United States

Ohio: Despite Contract Language, Board of Tax Appeals Holds that Employment Services Not Subject to Sales and Use Tax

Mar 16, 2015
From KPMG TaxWatch

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The Ohio Board of Tax Appeals recently reversed a Tax Commissioner determination and held that a taxpayer’s purchase of employment services was not subject to sales and use tax. The taxpayer owned a fleet of delivery trucks used to deliver various specialty metals to customers. Rather than hire drivers, the taxpayer utilized an experienced third-party transportation company to provide drivers for its trucks.

Under Ohio law, sales and use tax is imposed on employment services which are defined effectively as providing personnel on a temporary or permanent basis to work under the supervision and control of another, but the compensation for which is paid by the service provider. An exception applies to contracts that are longer than a year in duration and under which workers are supplied to the buyer on permanent basis. Both the Commissioner and the Board agreed that the durational requirement of at least one year was met in the taxpayer’s case.  However, the Commissioner asserted that, under the language of the employment contract, the drivers were not assigned to the taxpayer on a permanent basis, and therefore, the services were taxable. As support for his position, the Commissioner observed that the language in the contract did not specify that the drivers were assigned on a permanent basis, and that the contract allowed the taxpayer to adjust the number of drivers or request the removal of any driver.

The Board noted that there was nothing in the statute (or related case law) requiring the contract to specify a certain or static number of employees for the employment to be considered permanent or for the contract to specify that the employment arrangement was to be considered permanent. Instead, case law called for an examination the facts and circumstances to determine that the employment was intended to be “indefinite” as opposed to seasonal or to meet short-term work requirements. Here the Board relied heavily on testimony of employees of the taxpayer and the transportation company indicating that a permanent relationship was intended, as demonstrated by the company’s long term relationships with the same drivers over many years. Thus, despite the contract not specifying permanency, the Board concluded that the taxpayer met this requirement, and the employment services were not taxable. For more information on A.M. Castle & Company, et al. v. Testa, Ohio BTA (Case No. 2013-5851, March 9, 2015), please contact Dave Perry at (513) 763-2402.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.