PS 93(3.2)

Taxation of Services by Employment Agencies and Agencies Providing Personnel Services

This publication has been cited in IP 2000(26) and superseded by PS 2007(7)

BACKGROUND: The Department issued PS 93(3) on November 3, 1993, to provide information regarding the taxation of services rendered by employment agencies and personnel agencies. The Department issued PS 93(3.1) on June 16, 1994, to expand the examples illustrating the taxability of personnel services. This Policy Statement discusses legislative changes affecting the definition of leased employee in Conn. Gen. Stat. § 12-407(8) and (9).

PURPOSE: This Policy Statement sets forth the Department's guidelines for the imposition of sales and use taxes on services by employment agencies and agencies providing personnel services under Conn. Gen. Stat. §12-407(2)(I)(C), and explains the new definition of leased employee for purposes of the exclusion from gross receipts and sales price of certain amounts paid with respect to such leased employees provided by personnel agencies.

EFFECTIVE DATE: Effective upon issuance and applicable to all open tax periods as of the date of issuance, except that the new definition of leased employee described herein is applicable only to sales of services occurring on or after July 1, 1997.

STATUTORY AUTHORITY: Conn. Gen. Stat. §12-407(2)(i)(C) and Conn. Gen. Stat. §12-407(8) and (9), as amended by 1997 Conn. Pub. Acts 316, §7; Conn. Agencies Regs. §12-426-27(b)(3)(b) and (c); and Conn. Agencies Regs. §12-426-27(g) and (h).

AGENCIES DEFINED: The term agencies, as used in Conn. Gen. Stat. §12-407(2)(I)(C), includes, but is not limited to, service providers generally recognized as temporary help agencies and employment agencies. The Supreme Court of Connecticut has recognized that an agency is "any organization, company or bureau that provides some service to another." [American Totalisator Systems, Inc. v. Dubno, 210 Conn. 413, 419 (1989)]. Therefore, any organization, company or bureau providing services that fit the descriptions of taxable services set forth in this Policy Statement is an agency for purposes of Conn. Gen. Stat. §12-407(2)(I)(C).

SERVICES BY EMPLOYMENT AGENCIES: Taxable services by employment agencies are described in Conn. Agencies Regs.§12-426-27(b)(3)(b) as follows:

• Employment services mean and include the procurement or offer to procure for a consideration: Jobs or positions for those seeking employment; or employees for employers seeking the services of employees.

The regulation describes the two most common types of services of employment agencies, namely, when an agency attempts to obtain a job for a job-seeker, and when an agency attempts to find an employee for an employer.

• Employer-employee relationship: The precise language of the last portion of this regulation--"employees for employers seeking the services of employees"--indicates that, to provide taxable services, employment agencies must procure or offer to procure an actual employee, with the intention of creating a permanent employer-employee relationship between the service recipient (the employer) and the employee seeking the job. Similarly, when an employment agency procures or offers to procure "jobs or positions for those seeking employment," to be taxable such services must result or be intended to result in a permanent employer-employee relationship between the service recipient (the job-seeker) and an employer.
• Agents for independent contractors: Agencies that assist in any way (as agents, brokers or otherwise) in the procurement of jobs for musicians, entertainers or others, typically on a short-term or one-time basis, when the job-seekers are and will remain independent contractors, are not performing taxable employment agency services, because these services are not intended to result in the creation of a permanent employer-employee relationship.
• Taxable gross receipts for services by employment agencies: The gross receipts subject to sales tax and the sales price subject to use tax for services by employment agencies is the total fee charged by the service provider for procuring or offering to procure a job or position for a service recipient (either a job-seeker or an employer), whether the fee is ultimately paid by the service recipient or by a third party.

AGENCIES PROVIDING PERSONNEL SERVICES: Taxable personnel services are described in Conn. Agencies Regs. §12-426-27(b)(3)(c) as follows:

• Personnel services mean and include furnishing temporary or part-time help to others by means of employing such temporary and part-time help directly.

As differentiated from employment agency services, personnel services involve the placing, for a consideration, of an agency's own employee with a service recipient for the purpose of having that employee act as the employee of the service recipient during the time he or she is so placed. Typically, such temporary employees are provided in order to support or supplement the workforce of a service recipient; however, even if a service recipient has no workforce per se, it may purchase taxable personnel services.

• Necessary elements of a personnel service: Two elements are necessary for a personnel service to be taxable: (1) an employer must directly employ employees who will furnish temporary or part-time help to a service recipient; and (2) while the employee is with the service recipient, the service recipient must have control over the work the employee is to do as well as how the work is to be done within the general parameters of the type of personnel service contracted for (e.g., clerical, accounting, etc.).

• To determine whether an employee is functioning as the employee of a service recipient, it is necessary to examine who controls the means and method of the employment during the time the employee is with the service recipient. The element of control over what is to be done and how it is to be done is the standard which is used to differentiate between a service recipient who wishes to receive the services of a temporary or part-time employee (such as to support or supplement the service recipient's workforce), as opposed to a service recipient who wishes to receive a specific service which may be performed by an employee of the service provider.

EXAMPLE 1: An individual hires an agency to provide a driver to drive the individual in his own vehicle to the airport, drop him off, drive the vehicle back to a specified location, then drive the vehicle back to the airport a week later at a specified time, to pick him up. The driver is an employee of the agency. The route, the drop off and pick up times and the storage location of the vehicle are prearranged between the agency and the individual. Although the individual may request minor deviations in the route along the way, in general, the driver's responsibilities and conduct are prearranged, and are prescribed and controlled by the agency, not by the individual. In this case, the individual is purchasing driving services (which are not taxable), not personnel services.

EXAMPLE 2: A medically incapacitated individual hires a nursing agency to provide a nurse to care for, and assist in the medical recovery of, the individual. The nurse is an employee of the agency. The duties, of which "light housekeeping" may be an inconsequential element, are prearranged between the agency and the individual. The nurse's responsibilities and conduct are prearranged, and are prescribed and controlled by the agency, and not by the individual. In this case, the individual is purchasing nursing services, not personnel services. The services are not subject to sales and use tax.

EXAMPLE 3: A nursing agency is hired by a convalescent home to provide nurses who will work on a part-time basis in supplementing the workforce of the home. The nurses are employees of the agency. While the nurses are placed with the convalescent home, the home will have control over the work which the employees are to do as well as how the work is to be done within the general parameters of the type of personnel services contracted for (namely, nursing services). In this case, the convalescent home is purchasing personnel services, and, if the home is not, as described in Conn. Gen. Stat. §12-412(5), a nonprofit home for the aged, nursing home or rest home that has been issued a license by the Connecticut Department of Public Health and Addictive Services pursuant to chapter 368v of the Conn. Gen. Statutes, those purchases are subject to sales and use taxes.

• Employee leasing: Employee leasing means providing leased employees for a consideration. A leased employee is defined generally in Section 414(n) of the Internal Revenue Code as an employee of a service provider who provides services to a service recipient, if (a) such services are performed pursuant to an agreement between the service provider and the service recipient; (b) the employee has performed such services for the service recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least one year; and (c) such services are of a type historically performed, in the business field of the service recipient, by employees. Employee leasing is a taxable personnel service, and providers of leased employees are agencies providing personnel services under Conn. Gen. Stat. §12-407 (2) (I) (C).
• Taxable gross receipts of agencies providing personnel services: In general, the gross receipts subject to sales tax and the sales price subject to use tax for services of agencies providing personnel services are the entire amount charged by the service provider to the service recipient, including amounts for compensation of the employee and all expenses related thereto, whether or not separately stated by the service provider. However, there are special rules regarding sales and use taxes on leased employees (see below).

SALES AND USE TAXES ON LEASED EMPLOYEES: With respect to leased employees only, there are two special rules for measuring the gross receipts subject to sales tax and the sales price subject to use tax of personnel agencies providing such leased employees.

• For sales and purchases of leased employees occurring on or after July 1, 1993, but before July 1, 1997, Conn. Gen. Stat. §12-407(8) and (9) excluded from the measure of tax "the amount charged for separately stated compensation, fringe benefits, workers' compensation and payroll taxes or assessments paid to or on behalf of an employee, as defined as a leased employee pursuant to section 414(n) of the Internal Revenue Code of 1986, or any subsequent corresponding Internal Revenue Code of the United States..."

  For sales and purchases of "leased employees" occurring during the period indicated above, all separately stated employee-related expenses of the service provider for all employees who qualified as leased employees under the definition in Section 414(n) of the Internal Revenue Code were excluded from sales and use taxes (see the paragraph entitled Employee Leasing, above). Each individual employee was required to qualify as a leased employee under the definition, in order for that employee's separately stated employee-related expenses to be excluded from sales and use taxes. To so qualify, each employee was required to have completed one year of continuous employment, on a substantially full-time basis. The year of continuous employment could be met either by the employee's full-time employment by the service recipient during the period immediately preceding the commencement of the employee leasing contract, or the employee's full-time employment by the employee leasing company after the commencement of the contract, or by a combination of employment before and after the commencement of the contract. If additional employees were hired by the employee leasing company to replace or supplement its workforce, each employee was required to work on a substantially full-time basis for one year for the employee leasing company before that employee's payroll-related expenses would qualify for the exclusion from taxable gross receipts and sales price.

"[A]n employee shall be treated as a leased employee if (1) the employee is provided to the client at the commencement of an agreement with an employee leasing organization under which at least seventy-five percent of the employees provided to the client at the commencement of such initial agreement qualify as leased employees pursuant to Section 414(n) of the Internal Revenue Code of 1986, or any subsequent corresponding Internal Revenue Code of the United States, as from time to time amended, or (2) the employee is added to the client's workforce by the employee leasing organization subsequent to the commencement of such initial agreement and qualifies as a leased employee pursuant to Section 414(n) of said Internal Revenue Code of 1986 without regard to subparagraph (B) of paragraph (2) thereof."

The 1997 amendment, therefore, restricts the exclusion of separately stated employee-related expenses to only employees provided under certain types of contracts, but allows all employees provided under those contracts to immediately qualify as leased employees. If, at the commencement of an employee leasing contract (regardless of when the contract commenced or will commence), at least 75% of the Connecticut-based employees provided pursuant to the contract qualify as leased employees under the definition in Section 414(n) of the Internal Revenue Code (see the paragraph entitled Employee Leasing, above), then all the Connecticut-based employees provided under that contract by the employee leasing company will qualify for the exclusion, for sales of leased employees occurring on or after July 1, 1997. If additional employees are hired by an employee leasing company to replace or supplement the original leased employees, and at least 75% of such original employees qualified as leased employees under the definition in Section 414(n) of the Internal Revenue Code at the commencement of the contract, then the additional or replacement employees need not work on a substantially full-time basis, and need not complete one year of employment with the employee leasing company in order for their separately stated employment-related expenses to be excluded from gross receipts and sales price.

NOTE: This new definition of leased employee does not merely supplement, but replaces the previous definition, for purposes of the exclusion in Conn. Gen. Stat. §12-407(8) and (9). Therefore, for sales of services occurring on or after July 1, 1997, only those employees who are or were provided to a service recipient under an agreement at the commencement of which at least 75% of the Connecticut-based employees qualify or qualified as leased employees under Section 414(n) of the Internal Revenue Code of 1986, and any employees added to the workforce subsequent to the commencement of the original agreement, will be eligible for the exclusion. Employees provided under an agreement at the commencement of which fewer than 75% of the employees qualified as leased employees, who may have qualified prior to July 1, 1997, under the previous definition of leased employee, will no longer be leased employees for purposes of the exclusion, and the entire gross receipts from the provision of such employees will be subject to tax on or after July 1, 1997.

EXAMPLE 1: An employee leasing company contracted with a service recipient to provide 50 Connecticut-based employees to the service recipient. At the commencement of the contract, 40 (80%) of the employees had been working full time for the service recipient for over one year. The other 10 employees either had been working for the recipient for less than one year, or had been working only part-time. The employee leasing company can exclude the compensation, fringe benefits, workers' compensation and payroll taxes or assessments paid to or on behalf of all 50 employees from sales and use taxes on or after July 1, 1997, if such amounts are separately stated. Any additional Connecticut-based employees hired under the contract by the employee leasing company will qualify for the exclusion as soon as they are hired.

EXAMPLE 2: In 1993, an employee leasing company contracted with a service recipient to provide 50 Connecticut-based employees to the service recipient. At the commencement of the contract, 30 (60%) of the employees had been working full time for the service recipient for over one year. The other 20 employees either had been working for the recipient for less than one year, or had been working only part-time. During the next three years the other 20 employees and 10 replacement employees qualified as leased employees by completing one year of substantially full-time employment. On July 1, 1997, none of the employees under this contract are leased employees, and none of them qualify for the exclusion, because at the commencement of the contract, fewer than 75% of the employees qualified as leased employees. In September 1997, the employee leasing company enters into a new contract with the service provider, involving the same employees. The employees, and any additional Connecticut-based employees hired under the new contract, will qualify as leased employees on and after the date of the new contract, because at the commencement of the new contract at least 75% of the employees qualified as leased employees. Separately stated compensation, fringe benefits, workers' compensation and payroll taxes or assessments paid to or on behalf of these employees are excluded from sales and use taxes.

SOURCING OF SERVICES: The rules regarding the sourcing of employment agency and personnel services are set forth in Conn. Agencies Regs. §12-426-27. Subsection (g) of the regulation states:

For employment agency services, it is the location of the job which is procured that determines whether the service is taxable in Connecticut.

EXAMPLE: A company with an office within and an office outside Connecticut seeks a full-time employee for each of those offices, and pays fees to an employment agency for the procurement of the employees. The fees in connection with the procurement of the employee who will work in the Connecticut office are taxable, and the fees in connection with the employee who will work outside Connecticut are not taxable, regardless of the location of the agency providing the services. Similarly, subsection (h) of the regulation states: