Staffing Industry Tax Guide - Washington State
IntroductionThe staffing industry provides workers who perform a variety of business activities, including servicesrendered with respect to construction, customer software design and implementation, manufacturing and lightindustrial activities, other skilled and unskilled labor, clerical, and other professional services.The gross income received by a staffing business for each of these activities is subject to the business andoccupation (B&O) tax. The nature of the activity determines the appropriate classification and tax rate. Inaddition, staffing businesses must collect retail sales tax and remit the collected tax to the state on all incomesubject to the retailing classification of the B&O tax unless a specific statutory exemption applies.This publication will assist the staffing industry in determining how to report their gross income and when tocollect state and local retail sales tax. For general discussions of the business and occupation tax, sales tax,use tax and public utility tax, please refer to the appendices referenced in the Table of Contents.
Table of ContentsThe Staffing Industry – Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3Taxable Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1B&O Tax Classification & Retail Sales Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Identifying the Proper B&O Tax Classification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Examples for Classifying Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3Engaging in More Than One Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4B&O Tax and Public Utility Tax Exemptions and Deductions. . . . . . . . . . . . . . . . . . . . . . . . 5Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6Documenting the Services Provided. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Incorrectly Classified Income – Amended Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Reliance on the Best Information Available. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Customer’s Responsibility to Keep Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Re-billing for Retail Sales Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Specific B&O Tax Applications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-9Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Processing for Hire. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Warehousing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Insurance Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Travel Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Landscaping/Lawn Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Janitorial Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Computer/Software Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Stevedoring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9The Audit Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-12When and Where the Audit will be Performed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9What is Reviewed During an Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Preparing for an Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10What Happens During an Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11After the Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Appendix A – State Tax Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-14Major Taxes in Washington. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Business and Occupation (B&O) Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Retail Sales Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Use Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Public Utility Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Appendix B – Decision Trees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-19Appendix C – Laws, Rules & Other Guidance for the Staffing Industry. . . . . . . . . . . 20-48
The Staffing Industry - OverviewTaxable IncomeThe activity or service performed by the workermay be classified differently for tax purposesfrom the classification reported by the customer.For example, a person operating an insuranceagency is taxable under the Insurance AgentsB&O tax classification. If a temporary staffingbusiness provides a receptionist for the insuranceagency, the gross income received for the worker’sservices is subject to B&O tax under the Serviceand Other Activities classification. This is becausethe receptionist is not providing services under theauthority of an insurance agent’s license.The tax owed by a staffing business is based on thegross income received for the work performed andthe services provided. Generally, no deduction isallowed from gross income for payroll or any otherexpenses incurred by the business.B&O Tax Classification & Retail Sales TaxA staffing business is subject to tax based onthe services provided to customers through theirworkers. This means the gross income received bythe staffing business is subject to the classificationof the business and occupation tax that applies tothat activity.If the staffing business provides a worker whois licensed as an insurance agent to an insuranceagency, and the worker performs services underthe authority of that license, the related incomeis taxable under Insurance Agents B&O taxclassification. In all cases, the staffing businessmust look to the activity engaged in by the worker,regardless of the nature of the customer’s business.When a worker performs an activity defined as aretail sale, the staffing business must collect salestax from its customer. If a retail-type service isperformed for a person that resells that service,such as construction work performed for a generalcontractor, sales tax is not collected. Instead, thestaffing business is required to obtain a completedresale certificate from the contractor and reportsuch charges for the worker under the WholesalingB&O tax classification (RCW 82.04.050).Examples for Classifying IncomeBelow are descriptions of the major B&O taxclassifications and examples of the activities thatfall within those classifications.Identifying the Proper B&O Tax ClassificationRetailingA staffing business is responsible for determiningthe applicable B&O tax classification for theactivity to be performed by the worker. Thisdetermination should be made prior to dispatchingthe worker to the customer. It is important forthe staffing business to know whether retail salestax should be collected from the customer, or ifan exemption certificate or other documentationshould be obtained from the customer as evidenceof a sales tax exemption.Retailing B&O tax applies to gross incomereceived for repairing, altering, or improvingreal or personal property for the propertyowner, even in those cases where only labor isprovided. In addition, retail sales tax must becollected from the customer. Examples of retailservices include:CommercialconstructionSheet metalinstallationRoofingConcrete workNote: The staffing business should not assumethat the income it receives through the activitiesof its workers is subject to tax under the sameclassification that the customer reports under. 1 ResidentialconstructionElectrical workExcavation workPainting
Paper tilityline installationDemolitionMoving earthLandscapemaintenancesubcontractor and repair work performed for arepair shop. In both of these examples, the laboris used by the customer to produce somethingfor resale.CarpentryRepairs of computerhardwareInstallation ofcanned softwareSite cleanupClearing landInstallation ofpersonal propertySpecific Documentation Required: The customermust provide the staffing business with aproperly completed Resale Certificate (REV27 0020e). This form can be found on theDepartment of Revenue’s web site athttp://dor.wa.gov/content/forms.Retail Sales Tax Exemptions(Documentation Required)ManufacturingThe Manufacturing classification applies toall activities of a commercial or industrialnature where labor or skill is applied, by handor machinery, to materials so that as a result anew, different or useful substance or article oftangible personal property is produced for saleor for commercial or industrial use. The tax isapplied against the value of articles, substances,or commodities manufactured in Washington forsale to others as tangible personal property orfor the manufacturer’s own use.All retail sales are subject to sales tax unless thecustomer provides documentation to establishits exemption from the retail sales tax. Withdocumentation, certain retail sales and servicesare exempt from the retail sales tax. Examplesinclude repair and/or maintenance of certainmanufacturing machinery and equipment, andrepair and/or maintenance of carrier propertyused substantially in interstate commerce.In all cases where the customer claimsexemption from retail sales tax, the client mustprovide the staffing business with a properlycompleted exemption certificate. The Buyers’Retail Sales Tax Exemption Certificate (REV27 0032) is used to document retail sales taxexemptions. This form can be downloaded fromthe Department of Revenue’s web site at http://dor.wa.gov/content/forms.Processing for HireProcessing for Hire B&O tax applies to incomereceived for applying labor and mechanicalservices upon property belonging to others sothat as a result a new, different, or useful articleof tangible personal property is produced forsale or for commercial or industrial use. Thus, aprocessor for hire is any person who would bea manufacturer if that person were performingthe labor and mechanical services upon his orher own materials. Examples include producinga fully or partially completed item from rawmaterials provided by the customer; assemblingparts provided by the customer to produce afully or partially completed item; performing afunction on an assembly line that alters tangiblepersonal property; and operating machinery onan assembly line that alters tangible personalproperty.WholesalingWholesaling B&O tax applies to incomereceived for repairing, altering, or improvingreal or personal property for someone otherthan the property owner, even in those caseswhere only labor is provided. The gross incomebilled to the customer for wholesaling activitiesmust be reported under the Wholesalingclassification of the B&O tax. Retail sales taxis not collected. Examples include constructionservices performed for a prime contractor or 2
Service and Other ActivitiesSpecial B&O Tax Rates – Specific Licenses RequiredThe Service and Other Activities classificationmay be considered a “catch-all” classification ofthe B&O tax. It applies to any business activityfor which a specific rate is not provided underthe law, or which is not specifically exempt fromexcise taxes by statute. In general, it includespersonal and professional services. Examplesinclude:Accounting servicesHousekeepingArchitectural designInspectingBeauty shop servicesJanitorial servicesBookkeeping andpayroll servicesLaboratory workCall center staffingLegal servicesComputer consultingservicesLicensed MassageTherapyComputerprogrammingProperty tective servicesSoftware designingEngineering servicesStenography servicesHair cutting andstylingSurveyingHealth care servicesTeachingHousecleaningservicesWeb design servicesSome activities may require the worker to havea special license or certification through theDepartment of Licensing. Generally, whetherthe worker has a license does not affect theapplication of tax. For example, incomereceived from the activities of a health careworker is subject to the Service and OtherActivities classification whether the activityrequires a licensed physician or requires nolicense at all.However, certain licensed professions havea special classification of the B&O taxclassification that is lower than the Service andOther Activities classification. In order to takeadvantage of the lower B&O tax classification,the worker provided by the staffing businessmust hold the appropriate valid license andperform services under authority of the license.An example of this is seen in the InsuranceAgents classification.Public Utility Tax – Motor or Urban TransportationThe public utility tax is a tax on gross receipts,similar to the B&O tax. It applies to mostutility services, such as water, power, and gasdistribution, and sewerage collection. It alsoapplies to providing transportation of personsor property for hire within five miles of the citylimits (Urban Transportation classification) andbeyond (Motor Transportation classification).These classifications apply whether or not theperson performing the work owns the vehiclewith which the activity is being performed.The Service and Other Activities classificationincludes merely inspecting, sorting, counting,moving, packing, loading, or unloading oroperating machinery that performs thesetasks even when they are performed at amanufacturing facility.Examples include taxi cab service, limousineservice, and hauling goods belonging to others(hauling for hire). See WAC 458-20-180. 3
Engaging in More Than One ActivityA worker provided by a staffing business may berequired to engage in several different activitieswhile on the same job that by themselvesare subject to tax under different B&O taxclassifications. Generally, the Department ofRevenue will allow the income to be reportedbased on the predominant activity. “Predominantactivity” will be considered to apply where for anygiven charge, more than 50 percent of the time isspent working in one tax classified activity, and thebilling is not segregated with respect to the minoractivity.of the meal. In this case, the predominant activityis cleaning the apartment. Therefore, the grossincome received by the staffing business isreportable under the Service and Other Activitiesclassification. Retail sales tax will not apply.Example 2: A staffing business provides aconstruction worker to a developer/property ownerto perform construction-related services (subjectto the Retailing B&O tax and retail sales tax). Theworker has a commercial driver’s license and isonly occasionally required to drive the developer’struck within the city to pick up a load of gravel (anactivity subject to the Urban Transportation publicutility tax). The worker also spends about one hourper day helping in the office. The predominantactivity is performing construction work for aproperty owner since the greatest amount of timeis spent performing retailing activities, and there isno segregated charge for the other lesser activities.In this case, the staffing business is subject to theRetailing B&O tax on the gross amount chargedto the developer. Retail sales tax also must becollected by the staffing business on the grosscharge to the customer.In the absence of segregated charges for eachactivity, where there are more than two differentB&O tax classifications that may apply to theactivities performed, the classification that willapply for reporting purposes will be the oneapplicable to the activity the worker spends thegreatest amount of time doing.Please note that when two or more workers,engaged in different activities, are provided to onecustomer, the income from each worker is reportedbased on their predominant activity.ExamplesExample 3: Same facts as Example 2, except thatthe staffing business also provides a receptionistto the developer/property owner. In this case, thestaffing business is subject to the Retailing B&Otax on the gross amount charged to the developerfor work done by the construction worker. Retailsales tax must also be collected on this charge. Thestaffing business is subject to Service and OtherActivities B&O tax on the gross amount chargedto the developer for work done by the receptionist.Example 1: A staffing business provides ahousekeeper whose primary job is to clean anapartment (subject to the Service and OtherActivities classification). The job also calls for thehousekeeper to prepare one meal per day (subjectto Retailing B&O tax and retail sales tax). Themajority (over half) of the charge is associated withthe housekeeping service (apartment cleaning).No segregated charge is made for the preparation 4
B&O Tax and Public Utility Tax Exemptionsand DeductionsThere are limited deductions from the B&O taxand public utility tax. There are no deductions foramounts paid to the worker, amounts deducted forpayroll taxes, or any other expenses whatsoeverpaid or accrued. (For a full listing of exemptionsand deductions, refer to http://dor.wa.gov/content/statistics/2004/tax exemptions 2004/default.aspx.)to the staffing business. For example, certainnonprofit hospitals may qualify for a deduction forincome received through Medicare. Non-profit andpublic hospitals are taxable on gross income at aspecial rate. However, the income received by astaffing business for providing physicians, nurses,or other healthcare workers to the hospital is fullytaxable under the Service and Other Activitiesclassification because the staffing business doesnot meet the criteria for the special nonprofithospital classification, or for the deduction.Income received for work performed outsidethe state may be deducted from gross income.Similarly, an interstate haul is exempt from thepublic utility tax. Bad debts on which tax has beenpaid and which may be written off for federal taxpurposes may be deducted.Similarly, income received by licensed AdultFamily Homes is exempt from tax. However, thegross income received by a staffing business
exemption from retail sales tax, the client must provide the staffing business with a properly completed exemption certificate. The Buyers’ Retail Sales Tax Exemption Certificate (REV 27 0032) is used to document retail sales tax exemptions. This form can be downloaded from the Department of Revenue’s web site at http: //dor.wa.gov/content .
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