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. http://law.justia.com/cases/texas/third-court-of-appeals/2016/03-13-00341-cv.html.
By: David E. Colmenero, JD, LLM, CPA; Partner, Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP; Dallas