May 18, 2021
Re: Appeal of 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 the denial of a refund of Business, Professional and Occupational License (BPOL) tax by ***** (the “County”) for the 2015 through 2017 tax years and an assessment issued for the 2018 tax year.
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, regulations 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 placing recruiters in contract and permanent positions with its clients. The Taxpayers clients included ***** (Client A), ***** (Client B), ***** (Client C), ***** (Client D), ***** (Client E), ***** (Client F) and ***** (Client G). During some part or all of each of the 2015 through 2018 tax years, the Taxpayer had a definite place of business in the County. The Taxpayer filed amended BPOL returns for the 2015 through 2017 tax years to claim the exemption from gross receipts for employee benefits paid to contract employees of staffing firms under Virginia Code § 58.1-3732.4. The Taxpayer also claimed the exemption for the 2018 tax year on its original BPOL return. Under review, the County determined that the Taxpayer did not qualify for the exemption. Accordingly, the County denied the refund claim for the 2015 through 2017 tax years and issued an assessment for the 2018 tax year.
The Taxpayer appealed to the County, contending it qualified for the exemption because it provided recruiters on a temporary basis to supplement its customers’ existing in-house recruiting operations. In its final determination, the County found that the Taxpayer’s employees and subcontractors were hired to fulfill technical recruitment services necessary for its clients’ projects, instead of to fill a post or position. As such, the County concluded that such individuals did not supplement an existing workforce, and thus the Taxpayer did not qualify for the exemption. The Taxpayer appealed to the Department, contending that the County erred in its determination that it was not a staffing firm.
ANALYSIS
New Information Provided With the Appeal
As an initial matter, the County asserts that the Taxpayer provided the Department with information it did not provide to the County while the local appeal was being reviewed, even after the County requested such information. The County contends that the Department is thus barred from considering this information in the appeal.
The administrative appeals process outlined in Virginia Code § 58.1-3703.1 and Title 23 of the Virginia Administrative Code (VAC) 10-500-640 et seq. was implemented to give taxpayers and localities an adjudication process that was less formal and less burdensome on the parties than litigating in the court system.
Administrative appeals are not governed, for example, by the same rules of evidence that would exist for litigation in court. The County cites no authority for its assertion that the Taxpayer is barred from introducing information to the Department that was not provided to the County for the local appeal. In fact, the BPOL regulations go as far as to contemplate entirely new issues being raised for the first time in an appeal to the Department and outlines procedures that the Department and localities can follow to address such issues. See Title 23 VAC 10-500-760. Thus, an absolute bar to providing additional information would be inconsistent with the policy of allowing new issues to be raised in the appeal to the Department. Accordingly, all information provided with this appeal has been given due consideration.
Staffing Firm Exemption
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. s. City of Richmond, 249 Va. 401, 407, 457 S.E.2d 76, 80 (1995). Virginia Code § 58.1-3731.4 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 contact 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.
In P.D. 21-6 (2/2/2021), the taxpayer’s contract with its client suggested it 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. A closer look at the relationship, however, showed that services were provided pursuant to specific statements of work (SOWs) that further defined the terms of the engagement. These SOWs showed that the person supplied by the taxpayer would work at the daily direction and oversight of the client and that the Taxpayer would be compensated based on a budgeted number of work hours. Further, the description in the SOWs of the work to be performed resembled a job description. The Department concluded that based on the sample SOWs provided, the taxpayer was at least to some extent exercising the kind of control that would suggest it was supporting or supplementing the client’s existing workforce. The same sample SOWs, however, also had a project-based option. Because it was unclear to what extent workers were supplementing the client’s existing workforce or merely completing project-based tasks under the ultimate control of the taxpayer itself, the case was remanded to the County to conduct a further examination of the facts.
A review of the contracts provided in this case indicates that a pattern similar to P.D. 21-6 may exist. It appears that the Taxpayer entered into service agreements with its clients. In general, these contracts provided that the Taxpayer would retain control over the performance of the services. As the Department observed in P.D. 21-6, if these contracts were the only evidence available, they likely would not have been sufficient to prove that the Taxpayer qualified for the exemption. Like the facts in P.D. 21-6, however, a closer examination suggests that the Taxpayer was providing temporary staff to fulfill specific positions within some of the clients’ organizations.
Potentially Exempt Contracts
The following facts tend to suggest that the Taxpayer was providing personnel to augment the clients’ existing workforces. As such, arrangements with these clients may bear a closer resemblance to the “staff augmentation” engagements the Department concluded in P.D. 21-6 would satisfy the requirement that the Taxpayer be supporting or supplementing the client’s existing workforce:
Client A
The SOW provided with the contract with Client A contemplates the possibility that the clients may offer permanent employment to personnel provided by the Taxpayer.
Client B
The contract with Client B indicates that the “services” provided thereunder were in fact specific positions to be filled with the clients, at least on a temporary basis. The contact with Client B also contemplates the possibility that the clients may offer permanent employment to personnel provided by the Taxpayer.
Client D
Like the contract with Client B, the contract with Client D indicates that the “services” provided were specific positions to be filled with the clients, at least on a temporary basis.
Client E
The contract with Client E was prefaced with the purpose that Client E was seeking candidates for temporary and temporary-to-permanent employment. Like the contracts with Client A and Client B, the contract with Client E also contemplates the possibility that the clients may offer permanent employment to personnel provided by the Taxpayer.
Likely Non-Exempt Contract
Client F
The contract with Client F appears to be structured only to compensate the Taxpayer by the hour for certain “research services” related to specific projects or positions with Client F. Gross receipts derived solely from compensation to perform candidate research and supply Client F with names of possible candidates would not qualify for the exemption.
Exemption Status Unknown
Client C
The contract with Client C specifically provides that the Taxpayer will determine the method, details, and means of performing the services to be carried out for the client. The contract contemplates that the specific work performed would be documented in advance by a “Services and Fee Agreement” attached to a purchase order. However, none of these agreements have been provided.
Client G
Similar to Client C, the contract with Client G states that SOWs will describe the specific services and deliverables to be provided, but none of the SOWs have been provided.
DETERMINATION
Certain aspects of the contracts with Client A, B, D and E tend to indicate that the Taxpayer was providing personnel to support or supplement the clients’ existing workforces. It appears, however, that the services provided under the contract with Client F may not be exempt. In addition, without further information regarding the contracts with Client C and Client G, it is unclear whether such support or supplementation was occurring under the contracts.
Gross receipts derived from any engagements found to be supporting or supplementing the client’s existing workforce 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).
Based solely on the analysis done by the County in issuing its final determination and the documentation provided by the Taxpayer on appeal, the Department is unable to draw definitive conclusions regarding the extent the Taxpayer may have qualified for the exemption, if at all. The County’s final determination disregarded certain aspects of the Taxpayer’s contracts that tend to indicate they were providing personnel to support or supplement the clients’ existing workforce, not merely providing “services.” Further, the local appeal was decided before the guidance provided by P.D. 21-6 would have been available to either party.
On the other hand, the documentation submitted by the Taxpayer on appeal, without further support, is inconclusive as to the extent the Taxpayer qualified for the exemption. As such, the Department concludes it is reasonable for the Taxpayer and locality to have an opportunity to re-examine the facts of this case under the policy guidance provided by P.D. 21-6 and this determination.
Therefore, I am remanding this case to the County with the instruction to review any further information and 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 P.D. 21-6 and this determination. In particular, the Taxpayer should provide any further contracts, SOWs, purchase orders, “Services and Fee Agreements,” or similar documents concerning each of its engagements that establish with more specificity what any personnel supplied by the Taxpayer was doing for the clients.
To the extent that personnel was supplied to fill specific positions within a client’s own workforce, that would tend to indicate the clients were in reality exercising the kind of control that would suggest the Taxpayer was supporting or supplementing the client’s existing workforce.
Further, to the extent the Taxpayer was supplying personnel to complete specified projects or tasks and the Taxpayer retained control over the assigned individuals without direction and oversight from the client, gross receipts derived from those engagements would likely not qualify for the deduction.
Likewise, gross receipts derived solely from performing candidate research and supplying clients with a list of possible candidates would not qualify for the exemption.
As the Taxpayer is seeking an exemption from gross receipts and thus bears the burden of proof, it is incumbent on the Taxpayer to provide sufficient information and documentation in order to establish the extent it qualified for the exemption, if at all.
Once the County’s review is complete, it must notify the Taxpayer of the results of that review by issuing a new final determination and issue a refund and adjust the assessment if warranted. 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.
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/3453.M