May 10, 2017
Re: Appeal of Assessment: Final Local Determination
Taxpayer: *****
Locality Assessing Tax: *****
Business, Professional and Occupational License (BPOL) Tax
Dear *****:
This final state determination is issued upon the application for correction filed by you on behalf of ***** (the “Taxpayer”) with the Department of Taxation. You appeal assessments of the Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the ***** (the “County”) for the 2012 through 2014 tax years.
The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e., the local assessment will stand unless the taxpayer proves that it is incorrect.
The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, regulation and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site.
FACTS
The Taxpayer, which had a definite place of business in the County, provided security staffing services to businesses on a contractual basis. Contracts ranged from less than a day up to five years. The Taxpayer employed the individuals who provided the services and paid their employee wages, salaries, payroll taxes and benefits. The Taxpayer was compensated by its clients on an hourly basis. Clients reimbursed the Taxpayer for specific services, such as drug testing, if required by the client.
The Taxpayer filed returns and paid BPOL tax at the rates applicable to protective agents for the 2012 trough 2014 tax years. In 2015, the Taxpayer determined it should be classified as a temporary staffing firm entitled to exclude certain employee benefits from gross receipts under Va. Code § 58.1-3732.4 and filed amended returns seeking refunds for the 2012 through 2014 tax years.
The County conducted an audit and concluded the Taxpayer should be classified as protective agents, denied the refunds, and issued an assessment for the 2015 tax year.
ANALYSIS
Classification
The BPOL tax is imposed on businesses and professionals for the privilege of doing business in a locality. The tax is imposed at different rates according to the classification of an enterprise. See Va. Code § 58.1-3706 A. These classifications are regulated under Title 23 the Virginia Administrative Code (VAC) 10-500-10 et seq. Classification of a specific business must be determined based on consideration of all the facts and circumstances. Some of the factors to be considered include:
- What is the nature of the enterprise's business?
- How does the enterprise generate gross receipts?
- Where does the enterprise conduct its business?
- Who are the enterprise's customers?
- How does the enterprise hold itself out to the public?
- What is the enterprise's North American Industry Classification System (NAICS) code?
The Taxpayer contends that it was a staffing firm for BPOL tax purposes subject to deducting certain employee expenses from its gross receipts. The Taxpayer states that it enters into contracts with clients to provide contract employees who perform specific duties at its clients' locations. The Taxpayer maintains that the employees it assigns to the client locations support and supplement the clients' work force by providing contracted services. The lengths of the contracts vary in duration, but are not permanent.
The County asserts that the Taxpayer was a service provider because: (1) it was licensed by the Department for Criminal Justice as a provider of security services; (2) it provides licensed and trained security guards to businesses under security service agreements; (3) it retained control of its employee security guards; (4) Taxpayer vehicles and uniforms have “security services” printed on them; (5) its website states it provides security services; and (6) it is classified as a provider of “Investigation and Security Services” under the NAICS Code (561600).
According to its website, the Taxpayer engages in a number of activities as a security service provider. While its primary business focuses on healthcare security services, the Taxpayer offers security, emergency management services, regulatory assessments, safety services, and consulting to government and commercial clients as well. The Taxpayer can also make its company a police force with the same capabilities and responsibilities of municipal police officers available to clients. In addition, the Taxpayer provides security assessments. Its healthcare security, safety, and emergency management experts evaluate, develop and deliver an assessment report and a multiyear work plan for a client's security program. The work plans aim to guide the client's security to support its core business. According to the Taxpayer, it allows clients to focus on serving the healthcare needs of their patients and community by providing security, safety, and emergency management services.
Staffing Firms
Virginia Code § 58.1-3732.4 A provides that the gross receipts of a staffing firm do not include employee benefits paid to a contract employee “for the period of time that the contract employee is actually employed for the use of the client company pursuant to the terms of a PEO services contract or temporary help services contract.”
Accordingly, a business that is classified as a staffing firm may exclude wages, salaries, payroll taxes, payroll deductions, workers' compensation costs, benefits, and similar expenses from its gross receipts. Virginia Code § 58.1-3732.4 B defines a staffing firm as “a person that provides PEO [professional employer organization] services or temporary help services.” [Insert added.] Both the Taxpayer and County agree that the Taxpayer did not provide PEO services. As such, the issue is whether the Taxpayer provided “temporary help services.”
Virginia Code § 58.1-3732.4 B defines temporary help services to mean “an arrangement whereby a staffing firm temporarily assigns employees to support or supplement a client company's workforce.” The County does not contest that the Taxpayer's assignment of security employees was temporary. Rather, it asserts that the placement of these employees did not support or supplement a client company's workforce. The Taxpayer argues that its employees did support and supplement its clients' workforce. Both the Taxpayer and the County rely on Public Document (P.D.) 04-175 (10/5/2004) as support for their respective positions.
In P.D. 04-175, a taxpayer provided temporary home nursing services to critically ill children. The taxpayer contracted directly with the family to provide health care services. The Department determined that the taxpayer did not provide temporary help services because it was providing a new service to an individual (the “client company”) that, at the time the contract was executed, had no workforce and, therefore, was not “supporting or supplementing a service provided by an existing workforce.”
The Taxpayer contends that, unlike the nursing service provider in P.D. 04-175, it supplements its clients' workforce because it provides security services to businesses that have a workforce. The County asserts that the Taxpayer was not supporting or supplementing its clients' workforce because it provided a service that was not provided by the clients' existing workforce.
An entity, however, may contract for temporary help services to provide an entire pool of workers, which the entity itself does not employ. The terms “professional employer organization” (561330) and “temporary help services” (561320) are identical to terms from the NAICS code. Because it can be one of the indicators of a business' classification, a review of the NAICS code is helpful in this case. Under NAICS code 561320, the temporary help service “industry comprises establishments primarily engaged in supplying workers to clients' businesses for limited periods of time to supplement the working force of the client.” While not identical to the definition in Va. Code § 58.1-3732.4, the similarities cannot be ignored. The NAICS code goes on to state that the workers remain employees of the temporary help services establishment, but “do not provide direct supervision of their employees at the clients' work sites.”
Because staff firms are not a separate class of business as set forth under Va. Code § 58.1-3706, taxpayers that qualify for the exemption are not limited to businesses described under the NAICS code. Thus, while the Department ruled against the provider of home nursing services in P.D. 04-175, the types of services it provided were not a factor in reaching the final determination. Therefore, if it can be determined that the Taxpayer is providing temporary help services, it would be eligible for the exclusion.
By reason of their character as legislative grants, however, statutes relating to exemptions allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See DKM Richmond Associates, L.P. v. City of Richmond, 249 Va. 401, 407, 457 S.E.2d 76, 80 (1995). Virginia Code § 58.1-3732.4 sets forth unique treatment afforded to businesses engaging in professional employer organization services or temporary help services for purposes of BPOL taxation under which they are permitted to exclude benefits paid to or for the benefit of their employees providing services to a client company.
Within the statutory definition, there are three conditions that must be met in order for a business to be considered to be providing temporary help services. These conditions are:
- An arrangement between the staffing firm and the client company,
- The arrangement must be temporary, and
- The staffing firm's employees must be assigned to support or supplement a client company's workforce.
The first two conditions are met so long as the staffing firm and the client company have executed a temporary help services contract and that contract is temporary. Even if a contract lasts for an extended period of time, it would be considered temporary as long as it includes a definite termination date. This would be the case even if the contract includes automatic extensions.
The third condition is less clear. The Taxpayer contends that it is supplementing and supporting a client's workforce “by performing the specific activities as contractually agreed upon by the parties.” It argues that supplementing or supporting a client company's workforce means providing services to the existing workforce regardless of what function that workforce performs. The Taxpayer asserts that neither Va. Code § 58.1-3732.4 B nor P.D. 04-175 require that the services provided by the contract employees be the same as services provided by the client company's workforce.
The County contends that P.D. 04-175 requires that a staffing firm support or supplement “a service provided by an existing workforce.” It asserts that the Taxpayer was not supplementing or supporting an existing client workforce because it provided entirely new services different from its clients' main business.
The Department is not convinced by the Taxpayer's argument. Under the Taxpayer's interpretation, almost any service provider that performs services to another business could claim to be supplementing the work force of that business. The Department finds it highly unlikely this interpretation was intended by the General Assembly when they enacted Va. Code § 58.1-3732.4. The fact that the General Assembly used the exact terms from the NAICS code, if not the precise definitions, indicates some limitation to these industrial classifications. When interpreting statutes “[a] fundamental rule of statutory construction requires that every part of a statute be presumed to have some meaning, and not be treated as meaningless unless absolutely necessary.” Raven Coal Corp. v. Absher, 153 Va. 332, 149 S.E. 541 (1929). Thus, the entire definition of temporary help services must be considered in determining whether a business is eligible to deduction salaries of certain employees from gross receipts.
In order to supplement or support an existing workforce, the employees must be assigned. The statute does not define what it means when it states that a staffing firm “assigns” an employee to a client's work force. In the absence of a statutory definition, the plain and ordinary meaning of the term is utilized. See 1987-1988 Op. Va. Att'y Gen. 513, 514 and Woolfolk v. Commonwealth, 18 Va. App. 840, 447 S.E.2d 530, (1994). The term “assigns” is a verb with several meanings depending on the context in which it is used. For example the term is defined to mean “to select for a duty or office; appoint” or “to give out as a task; allot.” See American Heritage Dictionary 79 (1st Col. Ed. 1981). A clear difference exists between being assigned to an office rather than being assigned a task. In such circumstances, the statutory term must be construed in its ordinary meaning within the context in which it is used. See Wallace v. Brumback, 177 Va. 36, 12 S.E.2d 801 (1941).
Within the context of the statute, it would appear that the staffing firm is assigning employees to a client company as opposed to assigning a task to be performed for a client. For purposes of the statute, an employee assigned a task to be performed for a client would be considered to be supplying a new service. Employees assigned to a post at a client company would be supporting or supplementing an existing workforce.
The determination as to whether a taxpayer qualifies as a staffing firm for purposes of the exclusion will depend on the amount of control the taxpayer retains over its employees who are working at client facilities. Such a determination is factual in nature and depends heavily on the nature of the contractual relationship. The Taxpayer has provided examples of two service agreements it uses with client companies.
In the first contract, the Taxpayer provides unarmed guards. They are professionally trained and licensed under the Taxpayer's supervision. The client company does provide direction with respect to its specific security needs, but reimburses the Taxpayer for specialized training required for security guards performing services in the healthcare industry. While the client company does supply basic office space and equipment for the guards, the Taxpayer provides uniforms, duty belts, traffic vests, flashlights and other equipment necessary for the security guards to perform their duty.
The second contract involves uniformed guard protections services. Under this contract, the Taxpayer is required to properly equip guards to perform security services, equip and maintain a capable organization, enjoin staff to improve their knowledge and skills, inform staff of new methods and procedures, maintain employer-employee relations, keep records of its personnel while they are on duty, and exercise control over their conduct. The uniformed guards are required to file reports at the end of each shift with the Taxpayer. The contract authorizes the Taxpayer to conduct inspections, control checks, and continual re-evaluations to insure top performance of the security force. The guards can act on their own initiative with direction from either the Taxpayer or the client.
DETERMINATION
After reviewing this case, it is clearly evident the Taxpayer must be classified as a provider of repair, personal, business and other services for BPOL tax purposes and specifically, a business engaged in protective services. As indicated above, however, such a classification would not necessarily disqualify the Taxpayer from being a staffing firm for the purposes of the exemption under Va. Code § 58.1-3732.4.
The facts presented, however, show the Taxpayer maintains a high level of control over how its employees perform their services on behalf of its clients, indicating it is performing new services for it clients rather than assigning employees to support or supplement an existing workforce. As such, the Department must conclude the
Taxpayer was not a staffing firm for the tax years at issue and was not entitled to exclude employee benefits from gross receipts. Accordingly, the County's assessments are upheld and no refunds should be issued.
If you have any questions regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1011.B