Staffing augmentation and payment processing services provided by an out-of-state technology company are not subject to sales and use tax in Tennessee. The company provides a downloadable app that helps its customers to find workers to fill short-term staffing needs.
The taxpayer’s customers can post job requests, create templates for posting future job requests and create lists of favored workers on the app. The company ensures that potential workers meet the customer’s criteria and undergo a background check through a third-party provider, if applicable. Customers can review and approve completion of a job and the time reported in the app. Customers and workers both can use a messaging feature on the app to communicate with one another.
Workers use the platform to view job requests, accept a job and report their time worked for the customers.
The company provides payment processing services when a customer pays the company for the number of hours that workers complete, and the company then transfers the payment to the workers’ accounts.
In a letter ruling, the Tennessee Department of Revenue (DOR) stated that the fees charged by the company to its customers are not subject to Tennessee sales and use tax since staff augmentation and payment processing services are not taxable in Tennessee. The DOR stated that the company’s platform is analogous to a labor hall, hiring hall, or employment agency. Labor halls, hiring halls and employment agencies are generally not subject to Tennessee sales and use tax for services they provide connecting workers with job offers. The company’s platform is not subject to Tennessee sales and use tax for providing essentially the same service through an app.
Payment processing services are specifically identified as not being subject to Tennessee sales and use tax. Therefore, the company’s payment processing services are not taxable.
While the company’s app is arguably subject to Tennessee sales and use tax as the use of computer software, the DOR found that connecting its customers with workers for short-term employment is the true object of the transaction, not the use of the app. Use of the app is merely incidental to the non-taxable services being provided by the company.
While the company provides a way for customers and workers to communicate through the app regarding job details, the company is not providing telecommunication services that would be subject to tax. Customers can only communicate with workers, and the communication is limited to job details and logistics. As a result, the communication feature is incidental to the non-taxable services.
This letter ruling provides a useful case study in the true object test and how a state can analyze the different aspects of a transaction. (Letter Ruling #23-05, Tennessee Department of Revenue, June 30, 2023)