Ruling 94-18, Sales and Use Taxes / Personnel Services / Leased Employees

FACTS:

The Company engages personnel agencies that provide individuals to perform services for the Company. The services rendered by such individuals are of a type historically performed, in the Company's business field, by employees on substantially a full-time basis.

Pursuant to its contracts with the personnel agencies, the Company generally receives the services of the individuals for three- or six-month periods. The contracts are subject to renewal. The Company has renewed, and intends to renew in the future, some of these contracts so that some of the individuals have or will provide services on a substantially full-time basis for a period of one year or more.

ISSUE:

Whether the amounts charged for separately stated compensation, fringe benefits, workers' compensation, and payroll taxes or assessments paid to or on behalf of individuals who initially are contracted to provide services for periods of less than one year, but whose contracts with the Company are renewed so that subsequently they qualify as "leased employees" under 26 U.S.C. § 414(n), are excluded from the measure of "sales price" and "gross receipts" as defined in Conn. Gen. Stat. §12-407(8) and (9), respectively, with regard to the services performed after such individuals qualify as "leased employees."

DISCUSSION:

Conn. Gen. Stat. §12-407(2)(i)(C) provides that for purposes of the Sales and Use Taxes Act, "sale" and "selling" mean and include "services by employment agencies and agencies providing personnel services ..." Conn. Agencies Regs. § 12-426-27(b)(3)(c) provides that "'personnel services' mean and include furnishing temporary or part-time help to others by means of employing such temporary and part-time help directly."

Under Conn. Gen. Stat. §12-407(8) and (9), "sales price" and "gross receipts" include "all compensation and all employment related expenses, whether or not separately stated, paid to or on behalf of employees of a retailer of any service described in [Conn. Gen. Stat. §12-407(2)(i)] . . . " unless specifically excluded. Section 28 of 1993 Conn. Pub. Acts 332 amended Conn. Gen. Stat. §12-407(8) and (9) to exclude from the measure of sales and use taxes for employee leasing all separately stated employee-related expenses of the service provider for all employees who qualify as "leased employees" under the definition in 26 U.S.C. § 414(n).

A leased employee is defined generally in 26 U.S.C. § 414(n) 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. See 26 U.S.C. § 414(n)(2)(B). Providers of leased employees are agencies providing personnel services under Conn. Gen. Stat. §12-407(2)(i)(C). See Policy Statement 93(3.1), p. 3 of 4.

Section 414(n)(4) of the Internal Revenue Code indicates that whether an employee is a leased employee is determined "after the close of the period referred to in [26 U.S.C. § 414(n)(2)(B)] ..." (Emphasis added.) Therefore, an employee cannot become a "leased employee" until after the close of a period of at least one year of substantially full-time work for the service recipient. (This one-year period may include substantially full-time work performed by an individual employed directly by the service recipient, who later becomes employed by the service provider to provide the same services for the same service recipient. See I.R.S. Notice 84-11, 1984-2 C.B. 469.)

Accordingly, when the Company initially contracts to receive a personnel service for less than one year, but through extensions of the contract the agency's employee provides services to the Company on a substantially full-time basis for one year, the agency's employee becomes a "leased employee." During that employee's first year, the agency is providing taxable personnel services under Conn. Gen. Stat. §12-407(2)(i)(C) and continues to provide personnel services thereafter. The measure of the tax will change after the first year elapses, but it will not change retroactively.

Therefore, on or after July 1, 1993, amounts charged by the agency to the Company for separately stated compensation, fringe benefits, workers' compensation and payroll taxes or assessments paid to or on behalf of a leased employee may be excluded from "sales price" and "gross receipts."

RULING:

Amounts charged for separately stated compensation, fringe benefits, workers' compensation, and payroll taxes or assessments paid to or on behalf of individuals who initially are contracted to provide services for periods of less than one year, but whose contracts with the Company are renewed so that subsequently they qualify as "leased employees" under 26 U.S.C. §414(n), are excluded from the measure of "sales price" and "gross receipts" as defined in Conn. Gen. Stat. §12-407(8) and (9), respectively, with regard to the services performed after they qualify as "leased employees." Accordingly, such separately stated items are not subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(C).

This Ruling clarifies Policy Statement 93(3.1).

LEGAL DIVISION

September 26, 1994