February 2, 2021
Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License 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 “County”) for the 2016 through 2018 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 and public documents 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 describes its business as providing data and business intelligence solutions to enterprise customers. During the tax years at issue, the Taxpayer had a definite place of business in the County and was classified for BPOL tax purposes as a business service. Under review, the County denied the exemption from gross receipts the Taxpayer claimed for employee benefits paid to contract employees of staffing firms under Virginia Code § 58.1-3732.4.
The Taxpayer appealed to the County, contending that it qualified for the exemption because the its clients had control over the Taxpayer’s employees. In its final determination, the County concluded that the Taxpayer was providing technical expertise, consulting, specialized, and information technology services for particular assignments and tasks and thus did not qualify for the exemption. The Taxpayer appealed to the Department, contending that the County ignored relevant information and evidence pertaining to its client relationships.
ANALYSIS
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.] Because the Taxpayer does not assert that it was a PEO, it had to have provided temporary help services to qualify for the exemption.
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 Department has determined that because staffing firms are not a separate class of business as set forth under Virginia Code § 58.1-3706, a taxpayer may qualify for the exemption regardless of the business’ classification. See Public Document (P.D.) 17-68 (5/10/2017).
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. As for the third element, the Department has distinguished between employees being assigned to an office rather than being assigned to a task. See P.D. 17-68. 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 provided a contract styled as a “Master Services Consulting Agreement” (the “Agreement”) entered into between the Taxpayer and a major client. In the Agreement, the Taxpayer and the client agreed that the Taxpayer would perform certain consulting services on a task by task basis. The Taxpayer and the client also agreed that the terms of any specific engagement would be set forth in a “Statement of Work” (SOW). If this were the only evidence the Taxpayer provided, it would not have been sufficient to prove that the Taxpayer qualified for the exemption. If anything, the Agreement by itself suggested the Taxpayer may have been performing the type of task-based services that the Department concluded in P.D. 17-68 would not qualify for the exemption.
The Taxpayer, however, also provided several example SOWs. These documents set forth the specific terms of each engagement. In the first SOW, the Taxpayer agreed to provide a consultant to project manage certain business and development teams of the client. In the second SOW, the Taxpayer agreed to provide a data analyst to provide certain services to the Taxpayer on a number of projects. Each SOW was described as a “staff augmentation” engagement, in which the individual the Taxpayer was providing to the client would fulfill all obligations under the SOW at the daily direction and oversight of the client. The services would be rendered at the client’s places of business over a fixed period of time, and the Taxpayer would be compensated based on a budgeted number of work hours for the individual over that period. The description of the specific work to be done on these SOWs was also similar to a job description. The SOW forms, however, also listed a project-based option under which the Taxpayer would retain control over the individual(s) assigned to the project, without direction and oversight from the client.
DETERMINATION
In the Department’s opinion, the SOWs provided indicate that at least as to these engagements, the client was exercising the kind of control that would suggest that the Taxpayer was supporting or supplementing the client’s existing workforce.
Gross receipts derived from any such engagements would qualify for the deduction, provided employee benefits were paid to employees of the Taxpayer who received a Form W-2 or employees who were treated as non-employees and issued Form 1099s. Benefits paid to independent contractors who received a Form 1099 would not qualify for the exemption. See P.D. 09-29 (3/30/2009). The same example SOW forms, however, also contained a project-based option under which it appears the Taxpayer would retain control over the individual(s) assigned to the project, without direction and oversight from the client. Gross receipts derived from those engagements would likely not qualify for the deduction.
Therefore, I am remanding this case to the County with the instruction to review any documentation the Taxpayer is able to provide to determine the extent that gross receipts from the Taxpayer’s engagements qualified for the deduction under the standards set forth in this determination. In particular, the Taxpayer should provide any contracts, SOWs, or similar documents concerning its engagements. The County must then notify the Taxpayer of the results of that review by issuing a new final determination and revising the assessments accordingly. If the Taxpayer wishes to dispute the outcome of that review, the Taxpayer will have 90 days from the date of the new final determination in which to file an appeal with the Department.
The Taxpayer and the County should both be aware that although the Department concludes that gross receipts from the engagements described by the example SOWs provided with this appeal would qualify for the staffing firm exemption, the “check-the-box” categories distinguishing between a staff augmentation engagement and a project-based engagement on the Taxpayers SOW form, though helpful, may not be determinative in all instances. Ultimately, the facts and circumstances of each engagement must be examined in order to reach a final conclusion.
If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3475.M