January 5, 2010
ALL STAFFING, INC., PETITIONER
COMMONWEALTH OF PENNSYLVANIA, RESPONDENT
The opinion of the court was delivered by: Senior Judge Friedman
Argued: December 8, 2009
BEFORE: HONORABLE JOHNNY J. BUTLER, Judge, HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge, HONORABLE KEITH B. QUIGLEY, Senior Judge.
All Staffing, Inc. (Taxpayer) petitions for review of the April 28, 2006, order of the Board of Finance and Revenue (Board) affirming the decision of the Pennsylvania Department of Revenue's (Department) Board of Appeals to sustain the Department's assessment against Taxpayer of state sales tax, penalties and corresponding interest for the period from January 1, 2001, to May 31, 2004 (Audit Period). The Board determined that Taxpayer provided its clients with taxable "help supply services" as that term is defined by section 201(cc) of the Tax Reform Code of 1971 (Tax Code),*fn1 and, therefore, Taxpayer should have been collecting sales tax on its service fees pursuant to the Department's regulations at 61 Pa. Code §60.4(a)(i). In this issue of first impression, we address the scope of "help supply services" made taxable by section 201(cc) of the Tax Code.
The facts here are not in dispute.*fn2 Taxpayer is a Professional Employer Organization (PEO), an entity that provides certain human resources-related services (PEO Services) to clients through the mechanism of placing the clients' employees on the payroll of the PEO.*fn3 This arrangement enables delivery of PEO Services at a competitive cost that reflects the economies of scale achieved in using one central computer payroll data system and specialized human relations knowledge for a large number of clients. (Joint Partial Stipulation (Stip.), ¶¶13, 17.)
Taxpayer provides its PEO Services under an Administrative Services Agreement (Agreement) with its clients, wherein Taxpayer is considered the "Administrative Employer" and the client is considered the "Worksite Employer." (Taxpayer's Ex. 9.) When Taxpayer contracts with a Worksite Employer, 100% of the Worksite Employer's employees are transferred to Taxpayer's payroll and become Taxpayer's employees. (Stip., ¶17.) However, just as before the transfer, the Worksite Employer retains control and direction over the day-to-day activities of these individuals and makes all hiring, firing, wage setting, disciplinary and other business and personnel decisions. (Stip., ¶20.) Taxpayer has no inventory of potential employees to add to the Worksite Employer's workforce, and the Worksite Employer always selects any additions to its workforce from sources other than Taxpayer. (Stip., ¶¶15-16.)
The PEO Services that Taxpayer provides for its clients are performed by Taxpayer's own personnel under Taxpayer's supervision, and almost all are performed at Taxpayer's offices, away from client worksites.*fn4 Conversely, the clients' workers that are transferred to Taxpayer's payroll perform none of the PEO Services. (Stip., ¶18.) As the Administrative Employer under the Agreement, Taxpayer performs all aspects of personnel administration included within the PEO Services, thereby acting as each Worksite Employer's virtual human resources department. (Stip, ¶20.) The Worksite Employer pays for all costs of the worksite employees placed on Taxpayer's payroll by reimbursing Taxpayer for these employee costs. In addition, Taxpayer charges clients an administrative service fee for providing the PEO Services,*fn5 which Taxpayer has apportioned between the various PEO Services provided.*fn6 The Department's tax assessment relates solely to this service fee. (Stip., ¶¶19, 22.)
On December 13, 2004, after an audit of Taxpayer's business activities for the Audit Period, the Department determined that Taxpayer's PEO Services, described above, constituted taxable "help supply services" and assessed sales tax on Taxpayer's fees for those services in the amount of $149,525.80. The assessment also included a use tax of $5,765.01, penalties of $46,584.13 and interest of $15,435.16, for a total of $217,313.10. Taxpayer filed a reassessment appeal to the Department's Board of Appeals, which denied Taxpayer relief. Following Taxpayer's further appeal, the Board affirmed by order mailed on April 28, 2006. (Stip., ¶¶3-6, Exs. D, F.) The Board of Appeals and the Board both agreed that, because Taxpayer places all of the employees of a client on Taxpayer's payroll, its business activities fall under the definition of "help supply services" and, thus, fees for its services were properly assessed sales tax pursuant to section 201(cc) of the Tax Code and 61 Pa. Code §60.4(a)(i). On May 26, 2006, Taxpayer petitioned this court for review of the Board's order,*fn7 asserting that the Board erred in its determination. (Stip., ¶7, Ex. G.) We agree with Taxpayer.
Pennsylvania imposes a sales tax of six percent on the purchase price of each separate "sale at retail" of tangible personal property and certain enumerated services within the Commonwealth. Section 202 of the Tax Code, 72 P.S. §7202. Effective October 1, 1991, the term "sale at retail" was expanded to include as one of these enumerated services "[t]he rendition for a consideration of . help supply services." Section 201(k)(15) of the Tax Code, 72 P.S. §7201(k)(15). Using the definition of "help supply services" under the Standard Industrial Classification (SIC) System of 1987,*fn8 (Supplemental Stip., ¶27; ex. H), the General Assembly defined the term "help supply services" for purposes of the Tax Code, in relevant part, as follows:
Providing temporary or continuing help where the help supplied is on the payroll of the supplying person or entity, but is under the supervision of the individual or business to which help is furnished. Such services include, but are not limited to, service of a type provided by labor and manpower pools, employe leasing services, office help supply services, temporary help services, usher services, modeling services or fashion show model supply services.
72 P.S. §7201(cc) (emphasis added). Similarly, the Department's regulation defines a "help supply service," in relevant part, as:
The providing of an individual by a vendor to a purchaser whereby the individual is an employe of the vendor and the work performed by the individual is under the supervision of the purchaser.
(i) The term includes the type of service provided by labor and manpower pools, employe leasing services, office help supply services, temporary help services, usher services, modeling services or fashion show model supply services.
61 Pa. Code §60.4(a)(i).*fn9 Taxpayer argues that the PEO Services it provides meet none of the statutory requirements for taxable help supply services.
First, Taxpayer points out that section 201(cc) of the Tax Code imposes sales tax on a vendor's "providing .help" to its customers, and Taxpayer asserts that it does not provide help, i.e., personnel, to any of its clients. Rather, it is the clients' payroll that is transferred to Taxpayer, thereby enabling Taxpayer to use its consolidated payroll system to provide its clients with comprehensive human resources-related PEO Services. Taxpayer notes that it has no supply of potential employees to recommend to a client and has never introduced a single new individual to a client's workforce, as contemplated by the statutory definition. Taxpayer insists that because this essential element of the definition is absent, the PEO Services provided by Taxpayer cannot be taxed as a help supply service.
Moreover, Taxpayer observes that the statute contains examples of "help supply services" to illustrate what the General Assembly meant by that term: "service of a type provided by labor and manpower pools, employe leasing services, office help supply services, temporary help services, usher services, modeling services or fashion show model supply services." 72 P.S. §7201(cc); 61 Pa. Code ¶60.4(a)(i). According to Taxpayer, the listed services all contain a common element; in each case, a vendor is providing individuals to a client to add to the clients' staff, something that Taxpayer never does for its clients. Taxpayer further asserts that the professional legal, consulting, management, accounting and payroll processing services provided by Taxpayer differ in kind from any of the temporary or continuing help services identified in the statute. Applying the statutory construction doctrine of ejusdem generis (of the same kind or class), Taxpayer maintains that, because the statute specifies the kinds of activities that constitute help supply services, and Taxpayer's PEO Services are not among them, Taxpayer does not provide help supply services as that term is defined.*fn10
Taxpayer further asserts that, even if the PEO Services provided are construed to constitute "help," no sales tax should be imposed. According to Taxpayer, to do so would overlook a significant statutory requirement that the help supplied be under the supervision of the client. Taxpayer notes that its clients do not supervise the employees providing the PEO Services; rather, Taxpayer uses its own employees, not the clients' employees on Taxpayer's payroll, to provide the PEO Services, and Taxpayer itself supervises the employees providing the PEO Services that the Department has taxed.*fn11 Taxpayer asserts that, on this basis alone, the assessment cannot be upheld.
The Commonwealth counters that Taxpayer was appropriately taxed on fees it received from clients for its operation as a PEO. The Commonwealth's position is simply that, in defining help supply services, the General Assembly clearly and unequivocally requires only that help supplied (1) be on the payroll of the supplying entity but (2) under the supervision of the business to which the help is furnished. According to the Commonwealth, both of these criteria clearly are met here, and, consequently, the fees paid to Taxpayer represents the "purchase price" in a taxable "help supply services" transaction pursuant to section 201(cc) of the Tax Code and the Department's regulations at 61 Pa. Code §60.4(a)(i).
However, the Department ignores the fact that it assessed sales tax only on the fees collected from the client for Taxpayer's PEO Services, with no tax assessed on the employee cost reimbursement paid by the client. As stipulated by the parties, these PEO Services are performed solely by Taxpayer's own employees, not by the clients' employees transferred to Taxpayer's payroll, and Taxpayer, not the clients, supervise the employees providing the PEO Services. Thus, because the PEO Services do not fit within the statutory definition of "help supply services," the Department erred in assessing sales tax on the fees received for those services.
Accordingly, we reverse.
AND NOW, this 5th day of January, 2010, the order of the Commonwealth of Pennsylvania, Board of Finance and Revenue, dated April 28, 2006, is hereby reversed. This order shall become final unless exceptions are filed within thirty days pursuant to Pa. R.A.P. 1571(i).
ROCHELLE S. FRIEDMAN, Senior Judge