By Michael Penza and Timothy Gustafson

The Utah State Tax Commission ruled that a Utah-based manufacturing and marketing company’s payroll factor must include compensation paid to a third-party “professional employer organization” (PEO) pursuant to a lease agreement for employees working at the taxpayer’s Utah facilities. The employees signed employment agreements with the PEO, and the PEO paid the employees’ salaries and withheld taxes for purposes of the Federal Insurance Contribution Act. The taxpayer, however, supervised and disciplined the employees; made all hiring and firing decisions; controlled the employees’ work schedules and working conditions; and provided the employees with new-hire orientation, on-the-job training and an employee handbook. Nevertheless, the taxpayer reported a zero Utah payroll factor, excluding all compensation it paid the PEO for the leased employees’ services while reporting deductions for salaries and wages on its federal tax returns. Rejecting the taxpayer’s position, the Tax Commission found that: (1) the taxpayer’s extensive control over the leased employees created an employer-employee relationship at common law; and (2) the taxpayer’s exclusion of the leased employees’ compensation from its payroll factor did not fairly reflect its Utah business activities. Accordingly, the compensation paid to the PEO for the “hundreds of people working in Utah” for the taxpayer was properly includable in the taxpayer’s payroll factor. Utah State Tax Commission, Appeal Nos. 05-0594; 05-1764 (decided Nov. 15, 2011; released Oct. 13, 2015).