemmas.
34
OHIO - Definition of “Employment Services”
Ohio defines an “employment service” as “the providing or supplying of
personnel, on a temporary or long-term basis, to perform work under
another’s supervision or control, when the personnel receive their wages,
salary, or other compensation from the supplier or provider of the
employment service or from a third party that provided or supplied the
personnel to the provider or supplier.” Sec. 5739.01(JJ), Ohio R.C.; Sales and
Use Tax Information Release ST 1993-08, Ohio Department of Taxation,
revised Feb. 2007.
35
OHIO – Resale of of “Employment Services
Ohio only recognizes the “resale of services” exemption if the temporary
services are sold by one employment services firm to another. If the
“temporary services” are resold to any firm other than another employment
services firm, the nature of the service is deemed to have changed from an
“employment service” to another taxable or non-taxable service type
regardless of whether the benefit of the service or the utilization of the
temporary worker’s skills does not change.
Ohio’s position is based upon Crew 4 You, Inc. v. Wilkins, where a temporary
services firm provided workers to perform taxable underlying services. In this
case, the taxable temporary service provided by Crew 4 You was deemed to
have been consumed by the client who then performed another underlying
taxable service for its client. Under this scenario, the courts ruled that the
resale exemption did not apply Crew 4 You, Inc. v. Wilkins, 105 Ohio St3d 356, 2005-
Ohio-2167 (May 18, 2005).
36
States Taxing Receipts from All Services
South Dakota
West Virginia
37
SOUTH DAKOTA
South Dakota imposes “a tax at the same rate as that imposed upon sales of
tangible personal property ..upon the gross receipts of any person from the
engaging or continuing in the practice of any business in which a service is
rendered. ‘Service’ means all activities engaged in for other persons for a
fee, retainer, commission, or other monetary charge,…….In determining what
is a service, the intended use, principal objective or ultimate objective of the
contracting parties shall not be controlling. (Sec. 10-45-4, SDCL Sec. 10-45-4,
SDCL)
38
WEST VIRGINIA
West Virginia 11-15-2(b)(18) imposes a tax upon “the furnishing of all
services, except professional and personal services, …”"Service" or "selected
service" includes all nonprofessional activities engaged in for other persons
for a consideration, which involve the rendering of a service as distinguished
from the sale of tangible personal property or custom software, but does not
include contracting [i.e. construction services], personal services or the
services rendered by an employee to his or her employer or any service
rendered for resale. W.Va. Code Sec. 11-15-2(b)(17) ; W.Va. Code Sec. 11-15-8
39
States Taxing Receipts from
Employment Services
Delaware
Hawaii
New Mexico
40
DELAWARE- Tax is on the Seller
Delaware applies its gross receipts tax to gross receipts greater than $1
million per month without deduction for wages, benefits, state or federal
taxes or any other expenses associated with the provision of employment
services.
NOTE: This is a tax on the Seller. It cannot be passed through to the
Purchaser.
Delaware Department of Finance, Division of Revenue, Basic License and Gross Receipts
Information (Sept. 20, 2000).
41
HAWAII – Tax can be Passed to Buyer
Hawaii 237-13(6)(A) applies an excise tax upon “every person engaging …in
any service business or calling including professional services not otherwise
specifically taxed ……is likewise hereby levied and shall be assessed and
collected a tax equal to four per cent of the gross income of the business.”
Haw Rev Stat §. 237-13(6)
42
NEW MEXICO- Sales of Services to Government Entities are Taxable
New Mexico applies its gross receipts tax to all “Receipts derived from
performing a service in New Mexico …unless a specific exemption or
deduction provided for in the Gross Receipts and Compensating Tax Act
applies.” 3.2.1.18 NMAC
Receipts from the sale of a service to a governmental agency are not
deductible pursuant to Section 7-9-54. Only the receipts from selling tangible
personal property to a governmental agency are deductible. 3.2.212.9NMAC.A.
43
States Taxing Receipts from
Underlying Services
* Depends on Whether State Specifically Subjects Certain Services
to Tax AND State Law Specific to the Sale of Services.
44
Common Taxable Services Performed by Temporary Workers
1. Computer Services Performed on Tangible Personal Property
2. Installation, Repair and Maintenance Services Performed on Tangible Personal
Property
3. General Services such as Cleaning, Landscaping, Security Services
45
It’s important to note that there is very little guidance by the states on
the taxation of underlying services when performed by a temporary
worker. Some states are more aggressive in this area than others and a
thorough reading of each state’s law should be conducted to ensure
compliance. Generally, the law is written for a situation where the Service
Provider is also the Seller of the TPP that is the object of the service,
The following is a list of taxable services in specific states. The extent to
which that same service is taxable when performed by a temporary
worker is dependent upon the tax code and state policy.
46
Taxable Computer Services
STATES WHERE SET-UP OF CUSTOM SOFTWARE IS TAXABLE WHEN VENDOR IS NOT
THE SELLER OF THE SOFTWARE:
CT, DC, HI, IN, MS, NE, SD, TN, TX, WV, WY
(SOURCE: CCH Smart Charts™ - Exceptions Apply – Refer to specific Jurisdictional Tax Code)
47
Taxable Repair of TPP
STATES WHERE LABOR TO REPAIR TPP IS TAXABLE
AR, CT, DC, FL, HI, IA, KS, LA, MS, NE, NJ, NM, OH,
PA, SD, TN, TX, UT, WA, WV, WI, WY
(SOURCE: CCH Smart Charts™ - Exceptions Apply – Refer to specific Jurisdictional Tax Code)
48
Taxable Cleaning, Landscaping, Security Services
(SOURCE: CCH Smart Charts™ - Exceptions Apply – Refer to specific Jurisdictional Tax Code)
CLEANING LANDSCAPING SECURITY
AR, DC, FL, HI, IA, LA,
MD, MN, NE, NJ, NM,
NY, OH, PA, SD, WV
AZ, AR, CT, DC, HI, IA,
MN, MS, NE, NJ, NM,
NY,OH, SD, TX, WA,
WV, WI
AR, CT, DC, FL, GA,
HI, IA, MD, MN, MS,
NE, NJ, NM, NY, OH,
SD, TX, WA, WV
49
NEW JERSEY- No Precedent-Just Policy
Labor Ready Northeast, Inc. v. Director, Division of Taxation. Labor Ready and the Division of
Taxation settled a 2008 audit assessment after which the Division sent Labor Ready a letter
stating:
“…if the services performed are taxable services, Labor Ready is required to collect … sales tax from
its clients, based on the amount charged for the worker's services, regardless of how calculated.” It then
went on to elaborate its conclusion by enumerating the circumstances pertaining to taxability of Labor
Ready's activities, namely: (1) where an enumerated service is performed directly for Labor Ready's
client, “tax must be charged” since there is no third-party involved; (2) where Labor Ready provides
workers to a client, and the client uses the workers to perform a nontaxable or non-enumerated service,
“tax is not due;” (3) where Labor Ready's client uses Labor Ready's worker to perform services “engaged
in by Client's own employees” for resale to a third party, then “a resale exemption may be claimed;” and
(4) if Labor Ready's worker performs taxable services for a contractor ( e.g., snow removal),
the services are taxable, however, if the worker is “acting as a subcontractor” or performing nontaxable
services ( e.g., assisting or helping a plumber), the “transactions are not subject to tax.”
The Court denied both parties motion for Summary Judgment on technical grounds. However,, the
guidance issued to Labor Ready based on the Division’s letter is indicative of how the Division will
continue to treat underlying services until such time as the Court rules on its application to all
temporary service providers.
New Jersey Tax Court, No. 000359-2010, 25 N.J.Tax 607, January 6, 2011
50
FLORIDA- The “Control” Issue Works Both Ways
Technical Assistance Advisement No. 97A-048, Florida Department of
Revenue, July 11, 1997
Cleaning services performed by a person hired as a temporary employee,
which are performed at the discretion and under the direction of the
customer (i.e., temporary employer), would not be construed as taxable
nonresidential cleaning services. Conversely, if a temporary staffing
company provides the labor, on-site supervision and process “know-how”,
and/or the implements (vacuums, mops, brooms, pails, sponges, soaps, etc.)
necessary to accomplish the cleaning activities, the company is engaged in
the business of providing a [taxable] cleaning service.
This guidance underscores the key criteria of wages and control. However,
the burden of proof is on the taxpayer to prove that “control” is exerted by
the customer in this instance.
51
Tennessee- A Lesson in “True Object”
Tennessee Department of Revenue, LTR 14-11 (Oct. 30, 2014)-
Ruling was in favor of the taxpayer providing staff augmentation services but….….the
department of revenue opined that “… when outsourcing operations to service providers
… the question often arises as to whether characterization of the service should be
limited to what the service provider claims to provide, or should be properly
characterized according to the true object of the customer’s broader operation for
which service is rendered…. Under Tennessee law, the provision of temporary workers is
not a taxable service, but repairing tangible personal property is a taxable service.
Accordingly, a court would have to determine the true object of the transaction to
determine the sales tax consequences of the transaction [emphasis added] …. the
taxpayer should determine whether ‘the true object of the transaction or any of the
‘crucial,’ ‘essential,’ ‘necessary,’ ‘consequential,’ or ‘integral’ elements thereof
would be subject to sales tax. If so, the entire transaction is subject to sales tax.”
Using this analysis, the characterization of the service provided by the staffing company
is based on the “true object” of the totality of the service which may not be disclosed
to the temporary services provider.
52
States Assessing Excise Taxes Based on
the Underlying Services
AZ, WA
53
ARIZONA- Type of Business Drive Taxation
Arizona imposes the transaction privilege tax upon sellers of services falling
into the amusement, intrastate telecommunications and transportation
services business classifications. Services that are not specifically included in
the classifications, such employment services, are deemed nontaxable.
However, if the underlying service falls into one of these business
classifications and constitutes a separate business under the test put forth in
State Tax Commission v. Holmes & Narver, Inc., (State Tax Commission v. Holmes
& Narver, Inc., 113 Ariz. 165, 548 P2d 1162 (1976). §42-5073 ARS; §42-5064 ARS; §42-
5062 ARS.)
54
WASHINGTON- B&O Tax Rates Are Determined by Underlying Service Tax Status
Washington’s taxation of underlying services is based upon business activity
classifications similar to Arizona. Unlike Arizona, however, its retail sales
classification incorporates both the sale of TPP and the sale of certain
services. Employment services providers must collect and remit the retail
sales tax when they provide temporary workers that perform retail services.
Only specified services are taxable in Washington and include canned
software installation, TPP repair and hardware repair and maintenance. The
business classification for sales tax purposes also impacts the allocation of
Washington’s business and occupation tax where different rates may be
applied. (Wash. Rev. Code Sec. 82.04.290; Wash. Rev. Code Sec. 82.04.540; Wash.
Special Notice, Employment Services, Washington Department of Revenue, Aug. 11,
2009., Wash. Rev. Code Sec. 82.04.215; Wash. Rev. Code Sec. 82.04.050(3)., Wash. Rev.
Code Sec. 82.04.290; Wash. Rev. Code Sec. 82.04.540)
55
AUDIT DEFENSE
CONSIDERATIONS
56
Audit Support and Documentation Issues
• High data volume and multiple data sources retain the data which drives
taxability
• Inconsistent exemption certificate administration is required due to differing
rules on resale administration
• Customized contracts and free form job descriptions may increase
administrative burden and have unintended consequences
• Remote workers may impact sourcing
• Multiple fee structures may create tax base issues
57
MULTIPLE DATA SOURCES FOR TAX DETERMINATION
CLIENT DATA
• WORKSITE
• JOB TITLE
• JOB DESC
STAFF CO DATA
• PAY RATE
• BILL RATE
• WORKER
VENDOR
MANAGEMENT
SYSTEM (VMS)
BILLING SYSTEM
Job ID Code
Worksite
Bill Rate
Tax
Decision
SOURCE Key Fields for Tax Calculations
CLIENT DATA/
VMS
SERVICE Job Description Provides Details of Underlying Service
CLIENT DATA/
VMS
SITUS Worksite Determines Tax Law and Tax Rates that Apply
BILLING SYSTEM
– TAX
DETERMINATION
TAXABLE –Y/N Manual or Automated – Generally associated with Billing
System
BILLING SYSTEM BILL RATE Basis for Calculating Tax Base
STAFF CO/ VMS PAY RATE Basis for Offsets (Pennsylvania Only)
58
Resale of Temporary Services
Acceptable Exemption Documentation
State issued Direct Pay Permit
Blanket exemption certificate
Properly executed Resale
59
Resale of Temporary Services
Tax law is written with assumption that service is sold with TPP. The code is
limited or silent in most states on resale of services. However, some states
have guidance:
Connecticut has the most extensive guidance. the sale of a service [must] be
“an integral and inseparable component of one of the enumerated services
that the purchaser will subsequently sell to an ultimate consumer.” Examples
are provided in the code to better determine what an “integral and
inseparable” component may be. Reg. Sec. 12-410(5)-1; Reg. Sec. 12-411(14)-1.
60
Resale of Temporary Services
Pennsylvania takes the position that the provision of “help supply service” is
any service where the employee is paid by the employment services provider
and is under the “control” of the client. The nature of the work and the
business classification is irrelevant if these two criteria apply. As such, the
resale exemption is applicable regardless of whether a provider in the
business of providing temporary services sells to a provider of technology
services as long as the technology services provider meets Pennsylvania’s
definition for “help supply services.” 72 PS §7201(k)(8).
61
Resale of Temporary Services
Ohio requires that for resale of services to apply, the service must be sold in
the same form in which it was purchased. As such, employment service
providers may only resell to other employment service providers for Ohio to
recognize the exclusion. Ohio R.C. 5739.01 (JJ)(5)
62
Resale of Temporary Services
New Mexico requires that for resale of services to apply, the buyer must
resell the service in the ordinary course of business and the resale must be
subject to the gross receipts tax. NMSA 1978, § 7-9-48
63
Sourcing
Remote workers performing tasks providing benefit is certain states may be
subject to tax.
Ohio take the position that sales of taxable services will be sourced to the
location where the consumer receives the service, no matter where the
service provider is located. One could argue that the remote upgrade of a
computer system might benefit the company in multiple locations both inside
and outside Ohio. However, if the worker is sourced from an employment
services provider, the total fee for that worker will be subject to Ohio tax
under current law. Information Release ST 2009-03, Ohio Department of Taxation (Dec. 2009).
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Tax Base
Tax Base for fee structures other than hourly rates are difficult to administer:
• Fixed Fee transactions will be taxed in their entirety on sales of taxable
services.
• Fees based on percentage of compensation must be clearly and separately
stated.
• Contingent fees are variable for the same service.
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FUTURE TRENDS
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Companies are Returning to Core Competencies
Companies are returning to Core Competencies and outsourcing or co-sourcing
human resource functions.
• BPO (Business Process Outsourcing) – Help Desks, Shared Services Centers,
Call Centers
• RPO (Recruitment Process Outsourcing)- Attracting, selecting and engaging
candidates for temporary or permanent jobs
• MSP (Managed Service Providers) – Provides the administration associated
with supplying temporary workers from preferred suppliers.
Assimilation of better communication and technologies into work administration
• Increase in usage of ATS (Applicant Tracking Software)
• Increase in usage of VMS (Vendor Management Software)
• Scaling communication and technology into cloud
• Increase in remote workers
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Work is Changing
• Over time, demand has shifted from lower skilled manufacturing work to the so-
called white collar or knowledge worker. Manufacturers’ Outsourcing to Staffing Services, Upjohn
Institute Staff Working Paper No. 07-132, Dec. 2006.
• 38% of the U.S. employers experience difficulty filling mission-critical positions. ManpowerGroup 2015 Talent Shortage Survey www.manpowergroup.com/talentsurvey.
• By 2020, there will be a world-wide shortage of skilled college-educated workers
representing 13 percent of demand. McKinsey Global Institute, THE WORLD AT WORK: JOBS, PAY, AND SKILLS
FOR 3.5 BILLION PEOPLE June 2012
• A 2014 survey of business leaders at the Global Leadership Summit found that 34
percent indicated that more than half of their company’s full-time workforce
would be working remotely by 2020. Laura Vanderkam, Will Half of People be Working Remotely by
2020?, FAST COMPANY (Aug. 2014).
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