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Sales and Use Tax Challenges With Highly Skilled Temporary Workers July 13, 2016 Katherine Gauntt, Engagement Manager Chandra Ford, Tax Manager Experis, Atlanta Allegis Group, Hanover, Md. katherine.gauntt@experis.com chaford@allegisgroup.com
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
Temporary work become commonplace in the 2000s….. SOURCE: https://americanstaffing.net/staffing-research-data/2015-asa-staffing-industry-economic-analysis/charts-figures/ 7
Manufacturing jobs declined and the service economy grew… 8
…the Gen Xers and millennial workforce grew… SOURCE: http://www.pewresearch.org/fact-tank/2015/05/11/millennials-surpass-gen-xers-as-the-largest-generation-in-u-s-labor-force/ 9
…while remote work became possible through advances in technology… 10
TYPES OF EMPLOYMENT SERVICES 11
PERMANENT PLACEMENT OF WORKERS Permanent placement services offered by employment firms has evolved. PROFESSIONAL RECRUITMENT IN HOUSE EMPLOYMENT EMPLOYMENT OUTSOURCED RECRUITMENT SEARCH FIRMS ORGANIZATIONS PROVIDERS (PEO) (RPO) 1990s 2000s Present 12
TEMPORARY WORKERS Labor pools have evolved to highly skilled temporary workers on demand. MANAGED SERVICE STAFF LABOR POOLS TEMPORARY PROVIDERS (MANUFACTURING) AUGMENTATION STAFFING (MSP) 1990s 2000s Present 13
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 2010s needs to create greater efficiencies. Skilled Workers to Professional Workers 2000s >Technology Low Skill Labor Pools > Finance to Skilled Workers > Engineering 1980s-1990s > Licensed Trades > Medicine Low Skill Labor Pools > Technology Workers >Factory Workers > Supervisory > Secretarial 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
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