Ruling 2015-2, Sales and Use Taxes Employment Agency Services Business Analysis Services Business Management Consulting Services

FACTS:

The Company is a consulting firm that provides the following services:

• Executive Search Services: These services involve finding candidates for executive roles.  The Company contracts with a client to procure an employee for the client with the intent of creating an employer-employee relationship between the client and the candidate.  The Company receives compensation regardless of whether a candidate is identified and ultimately hired by the client. Clients can purchase this service with the additional option of having the Company place an advertisement in a periodical or publication for the position.
• Middle-Management Search Services: These services are similar to Executive Search Services but are for middle-management positions.  Clients can purchase this service with the additional option of having the Company place an advertisement in a periodical or publication for the position.
• Board Search Services: These services involve finding qualified executive board members, who do not function in the capacity of employees.
• Executive Assessment Services: These services involve assessing whether an executive fits in with the client’s business culture through a one-on-one assessment approach.
• Board Effectiveness Assessment Services: These services involve reviewing a client’s board of directors to evaluate the structure and composition of its members for effectiveness.
• Assignment Study Services: These services involve providing a client with a review of the current market or potential executive candidates prior to performing Executive Search Services.
• CEO Succession Services: These services include an evaluation of the CEO position and succession planning services for the client, but exclude Executive Search Services.
• Post-Merger Integration Services: These services involve evaluating the talent within a client’s newly created organizational structure and integrating teams after a merger.
• Compensation Study Services: These services involve evaluating and analyzing a client’s pay structure and determining whether it is commensurate with the current market.
• Cultural Assessment Services: These services involve assessing top individuals at a client’s business and determining whether they fit into the client’s overall culture.
• Organization Design Services: These services involve determining the appropriate responsibilities and reporting relationships of the client’s management team.
• Team Effectiveness Services: These services involve evaluating the effectiveness of the client’s existing upper-management executive team.
• Coaching Services: These services involve one-on-one support for executives who want to strengthen a particular skillset, such as preparing for a speaking engagement.
• Convening Services: These services involve facilitating and hosting meetings for executives.

ISSUES:

1.    Whether the services performed by the Company are subject to sales and use taxes as services by employment agencies under Conn. Gen. Stat. § 12-407(a)(37)(C). 

2.    Whether the services performed by the Company are subject to sales and use taxes as business analysis services or business management consulting services under Conn. Gen. Stat. § 12-407(a)(37)(J).

RULINGS:

1.    Executive Search Services and Middle-Management Search Services are subject to Connecticut sales and use taxes as services by employment agencies under Conn. Gen. Stat. § 12-407(a)(37)(C).  The Board Search Services are not taxable employment agency services because there is no intention of creating an employer-employee relationship between the Company’s client and the director.

2.    The following services are subject to Connecticut sales and use taxes as business analysis services or business management consulting services relating to human resource management under Conn. Gen. Stat. § 12-407(a)(37)(J):

• Executive Assessment Services
• Board Effectiveness Assessment
• Assignment Study Services
• CEO Succession Services
• Post-Merger Integration Services
• Compensation Study Services
• Cultural Assessment Services
• Organization Design Services
• Team Effectiveness Services

The Coaching Services may or may not be subject to sales and use taxes as business management consulting services depending upon the subject of the coaching.  Coaching that involves strengthening general public speaking skills is a training service that is indirectly related to the employee’s job skills and is not subject to sales and use taxes.  However, such Coaching Services would be taxable as business management consulting services if the coaching directly pertains to the employee’s job skills, such as coaching to complete a specific job-required presentation. 

The Convening Services are not taxable as business analysis services or business management services because these hosting services do not include any analysis, recommendations, advice, or assistance to the Company’s clients.

DISCUSSION:

Employment Agency Services

Sales and use taxes are imposed on the sale of all tangible personal property, unless specifically exempt.  Conn. Gen. Stat. § 12-407(a)(2).  The sale of services is only subject to sales and use taxes if specifically enumerated.  Conn. Gen. Stat. § 12-407(a)(2).  Services by employment agencies and agencies providing personnel services are specifically enumerated as subject to sales and use taxes under Conn. Gen. Stat. § 12-407(a)(37)(C).  Employment services are defined in Conn. Agencies Regs. § 12-426-27(b) to “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.” Services by employment agencies are further discussed in Policy Statement 2007(7), Taxation of Services by Employment Agencies and Agencies Providing Personnel Services, which states as follows:

[T]o provide a taxable service, an employment agency 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 person seeking the job.  Similarly, when an employment agency procures or offers to procure jobs or positions for those seeking employment, to be taxable the service must result in or be intended to result in a permanent employer-employee relationship between the service recipient (the job seeker) and an employer.

Executive Search Services and Middle-Management Search Services both involve finding prospective employees for the Company’s clients with the intention of creating a permanent employer-employee relationship between the executive or manager and the Company’s clients.  While the Company is paid whether or not an employer-employee relationship is formed, the services are taxable because the Company is offering to procure an employee with the intention of creating a permanent employer-employee relationship. Accordingly, Executive Search Services and Middle-Management Search Services are taxable as the sale of services by employment agencies because these services involve offering to procure prospective employees for the Company’s clients with the intention of creating permanent employer-employee relationships. 

Board Search Services involve the Company finding qualified executives to serve on its client’s board of directors.  Neither the Company nor its client intend for such executives to enter into an employer-employee relationship with the Company’s client.  Rather, it is expected that the executives will serve as outside directors not otherwise employed by the Company’s client.  As a result, the Board Search Services are not taxable because they do not involve offering to procure prospective employees. 

Business Analysis Services and Business Management Consulting Services

Business analysis and business management consulting services are specifically enumerated as being subject to sales and use taxes under Conn. Gen. Stat. § 12-407(a)(37)(J).  The term “business analysis services” is defined in subsection (d) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1 as including “the examination of data relating to core business activities or human resource management activities . . . of a service recipient . . . .”  The term “business management consulting services” is defined in subsection (f) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1 as “the furnishing of advice and assistance on matters pertaining to the management of core business activities or human resource management activities . . . of a service recipient . . . .”  Based upon these definitions, the services must relate to either core business activities or human resource management activities of the service recipient in order to be subject to sales and use tax as business analysis services or business management consulting services.

“Core business activities” are defined in subsection (h) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1 as meaning and including “activities directly related to a service recipient’s lines of business involving sales of products, property, goods or services to others, its capital structure, its budgeting and its short-range, long-range or strategic planning.” “Human resource management activities” are defined in subsection (i) of Conn. Agencies Regs. § 12-407(2)(i)(J)-1 as activities “relating to the hiring, development, job-related training, compensation and management of personnel.”  Human resource management activities have been interpreted to include “recruiting, mentoring, motivating and managing manufacturer’s representatives as well as hiring or mentoring an employee to fill the Vice President of Sales and Marketing position.” Ruling No. 2001-2.

Executive Assessment Services involve determining whether executives fit into the client’s business culture.  This requires the examination of the executive and the client’s business culture, and requires the Company to formulate a conclusion and make a recommendation to its client based upon such examination.  Such an assessment also includes the furnishing of advice and assistance to the Company’s client.  Human resource management activities include the development and management of personnel.  As a result, the Executive Assessment Services are business analysis services and business management consulting services related to human resource management activities. 

Board Effectiveness Assessment Services involve analyzing the effectiveness of the client’s executive board and consulting on these results. This requires the examination of the client’s board of directors and its effectiveness, and requires the Company to formulate conclusions and make recommendations to its client based upon such examination. Such an assessment also includes the furnishing of advice and assistance to the Company’s client.  Core business activities include activities directly related to a service recipient’s short-range, long-range and strategic planning.  The effectiveness of the client’s board of directors is directly related to its short-range, long-range and strategic planning.  As a result, the Board Effectiveness Assessment Services are taxable as business analysis services and business management consulting services related to core business activities. 

Assignment Study Services involve reviewing and analyzing the current market or potential executive candidates prior to performing Executive Search Services.  This requires the examination of existing market conditions and potential labor pool and the formation of conclusions based upon such examination.  Assignment Study Services also include the furnishing of advice and assistance to the Company’s client.  Human resources management activities include activities related to the hiring of personnel.  As a result, Assignment Study Services are taxable as business analysis services and business management consulting services related to human resource management activities. 

CEO Succession Services include an evaluation of the CEO position as well as how the client should address succession planning.  This requires the examination of the CEO position and the client’s business, and requires the Company to formulate a conclusion and make a recommendation to its client based upon such examination.  Such an evaluation also includes the furnishing of advice and assistance to the Company’s client.  Human resource management activities include the hiring, development and management of personnel.  As a result, the Executive Assessment Services are business analysis services and business management consulting services related to human resource management activities. 

Post-Merger Integration Services involve evaluating and integrating personnel after a merger.  This requires the Company to examine its client’s personnel and to formulate conclusions and make recommendations based upon such examination. Such an evaluation also includes the furnishing of advice and assistance to the Company’s client.  Human resource management activities include the development and management of personnel.  As a result, the Post-Merger Integration Services are taxable as business analysis service and business management consulting services related to human resource management activities. 

Compensation Study Services involve analyzing a client’s pay structure and determining whether it is commensurate with the current market.  This requires the Company to examine its client’s pay structure and to formulate conclusions and make recommendations based upon such examination.  Such an evaluation also includes the furnishing of advice and assistance to the Company’s client.  Human resource management activities include the compensation of personnel.  As a result, Compensation Study Services are taxable as business analysis services and business management consulting services related to human resource management activities.     

Cultural Assessment Services involve assessing the top individuals at a client’s business and determining whether they fit into the client’s overall business culture.  This requires the Company to examine its client’s personnel and to formulate conclusions and make recommendations based upon such examination.  Such an assessment also includes the furnishing of advice and assistance to the Company’s client.  Human resource management activities include the development and management of personnel.  As a result, Cultural Assessment Services are taxable as business analysis services and business management consulting services related to human resource management activities. 

Organizational Design Services involve analyzing the structure of the organization and determining the appropriate responsibilities and reporting relationships of the client’s management team.  This requires the Company to examine its client’s personnel and organizational structure and make recommendations based upon such examination.  Such an evaluation also includes the furnishing of advice and assistance to the Company’s client. Human resource management activities include the development and management of personnel.  Core business activities include activities directly related to a service recipient’s short-range, long-range and strategic planning.  The organization of the client’s management team is directly related to its short-range, long-range and strategic planning.  As a result, Organizational Design Services are taxable as business analysis services and business management consulting services related to both core business activities and human resource management activities. 

Team Effectiveness Services involve evaluating the effectiveness of the client’s upper-management executive team.  This requires the Company to examine its client’s personnel and make recommendations based upon such examination.  Such an evaluation also includes the furnishing of advice and assistance to the Company’s client. Human resource management activities include the development and management of personnel.  Core business activities include activities directly related to a service recipient’s short-range, long-range and strategic planning.  The effectiveness of the client’s upper-management team is directly related to its short-range, long-range and strategic planning.  As a result, Team Effectiveness Services are taxable as business analysis services and business management consulting services related to both core business activities and human resource management activities.       

Coaching Services involve one-on-one support for executives, such as preparing for a speaking engagement.  This requires the Company to furnish advice and assistance to a client’s executive.  Human resource management activities include job-related training services. Job-related training means training that is directly related to teaching, maintaining, upgrading or improving the specific skills required in the employee's day-to-day job performance.  As further discussed in Policy Statement 2000(4), Sales and Use Taxes on Charges for Personnel Training Services, “training on topics indirectly related to an employee’s job skills is not taxable.”  Such topics include but are not limited to motivation, self-image, time management, public speaking, and interpersonal skills.  Coaching Services that involve generally strengthening public speaking skills are not taxable as business management consulting services because such training would be indirectly related to an executive’s job skills.  However, Coaching Services would be taxable as business management consulting services if the training directly pertained to the executive’s job skills, such as coaching to complete a specific job-required presentation.

Convening Services involve moderating and hosting meetings for clients.  Facilitating and hosting meetings does not include any analysis, recommendations, advice or assistance to Company’s clients.  As a result, the Convening Services are not taxable as business analysis services or business management services.

OFFICE OF COUNSEL
JUNE 8, 2015