By Jordan Simms
In Allstate Insurance Co. v. Hegar, 03-13-00341-CV (Tex. App. Dist. 3 02/18/2016), the Comptroller argued that temporary employment services do not include services provided:
- Under long-term umbrella or needs contracts;
- To an employer who understaffs its workforce; or
- Under contracts in which the temporary employees are independent contractors.
The Third Court of Appeals did not agree with the Comptroller’s reading of the sales tax exclusion, and the Comptroller may appeal the Third Court’s decision.
Insurance services are taxable services. However, Texas sales tax law excludes from sales tax taxable services provided by temporary employees. The exclusion in Tex. Tax Code Sec. 151.057 applies if:
- The service supplements a customer’s existing work force on a temporary basis;
- The service provider is a temporary employment service as defined in Labor Code Sec. 93.001;
- The service is one that is usually performed by the customer’s employees;
- The temporary employee is under the direct or general supervision of the customer; and
- The customer provides all supplies and equipment necessary.
Allstate entered into an “umbrella agreement” with Pilot Catastrophe Services, Inc. (“Pilot”) to provide Allstate the services of adjusters upon request. Allstate was not obligated to pay Pilot unless Allstate needed and Pilot provided adjusters.
Allstate employed adjusters, who were assigned to local offices based on the number of policies in a region and on actuarial information. When there was a catastrophe that resulted in large claims, Allstate assigned the claims to its “National Catastrophe Team.” When the event required additional adjusters, Allstate called Pilot to provide adjusters until Allstate had worked through the claims. In addition, Allstate called Pilot to fill in for Allstate adjusters who were out of the office due to illness, maternity leave, or vacation, etc.
The Comptroller argued that the services were not “temporary employment services” because the services were provided under a long-term umbrella contract and were not “temporary” in nature. The Court did not agree. Instead, the Court explained as a transaction tax, the sales tax is imposed when a taxable service is performed for consideration. An umbrella contract, or needs contract, is not the performance of a service. Such a contract is merely a promise to provide services if and when needed.
To determine whether the services were temporary, the Comptroller was required to review the duration of the services that were actually performed by Pilot adjusters. The facts showed that Allstate used Pilot adjusters for a temporary, as needed, period based on specific weather events in most cases.
In addition, the Comptroller argued that the temporary employee exclusion must be read restrictively to combat “understaffing” or recurrent temporary supplementation by employers. The Court, however, found that the law contemplates employer understaffing, as the exclusion is available when services are needed to supplement an existing workforce.
Next, the Comptroller argued that Allstate’s needs were not based on a “special work situation” as required in the definition of a temporary employment service. Labor Code Sec. 93.001, Labor Code defines a temporary employment services company as a company that employs individuals for the purpose of assigning them to clients to support or supplement the client’s workforce as needed in a special work situation, including an employee absence, a temporary skill shortage, a seasonal workload, or a special assignment or project. The Court explained that when “including” is used before a list, the list is a list of examples, not an exhaustive enumeration of applicable situations. For example, the reference to “a seasonal workload” means that a “special work situation” may include some recurrent and predictable spikes in workload. Allstate’s weather-related events and employee absences qualified as “special work situations,” and Allstate used Pilot adjusters to supplement its workforce as required by the exclusion.
Further, the Comptroller argued that because the contract provided that Pilot adjusters were independent contractors, Allstate did not supervise the adjusters as required by Tax Code Sec. 151.057. Section 151.057 requires that the customer directly or indirectly supervise a temporary employee. Allstate pointed out that many temporary-employment companies use the independent-contractor structure to limit the exposure and human resources burdens on their customers. The Court found that the Comptroller had attempted to rewrite the temporary employee exclusion by adding this requirement.
Finally, the temporary employee exclusion requires that the customer provide all supplies and equipment necessary. The contract required that Pilot adjusters have electronic voice mail, cellular telephones, and laptop computers. When a Pilot adjuster was assigned to an Allstate facility, the adjuster was required to use equipment provided by Allstate.
Allstate showed that the term “equipment necessary” meant equipment that was essential to the provision of adjustment services. Further, cellular phones, email, and laptop computers were not essential to the provision of insurance adjustment services. For example, when the Internet was not available due to weather events, adjusters were able to work on claims.
The Court opined that the exclusion requires that the customer provide the supplies and equipment essential or indispensable to perform the service. Because the contract between Allstate and Pilot required that the services be provided through the use of mobile phones, laptops, etc., the Court found that this equipment was essential and indispensable to that task. When Allstate provided the equipment used by a Pilot adjuster, the services were non-taxable temporary employment services. When Pilot or its employees provided the equipment, the Court found that the services did not qualify for the temporary employee exclusion.