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March 2016

Temporary Employee Services: The Texas Third Court of Appeals Rejects the Texas Comptroller’s “Holistic” Application of the Temporary Employee Exclusion for Texas Sales Tax Purposes

David E. Colmenero, JD, LLM, CPA-Dallas

In a recent decision, the Third Court of Appeals issued a decision favorable to taxpayers on the question of whether and under what circumstances temporary staffing services qualify as temporary employee services that are excluded from Texas sales or use tax. See Allstate Inc. Co. v. Hegar, 2016 Tex. App. LEXIS 1603 (Tex. App. – Austin, Feb. 19, 2016, no pet. h.). The taxpayer, Allstate Insurance Co., an insurance carrier, subcontracted with another entity, Pilot Catastrophe Services, Inc., to provide insurance claims adjusters as needed to supplement Allstate’s existing staff of claims adjusters. Allstate argued that the adjusters provided by Pilot were excluded from Texas sales tax under Section 151.057(2) of the Texas Tax Code, which states that “a service performed by an employee of a temporary employment service as defined by Section 93.001, Labor Code, 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.”

The Texas comptroller argued that the adjusters provided by Pilot did not qualify as temporary employees because they were provided by Pilot on a continuous and ongoing basis and were therefore not temporary in nature. In support of its argument, the Texas comptroller noted that, on any given date throughout the tax years in question, there was at least one Pilot employee, and typically more, providing adjusting services to Allstate. The court disagreed with the Texas comptroller’s “holistic” view of the services provided by Pilot, holding that the temporary services exclusion must be applied on an individual employee basis. When viewed in this manner, the court had no trouble concluding that the individual adjusters were provided by Pilot to Allstate on a temporary basis.

While the court agreed with Allstate that several of its adjusters satisfied the other elements of this exclusion, the court ruled against Allstate with respect to certain adjusters where Allstate did not provide the necessary equipment. Specifically, the agreement with Pilot required that all adjusters provided by Pilot have “electronic voice mail, cellular telephones and laptop computers at the time they arrive at a site to provide Adjusting Services to Allstate.” Because these items were required under the contract with Allstate, the court found them to be “necessary” to performance of the adjusting services as contemplated by Section 151.057(2). Allstate conceded that it did not provide this equipment to certain “outside” adjusters provided by Pilot. Thus, the court held that Allstate failed to meet its burden with respect to sales tax due in connection with services provided by those adjusters.

While the above decision focuses on the insurance adjusting industries, the issue regarding the applicability of the temporary employee services exclusion arises in a number of different contexts. The Allstate court’s rejection of the Texas comptroller’s “holistic” approach in applying this exclusion may very well call into question the comptroller’s continued denial of the exclusion in at least some other cases where the comptroller has similarly denied the exclusion.

By: David E. Colmenero, JD, LLM, CPA; Partner, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP; Dallas

IRS Delays Filing Deadline for Consistent Estate Basis Reporting Statements to June 30, 2016

On Monday, the Texas Society of CPAs joined AICPA in requesting that the Treasury Department and the IRS delay the estate basis reporting due date from March 31, 2016 until May 31, 2016, to give taxpayers, executors and practitioners adequate time to become familiar with the new filing requirements. On Wednesday, the IRS delayed the due date even further than requested to June 30, 2016.

TSCPA tax committees request that the IRS expose "future state" plan for public comments

Last week, the Texas Society of CPAs’ Federal Tax Policy and Relations with IRS Committees joined the National Taxpayer Advocate in requesting that the Treasury Department and the IRS expose the “future state” plan and Concept of Operations for general public review and comment. As the IRS moves toward increased use of technology to serve taxpayers, stakeholders should have an opportunity to assist with identifying situations where technology will both benefit taxpayers and make IRS operations more efficient.

R&D Credit is Back and Better than Before

By Jim Streets, CPA

Not only did the 2015 Protecting Americans from Tax Hikes (PATH) Act restore and make permanent the research and development (R&D) tax credit under IRC Section 41, it added new Subsection (h), which allows qualified small businesses to use the credit against payroll taxes. Prior to the PATH Act, the R&D credit could only be used against income tax, which did not make it attractive to most startup companies that typically incur significant R&D expenses but no income tax. 

Starting with tax years beginning in calendar year 2016, a qualified small business can elect to use the R&D credit against payroll taxes. Under Section 41(h), a qualified small business is a person, corporation or partnership with gross receipts of less than $5 million for the current tax year and no gross receipts for any tax year before the five tax years ending with the current tax year. There are aggregation rules that apply. The election is made on or before the due date, including extensions, of the tax return for the taxable year and must specify the amount of the credit to which the election applies. 

The R&D credit elected to be used against payroll tax is limited to the least of $250,000, the amount of the credit determined without regard to the election, or in the case of a qualified small business other than a partnership or S corporation, the amount of the business credit carryforward from the tax year determined without regard to the election. 

The payroll tax credit election can only be used against the employer’s share of the Social Security portion of FICA taxes. It cannot be used to lower the employer’s portion of the Medicare tax or any FICA taxes the employer withholds and remits to the government on behalf of employees. 

While the R&D payroll tax credit is limited, the credit against payroll taxes is not taken into account in determining the amount of income tax deduction allowed for payroll taxes. In other words, the payroll tax deduction is not reduced by the amount of the R&D credit elected to be used against payroll taxes. 

The R&D credit against payroll taxes is allowed for the first calendar quarter after the date the tax return is filed with the election. Any credit not used in the first calendar quarter will be carried over to the next calendar quarter. Many small businesses have payroll tax expenses but no income tax while they are in startup mode, which makes the new election to use R&D credit against payroll taxes an opportunity to get immediate benefit from the R&D credit.

Jim Streets, CPA-Houston, is a Tax Director for PKF Texas. Contact him at 713-860-1400 or at