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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER OSTATE AND LOCAL SALES AND USE TAXES
RULE §3.364Staff Leasing Services

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

  (1) Assigned employee--An employee who is assigned to a client company by a staff leasing company, whose work is performed in this state, and as to whom the staff leasing company and the client company share employment responsibilities. The term does not include an employee or independent contractor retained or hired by a client company for a limited period of time to support or supplement a client company's workforce in a special work situation, including:

    (A) an employee absence;

    (B) a temporary skill shortage;

    (C) a seasonal workload; or

    (D) a special assignment or project.

  (2) Client company--A person that contracts with a staff leasing company and is assigned employees by the staff leasing company under the contract.

  (3) Independent contractor--A person who contracts to perform work or provide a service for the benefit of another and who:

    (A) is paid by the job even when consideration is based on a time measured basis;

    (B) is free to hire as many helpers as the person desires and to determine what each helper will be paid;

    (C) is free to work for other customers, or to send helpers to work for other customers, while under contract to the hiring customer; and

    (D) is in control of the details of the work and the right to terminate the employment of its employees.

  (4) Shared employment relationship--An employment relationship among an assigned employee, client company, and staff leasing company in which by written contract and in fact the staff leasing company and client company share employment responsibilities.

  (5) Staff leasing company--A business that offers staff leasing services and is licensed under the Labor Code, Chapter 91, or a business that offers staff leasing services but is exempt from the licensing requirements of the Labor Code.

  (6) Staff leasing services--Services performed by assigned employees, together with personnel management services, such as employee benefit and payroll services, performed by the staff leasing company and related to shared employees, for the client company under a written contract between the staff leasing company and the client company that provides for a shared employment relationship as to the assigned employees.

(b) Tax responsibilities of persons who perform staff leasing services.

  (1) Sales tax is not due on staff leasing services if all of the following conditions are met:

    (A) at least 75% of the assigned employees providing services under the staff leasing contract were previously employees of the client company for a period of at least three months immediately prior to commencement of the staff leasing contract;

    (B) none of the assigned employees were employed previously:

      (i) by the company providing staff leasing services under the contract unless the previous employment was through a shared employment relationship; or

      (ii) by an entity that previously provided or currently provides taxable services to the client company; and

    (C) a shared employment relationship exists between the client company and the staff leasing company as to the assigned employees.

  (2) The following are exceptions to paragraph (1) of this subsection.

    (A) A staff leasing contract must comply only with paragraph (1)(B) and (C) of this subsection when the client company has been in operation for less than a year; provided that a client company that has been in existence less than a year solely due to a change in legal entity, merger, or corporate reorganization must meet all three conditions. In the latter situation, the combined experience of all entities involved in such legal change, merger, or corporate reorganization will be considered when applying the tests set forth in paragraph (1) of this subsection.

    (B) When a staff leasing company enters into a contract with a client company that previously was in a shared employment relationship with another staff leasing company immediately prior to the effective date of such new contract, the shared employees will be considered employees of the client company in meeting the requirement in paragraph (1)(A) of this subsection.

    (C) A staff leasing contract that has met the qualifications in paragraph (1) of this subsection will not have to re-qualify if an employee assigned under the contract is fired or resigns and is replaced. However, a contract must re-qualify under paragraph (1) if, within six months after it is entered into, all of the assigned employees or an identifiable segment of the assigned employees are replaced by:

      (i) employees previously employed by the staff leasing company unless the previous employment was through a shared employment relationship with another client company; or

      (ii) employees of an entity that previously provided or currently provides taxable services to the client company.

    (D) If the scope of an existing staff leasing contract is expanded to increase the volume of services of the type already provided by the staff leasing company by adding employees to perform the same work functions of employees already under the contract (e.g., another shift is added), the amended contract must meet the qualifications in paragraph (1)(B)(i) and (C) of this subsection.

    (E) If the scope of an existing staff leasing contract is expanded to include services not previously provided by the staff leasing company by adding employees to perform functions that are not currently performed by employees under the contract (e.g., employees are added to perform debt collection services for a client who previously had not performed those services in house), the amended contract must meet the qualifications in paragraph (1)(B) and (C) of this subsection.

  (3) The client company and the staff leasing company must sign a written certification that the staff leasing contract or amendments to the contract meet the requirements and conditions set out in this section, and both parties must retain a copy of the certification in their files.

  (4) If a contract does not meet the conditions for exemption set out in subsection (b) of this section, taxable services as defined in the Tax Code, §151.0101, performed under the contract are subject to sales tax, unless purchased for resale as provided in §3.285 of this title (relating to Sales for Resale; Resale Certificates).

  (5) When both nontaxable staff leasing services and taxable services are being performed under the same contract, the parties to the contract should separately identify the taxable from nontaxable services in a contract and the charges applicable to each. Failure to separate the charges will result in the entire contract being presumed to be for taxable services. Documentation that clearly defines the work being performed should be retained by both parties to show that had the nontaxable staff leasing services and taxable services been performed independently of each other, the cost of each would be reasonably near the allocation of charges. Examples of acceptable documentation include written contracts which detail the scope of work, bid sheets, tally sheets, payroll records, and job descriptions. If there is not a written contract signed by both parties clearly showing agreement as to the taxable and nontaxable work being performed, the customer and the service provider may prepare a written certification verifying the allocation of nontaxable staff leasing and taxable services. All services performed will be presumed to be taxable if the parties fail to provide the written certification. The comptroller may recalculate the charges if the allocation appears unreasonable and either party may be held responsible for the additional tax due.

(c) Independent contractor. Staff leasing services do not include services performed by an independent contractor regardless of the status of the contractor as a licensed staff leasing company.

(d) Temporary help service. For information on the taxability of services performed by a temporary help service, see §3.356 of this title (relating to Real Property Service).


Source Note: The provisions of this §3.364 adopted to be effective August 12, 1996, 21 TexReg 7266; amended to be effective May 10, 1998, 23 TexReg 4314.

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