Taxation of Employment Services in Ohio
By Mark Thomas, Supervisor, Tax & Business Services
It is not unusual for businesses to contract with employment service companies to meet their labor needs, and many times those needs can be met on a temporary basis. Ohio is one of a few states that subject temporary labor services to sales tax. Now the state is attempting to cast a much wider net when it comes to the taxation of temporary workers, with much of the debate focused on temporary workers engaged over a long period of time.
Employment services are included in the definition of “sale and selling” per Ohio Revised Code (ORC) 5739.01(B)(3)(k), and defined per ORC 5739.01(JJ) as providing personnel on a temporary or long–term basis under the control of another, when the personnel receive their compensation from the provider of the service.
Ohio’s One-Year Exclusion
Ohio has five exclusions from the definition of employment services, including “supplying personnel to a purchaser pursuant to a contract of at least one year between the service provider and the purchaser that specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis.”
This is currently a very hot audit issue with the state of Ohio. Not only will the auditor review the employment service contract to determine if the contract meets the one-year exclusion, but they will also test the performance of the contract. This generally involves reviewing invoices to determine if the average number of employees are working on a consistent basis throughout the year. If there are fluctuations in the number of employees and/or the hours worked during a period of time, Ohio will generally disallow the exclusion and tax the contract as an employment service.
The Ohio Board of Tax Appeals has ruled in favor of the taxpayer in the following two cases:
- In Accel Inc. (et. al.) v Testa, BTA Case No. 2012-2840, Accel argued that employees were assigned on a permanent basis. The commissioner argued that the employees were determined on a project-by-project basis. The court determined that “Accel adjusted its labor needs for each project by decreasing each employees’ hours, rather than by accepting a smaller number of employees during less busy time periods.”
- In A.M. Castle & Company (et. al.) v Testa, BTA Case No. 2013-5851, the contract was for the duration of at least one year, but it did not specify that the employees were assigned on a permanent basis. The contract also did not specify how many employees would be assigned to A.M. Castle. The court found no requirement that the number of employees must be a static, specific number that cannot be adjusted depending on the condition.
The State of Ohio has appealed both of these cases to the Ohio Supreme Court.
Review Your Contract
As previously indicated, employment services is a highly contested issue in audit situations. It is best to review your contract for the language requirement and consistently try to keep your contracted employees at the same staffing level.