Iowa DOR Rules Temporary Staffing Services Exempt from Sales Tax When Worker Is Employed by Agency

The Iowa Department of Revenue (DOR) has determined that temporary staffing services are not subject to Iowa sales tax when the worker is employed directly by the staffing agency rather than by the client. The ruling, issued under Declaratory Order No. 913861, involved an out-of-state talent agency that provided a Certified Registered Nurse Anesthesiologist (CRNA) to a medical facility in Iowa.

Who employed the worker and why it mattered

In the case before the DOR, the CRNA was an employee of the Petitioner (the staffing agency). The agency paid the worker weekly but assigned the CRNA to perform services under the supervision of the medical facility. This arrangement raised a key question: who bears responsibility for sales tax on staffing services when the worker remains employed by the agency?

The DOR’s analysis focused on the nature of the employment relationship and whether the agency’s activities constituted a taxable “placement service” under Iowa law.

Typical treatment under the law

Under Iowa Code § 423.2(5), Iowa imposes a 6% sales tax on certain enumerated services, including those provided by private employment agencies as defined in § 423.2(6)(aq).

Iowa Administrative Code rule 701—211.13 defines a private employment agency as any business engaged in:

• Listing job opportunities,
• Providing employment counseling, or
• Assisting individuals in securing employment.

Typically, if an agency performs these services for positions located within Iowa, the transactions are taxable, regardless of whether the agency serves the job seeker or the employer.

The distinction between staffing and placement

Although the Petitioner’s website listed job opportunities and connected healthcare facilities with professionals, activities characteristic of a private employment agency, the DOR found that the actual relationship between the parties set this case apart.

Because the CRNA remained an employee of the staffing agency, the agency was not facilitating a new hire by the medical facility. The facility supervised the worker’s day-to-day duties, but the employment relationship, hiring, payroll, and employment terms, remained with the agency.

As a result, the DOR concluded that the agency’s services did not constitute a taxable “placement service” under Iowa Code § 423.2(6)(aq). Instead, the agency was providing labor through its own employee, which falls outside the scope of taxable services.

Details on the Department’s ruling

The Iowa Department of Revenue determined that the Petitioner’s services were exempt from sales tax. Because the CRNA was employed and paid by the agency, not by the medical facility, the agency did not act as an intermediary or assist in securing employment.

In essence, the DOR drew a clear distinction between staffing services, where the worker remains an employee of the agency, and placement services, where the agency connects an employer and a job seeker for a direct hire. Only the latter is taxable under Iowa law.

Applicability for staffing agencies

The decision highlights a key compliance point for staffing and recruiting firms: the employment relationship determines taxability, not merely the work performed or billed. Agencies that retain full employment responsibility, wages, benefits, and supervision, may qualify for exemption from Iowa sales tax, even when the worker performs services within the state.

For firms operating across state lines, this ruling underscores the importance of clearly defining employment relationships and documenting them in contracts and invoices.