Are recruiting services taxable?

Services are generally not subject to sales tax... Generally.

As jurisdictions continue scrambling for revenue, states – Kentucky being the latest – are beginning to tax more services. Twelve other states plus the District of Columbia levy a sales tax on permanent placement and temporary staffing: Connecticut, Delaware, Iowa, New York, Ohio, Pennsylvania, Washington and Tennessee. (Hawaii, New Mexico, South Dakota and West Virginia tax all services.)

Other states cherry pick the services they tax. Texas and Indiana tax many, but not all, services. Florida taxes security services but will cut a tax break for tiny firms. In Minnesota, the service of delivery of aggregate materials has been exempt if the materials are for road construction. Maine charges sales tax on some services but also has a service provider tax on such items as lodging and prepaid calling services, among others.

What’s in a ‘service?’

Services can comprise those done on such tangible personal property as an appliance or on real property (repair or janitorial services, for instance); personal services such as grooming; and amusement and recreation.

“Business services” are those that a business might contract out to a third party (recruiting’s a prime example). “Professional services” comprise legal work, medical care, accounting and other services from licensed specialists. Some services are regulars on states’ sales tax lists: cleaning, painting, photography and credit reporting, to name a few.

What about recruiting?

Taxable fees vary by state but can include placement, counseling and recruitment services. Recruiting and staffing can also be far-flung enterprises, which does not work to a company’s advantage for sales tax obligations (especially in this age of remote workers). Each state where your staff is located has its own unique tax rules. If your clients utilize staffing services in a state that taxes these services, you also may be required to collect and remit sales tax to that state.

(When staffing services are purchased for resale, such as one staffing company procuring services from another staffing company, you must also obtain reseller exemption certificates from your customers to support any tax exemption.)

Examining definitions

The statutes of various states that tax recruiting and staffing companies can lend insight into how states determine their policies.

For instance, Connecticut uses the term “agencies” as “service providers generally recognized as employment agencies and temporary help agencies.” The criteria for determining whether staff is an employee or an independent contractor for federal tax purposes also apply for Connecticut taxation. Connecticut describes taxable services by employment agencies as the procurement or offer to procure jobs or positions for those seeking employment, or employees for employers seeking the services of employees.

Personnel services are different from employment agency services. “Personnel services” mean furnishing temporary or part-time help to others by means of employing temporary and part-time help directly. Personnel services involve placing a service provider’s own employee with a service recipient and having that employee act as the employee of the service recipient during the time the employee is placed. The more control the service recipient has over the duties of the employee of the service provider and the less that employee’s duties are related to a predetermined task or project, the more likely the services are personnel services. Generally, the amount subject to sales and use taxes for agencies providing personnel services is the entire charge by the service provider to the service recipient.

Kentucky adds that “executive employees” such as administrators or managers in an organization are the criteria used to determine the types of recruitment services covered. “The sales and use tax on services is based upon where the customer receives the service and not necessarily where the service is performed,” the states says. “If an out-of-state service provider delivers executive employee recruitment services for a Kentucky company, the charges are subject to Kentucky sales and use tax.

“The provider of executive employee recruitment services must report the receipts on its sales and use tax return and remit the applicable tax by the 20th day of the month following the previous month in which the executive recruitment services are provided, and receipts are recorded. Many retailers operate on an accrual basis, so transactions are often reported before payments are received. If a contract penalty results in a reduction in receipts, then the provider may take a deduction on the sales and use tax return in the same fashion as the returned merchandise deduction works with the sale of tangible personal property,” Kentucky said.

​“​A provider of employee recruitment services is liable for sales and use tax on its gross receipts derived from the provision of employee recruitment services. If the provider bills its clients a lump sum amount that includes executive employee recruitment services without breaking out the charges from services not subject to tax, then the entire invoice amount is subject to tax.”

Nothing in sales tax is simple, and this burgeoning new potential source of states’ revenue is no different.

If you think your business may be impacted by developments such as the taxing of services, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department.