SECTION 3.364. Services by Employees

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

(1) Affiliated group--Entities in which a controlling interest is owned by a common owner or owners, either corporate or noncorporate, or by one or more of the member entities.

(2) Client--Any person who enters into a professional employer services agreement with a professional employer organization.

(3) Coemployer--A professional employer organization or a client that is a party to a coemployment relationship.

(4) Coemployment relationship--A contractual relationship between a client and a professional employer organization that involves the sharing of employment responsibilities with or allocation of employment responsibilities to covered employees in accordance with a professional employer services agreement and the provisions of Labor Code, Chapter 91.

(5) Covered employee--An individual having a coemployment relationship with a professional employer organization and a client. The term does not include an independent contractor, a temporary common worker as defined by Labor Code, Chapter 92, or an employee providing temporary help.

(6) Controlling interest--

(A) for a corporation, either more than 50%, owned directly or indirectly, of the total combined voting power of all classes of stock of the corporation, or more than 50%, owned directly or indirectly, of the beneficial ownership interest in the voting stock of the corporation;

(B) for a partnership, association, trust, or other entity other than a limited liability company, more than 50%, owned directly or indirectly, of the capital, profits, or beneficial interest in the partnership, association, trust, or other entity; and

(C) for a limited liability company, either more than 50%, owned directly or indirectly, of the total membership interest of the limited liability company or more than 50%, owned directly or indirectly, of the beneficial ownership interest in the membership interest of the limited liability company.

(7) Host employer--The employer who owns, manages, or controls the property or worksite where a temporary employee performs a service.

(8) 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, not by the hour or some other 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.

(9) Professional employer organization--A business entity that offers professional employer services and is licensed under Labor Code, Chapter 91.

(10) Professional employer services--Services provided to a client by a professional employer organization through a coemployment relationship when a majority of the employees providing services to the client, or to a division or work unit of the client, are covered employees. The term does not include:

(A) temporary employees;

(B) the provision of services by an independent contractor;

(C) the provision of services that otherwise meet the definition of "professional employer services" by one person solely to other persons who are related to the service provider by common ownership; or

(D) services provided by a temporary common worker employer as defined by Labor Code, Chapter 92.

(11) Temporary employee--An employee of a temporary employment service.

(12) Temporary employment service--A person, corporation, organization, or other legal entity that employs individuals for the purpose of assigning those individuals to a host employer to support or supplement the host employer'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.

(b) Tax responsibilities of professional employer organizations.

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

(A) at least 75% of the covered employees providing services under the professional employer services agreement were previously employees of the client for a period of at least three months immediately prior to commencement of the professional employer services agreement;

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

(i) by the company providing professional employer services under the agreement unless the previous employment was through a coemployment relationship; or

(ii) by a person that previously provided or currently provides taxable services to the client; and

(C) a coemployment relationship exists between the client and the professional employer organization as to the covered employees.

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

(A) A professional employer services agreement must comply only with paragraph (1)(B) and (C) of this subsection when the client has been in operation for less than a year; provided that a client 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 professional employer organization enters into an agreement with a client that previously was in a coemployment relationship with another professional employer organization immediately prior to the effective date of such new agreement, the employees that were subject to the coemployment relationship will be considered employees of the client in meeting the requirement in paragraph (1)(A) of this subsection.

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

(i) employees previously employed by the professional employer organization unless the previous employment was through a coemployment relationship with another client; or

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

(D) If the scope of an existing professional employer services agreement is expanded to increase the volume of services of the type already provided by the professional employer organization by adding employees to perform the same work functions of employees already under the agreement (for example, another shift is added), the amended agreement must meet the qualifications in paragraph (1)(B)(i) and (C) of this subsection.

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

(3) The client and the professional employer organization must sign a written certification that the professional employer services agreement or amendments to the agreement 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 an agreement does not meet the conditions for exemption set out in subsection (b) of this section, taxable services as defined in Tax Code, §151.0101, performed under the agreement are subject to sales tax, unless purchased for resale as provided in §3.285 of this title (relating to Resale Certificates; Sales for Resale).

(5) When both nontaxable professional employer services and taxable services are being performed under the same agreement, the parties to the agreement should separately identify the taxable from nontaxable services in the agreement and the charges applicable to each. Failure to separate the charges will result in the entire agreement 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 professional employer 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 agreements, which detail the scope of work, bid sheets, tally sheets, payroll records, and job descriptions. If there is not a written agreement 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 professional employer services 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. Professional employer services do not include services performed by an independent contractor regardless of the status of the contractor as a licensed professional employer organization.

(d) Tax responsibilities of temporary employment services.

(1) Taxable services performed for a host employer by temporary employees are exempt from sales tax when the following conditions are met:

(A) the service is normally performed by the host employer's own employees;

(B) the host employer is using the temporary employees to supplement its own work force;

(C) the host employer provides the temporary employees all supplies and equipment necessary to perform the services, other than personal protective equipment provided by the temporary employment service pursuant to a federal law or regulation; and

(D) the host employer does not rent, lease, purchase, or otherwise acquire for use any of the supplies and equipment described in paragraph (1)(C) of this subsection, other than the personal protective equipment described by that subsection, from the temporary employment service or an entity that is a member of an affiliated group of which the temporary employment service is also a member.

(E) the host employer has the sole right to supervise, direct, and control the work performed by the temporary employee as necessary to conduct the host employer's business or to comply with any licensing, statutory, or regulatory requirement applicable to the host.

(2) A temporary employment service may accept a properly completed blanket exemption certificate from the host employer. Refer to §3.287 of this title (relating to Exemption Certificates).

(e) Services provided for an employer by an employee. A service performed by an employee for the employee's employer in the regular course of business, within the scope of the employee's duties, and for which the employee is paid regular wages or salary, is exempt from sales and use tax. An employee is not required to provide an employer with an exemption certificate. The employment tax records that an employer maintains for the Internal Revenue Service are sufficient documentation of exemption.

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; amended to be effective August 28, 2016, 41 TexReg 6213; amended to be effective July 3, 2018, 43 TexReg 4465