NJ Sales Tax for Staffing Agencies

New Jersey Sales Tax as it applies to the Temporary Staffing Industry

Why you need to read this article!

Many staffing firms and their clients in New Jersey believe that temporary staffing services are not subject to New Jersey’s Sales Taxes. In the vast majority of situations served by the temporary staffing industry this is true. But not all!

This Legal Resource document has been written specifically with the purpose of pointing out to staffing firms and their clients that New Jersey does apply sales tax liability to the provision of temporary staffing services that fall under certain specific service categories.

Since there is a "cost" to not collecting and remitting sales taxes when required, the document also has a section on who is liable for sales tax payments, the associated record keeping requirements and a brief description of the interest and penalties imposed by the State of New Jersey for failure to report and/or pay sales taxes in a timely and accurate manner.

Note especially the section detailing how sales tax liability is not only a firm obligation but also can be a personal liability for owners and managers of the firm as well.

This document has been provided to inform the staffing industry of its sales tax requirements and also to be shared with the client as a resource defending the staffing firm’s position that sales tax applies. References have been provided for the reader to research this subject further.

This document however is designed to be general and informational. Therefore each situation will be case-specific and needs to be evaluated by the firm’s professional advisor to determine the direct sales tax application to the firm and its client.

New Jersey Sales Tax

Temporary Staffing Industry

Written by David Seiden, CPA and Pamela Avraham, CPA

There is a core difference between how New Jersey treats the sale of tangible personal property and the sale of services for sales tax purposes. New Jersey Statute, N.J.S.A 54:32B-3(a) provides that all retail sales of tangible personal property are subject to sales tax unless specifically exempt and sales of services are exempt unless specifically enumerated as taxable. N.J.S.A 54:32B-3(b) lists the services that are subject to sales tax. Temporary services are not listed as taxable and therefore appear not to be subject to New Jersey sales tax.

However, the November/December 1990 New Jersey State Tax News specifically addresses "Temporary Service Contractors". It differentiates between employment agencies that merely refer people and collect a fee and a temporary staffing agency that employs temporary staff and provides them to clients for a fee. Referring people for a fee is exempt from New Jersey sales tax while temporary staffing services could be subject to New Jersey sales tax. The 1990 notice states: “when an individual is required to perform taxable services, the service contractor is required to collect sales tax on the fee charged to the client.” For example, both a temporary staffing agency and a security firm are required to collect New Jersey sales tax on their fee for supplying a security guard to their respective client since security services are a taxable service in New Jersey.

The following is a list of services subject to New Jersey sales tax. Therefore, a temporary staffing agency that provides temporary staff that performs any of these services is required to collect and remit New Jersey sales tax on the fees associated with such services. This list is general (specific details of requirements need to be researched), subject to change, and is not necessarily all-inclusive.

Taxable Services in New Jersey

Note that "Installing personal property" and "Repairs of personal and real property" includes the supply of craft labor (mechanics, welders, painters, electricians, plumbers, technicians, and similar job titles) for purposes of installing or repairing production machinery, equipment and/or buildings for clients, irrespective of whether or not the temporary staff is managed by the client.

Information Technology-Related Staffing Services

The following section evaluates the various types of IT related staffing services that are subject to sales tax.

A temporary staffing agency that provides temporary staff to a client is required to collect and remit New Jersey sales tax if the temporary staff performs one of the following services:

• Computer consulting
• Training
• Data processing
• Creation or modification of software
• Software maintenance contracts (training, consultation, customer support only, no software provided)

Sales for Resale or Other Exemptions

Sellers may discharge their liability for collecting the sales tax due from their customers by taking a sale-for-resale certificate (NJ Form ST-3) or other exemption certificate. An exemption is allowed for services purchased with the intention to resell them in the form purchased or as a component of other services. The tax does not apply at the time of the purchase for resale, but does apply at the time the services are resold at retail. The Seller who accepts the certificate must maintain a record that associates the sale for resale with the exemption certificate on file.

For example, if a temporary staffing agency provides a temporary security guard to a security firm (that provides security services to corporations), the security firm is permitted to provide the temporary staffing agency with a sale for resale exemption certificate thereby relieving the temporary staffing agency from collecting and remitting sales tax on the taxable services of the security temporary staff. The security firm is required to collect and remit sales tax on its taxable security services that it provides to its corporate customer. On the other hand if a temporary staffing agency assigned an individual as a security guard to a client (i.e. a manufacturing plant), then the temporary staffing agency is required to collect and remit New Jersey sales tax on such services.

Liability for Sales Tax Payments and Penalties and Interest

Obligation of the Seller (Temporary Staffing Agency)

New Jersey sales tax is imposed on purchasers of goods and services (hereafter "customers") but collected by Sellers who have “nexus” in the State. Nexus is defined as the minimum level1 of business activity that allows a state to impose taxes on such business activity or require the entity to collect and remit sales/use tax. All New Jersey Sellers (i.e., both New Jersey based and out-of-state Sellers) that meet the nexus threshold are required to file a Certificate of Registration with the New Jersey Division of Revenue and obtain a Certificate of Authority which empowers the Seller to collect and remit sales tax in New Jersey. A Seller’s failure to obtain a Certificate of Authority does not relieve the Seller of the obligation to collect and remit the tax.

Obligation of the Customer (Client)

N.J. Rev. Stat. §54:32B-12(a) provides that Sellers are to collect New Jersey sales tax from the customer when collecting the sales price to which the tax applies. Customers that fail to pay the Seller the applicable New Jersey sales tax are required to pay the tax directly to the State. N.J. Rev. Stat. §54:32B-14(b). New Jersey can legally recover the sales tax due from either the Seller or the customer. A contract between the Seller and the customer, delegating the sales tax liability to one party, does not preclude the State from legally seeking such liability from either party.

Sellers have the same legal rights to collect New Jersey sales tax from their customers as if the tax is a part of the purchase price of the service. The State must be joined as a party in any action or proceeding brought by a Seller to collect the tax due from the customer. N.J. Rev. Stat. §54:32B-14(a).

Personal Liability

N.J. Stat. § 54:32B-14(a) states that “every person required to collect any tax imposed by this act shall be personally liable for the tax imposed, collected or required to be collected under this act”. In other words, New Jersey holds “persons required to collect the tax” (at a Seller) personally liable for any uncollected sales tax due from customers on taxable products and services. N.J. Rev. Stat. § 54:32B-2(W) states that “persons required to collect tax” includes any officer or employee of a corporation or of a dissolved corporation who as such officer or employee is under a duty to act for such corporation in complying with any requirement of this act and any member of a partnership. With respect to Limited Liability Companies, all members of such entity (regardless of their involvement in the business) are deemed to be a person required to collect tax, and therefore personally liable for unpaid sales tax.

In Hapag-Lloyd A.G. v. Director, 7 NJ Tax 108 (1984) and Theryoung v. Director, Dkt. No. 02-19-0409-89ST, 1-6-93 (Not Approved for Publication) an officer of a corporation with limited participation in the affairs of the corporation was held to be a responsible officer for purposes of personal liability imposed on persons required to collect taxes. New Jersey Courts have adopted the position that does not permit an abdication of the responsibility for the collection of sales tax and other trust fund taxes. The officer and his wife were owners of 80% of the corporate stock of a company engaged in the construction and set-up of advertising displays. The officer never visited the location of the business during most of the period that the sales tax deficiencies occurred, an arrangement agreed on with the two other shareholders when they purchased the business. The officer was aware of the poor financial condition of the company as a result of off-site meetings held with the other officers. He also had the authority to hire and fire employees and signed the New Jersey CBT-100 as president of the corporation.

Returns and Payments

All Sellers are required to file quarterly sales tax returns and remit the tax due on a quarterly basis. Sellers whose monthly sales tax liability exceeds $500 in the first or second month of any quarterly filing period are required to file a monthly sales tax report and remit the tax due for that month. Quarterly returns and payments are due on or before the 20th day of the month following the close of the quarter. Monthly returns and payments are due on or before the 20th day of the following month.

Record Keeping Requirements

Sellers required to be registered in New Jersey must keep accurate books and records including a true copy of all sales slips, invoices, receipts, statements, etc. issued to customers for a period of 4 years (i.e., statute of limitations). If a Seller’s records are determined to be incorrect or insufficient, any sales tax returns filed on the basis of such records can also be deemed to be incorrect or insufficient. In such case, the State may determine the Seller’s tax liability based on any reasonable methodology or information available.

Interest and Penalties

Sellers that fail to timely remit sales tax collected are subject to interest at the rate of 3% above the prime rate, per month or fraction of a month during which the deficiency remains, from the original tax payment due date until the actual date of payment. Interest is compounded annually. In addition, any amount of New Jersey sales tax that remains unpaid after the due date is considered an underpayment and subjects the Seller to a penalty of 5% of the underpayment.

Sellers that fail to timely file a required sales /use tax return with the State are liable for a late filing penalty of 5% of the tax due per month or fraction of a month during which the sales tax return remains late, but is capped at 25% of the tax due. An additional penalty of $100 per month or fraction of a month during which the return remains delinquent may be imposed. This penalty is imposed on the first day following the original return due date and on the same calendar day of each succeeding month thereafter.

For example, assume an out-of-state Seller began providing taxable services to a New Jersey based customer in October 2009. The prime rate was 5% throughout the entire applicable time period. The Seller should have collected $1,000 in New Jersey sales tax for the customer. The Seller then files and pays the outstanding liability on May 15, 2010. The Seller would now potentially owe New Jersey the following:

• $1,000 in tax,
• $500 for late filing of a return (sales tax return was due January 20, 2010…..penalty is
• $100 per month or fraction of a month …..Jan, Feb, March, April, May),
• $250 penalty for late filing (5% per month for 5 months),
• $50 penalty for late payment of taxes due (5%),
• And approximately $35 in interest (balance due x 8% per annum x 5 months)

Total New Jersey sales tax liability is $1,835 including penalties and interest.

Please contact your tax professional for assistance in assessing your specific situation.

Links:

New Jersey Sales Tax Guide

NJ Technical Bulletin-Taxability of Software

The Authors:

David Seiden, CPA is a partner at Citrin Cooperman & Company, LLP where he is in charge of the firm’s state and local tax practice. David has over 20 years of multistate tax experience and is a frequent speaker and author on state and local tax matters. David can be reached at 914-949-2990 or dseiden@citrincooperman.com.

Pamela Avraham, CPA is a partner in Urbach & Avraham, CPAS, LLP. The firm provides accounting, consulting and tax services to closely-held businesses, specializing in temporary staffing agencies. The firm’s website is www.ua-cpas.com.

1 The United States Supreme Court (hereafter, the “Court”) ruled in Quill Corporation v. North Dakota, 504 US 298 (1992), that an entity must have “substantial nexus” with a state before such state can impose a tax on the entity. The Court defined “substantial nexus” in terms of a seller’s physical presence, holding that a state may not require a seller to collect tax from its residents if the seller’s only contact with customers in the state was via U.S. mail or common carrier. In other words, The Court concluded, a company needs to have a physical presence in a state before such state can require the company to collect and remit sales tax. The Court went further and stated that the entity’s in-state physical presence must be more than the “slightest presence”. The Court did not create a bright line test to determine when an entity’s in-state activities exceed the slightest presence test but left it to the states to interpret The Court’s decision. There is divergent authority on whether the Court’s ruling in Quill, which requires a physical presence, applies to non-sales taxes (i.e., income/franchise taxes).