The opinion of the court was delivered by: Senior Judge Friedman
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 ...