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Article 11/15/2018

Ohio Employment Services Taxability

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Ohio imposes its sales tax on specifically enumerated services, which include employment services. Ohio’s statutes define employment service as “providing or supplying personnel, on a temporary or long-term basis, to perform work under the supervision of another, when the personnel supplied are paid by the employment service provider.”

Within the last 12 months, both the Ohio Supreme Court (Court) and Ohio Board of Tax Appeals (BTA) have issued decisions regarding the taxability of employment services that, when read together, may provide significant refund opportunities and future sales tax savings.

On December 6, 2017, the Court issued its opinion in Accel, Inc. v. Testa, Slip Opinion No. 2017-Ohio-8798, affirming the decision of the BTA, which held that Accel, Inc.’s purchases of staffing services weren’t taxable because they qualified for the exclusion found in Ohio Revised Code (RC) 5739.01(JJ)(3)—the personnel were assigned on a permanent basis under a contract for at least one year.

On August 2, 2018, in its opinion in Career Staffing, LLC v. Testa, BTA Case No. 2016-2617, the BTA once again rejected the tax commissioner’s argument that fluctuations in staffing levels preclude a taxpayer from qualifying for the permanent assignment exclusion of taxable employment services. The BTA noted the exclusion within RC 5739.01(JJ)(3) has two requirements:

  1. Personnel must be supplied to a purchaser, pursuant to a contract, for at least one year.
  2. Each employee must be assigned to the purchaser on a “permanent basis.”

The BTA also noted the Court had recently addressed the “permanent assignment” requirement of RC 5739.01(JJ)(3) and rejected an analysis that focused on whether the contract specifies permanent assignment in favor of a broader facts-and-circumstances test. Based on its own prior decision in Accel, Inc. v. Testa, the BTA noted there’s permanent assignment where the contract doesn’t specify an ending date, i.e., personnel are supplied on an indefinite basis, and the employees provided aren’t substitutes for current employees or needed to meet seasonal or short-term workloads.

These two decisions may have significant Ohio sales tax implications on both employment service agencies and companies that purchase employment services. Companies should carefully review their contracts to determine if such services are subject to Ohio sales or use tax.

For further guidance on how this decision may affect your business, contact Scott or your trusted BKD advisor.