United States

Ohio: Gift-Basket Company Qualified For Assembling Sales and Use Tax Exemption

Jul 27, 2015
From KPMG TaxWatch

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The Ohio Board of Tax Appeals recently addressed whether materials used in developing gift baskets were exempt from sales and use tax. The taxpayer assembled gift sets for major retailers; the gift sets consisted primarily of health and beauty products, such as shampoos, lotions, and shower gels, together with a basket. To assist in its operations, the taxpayer contracted with two employee-leasing companies to provide labor. Following an audit, the Tax Commissioner assessed use tax on packaging materials used in the taxpayer’s operations and its purchased labor. The taxpayer appealed the assessment to the Board of Tax Appeals.

Under Ohio law, a sales and use tax exemption applies to purchases that are incorporated into tangible personal property produced for sale by manufacturing, assembling, processing, or refining. In contrast, there is no exemption for purchases of items used in packaging operations. The taxpayer argued that its operations constituted manufacturing or assembly, while the Commissioner argued that the taxpayer was engaged in packaging. The Board first held that the taxpayer did more than merely package products. Rather, it transformed individual products like shampoos and lotions into a distinct new product – a gift set specifically assembled in a reusable basket. The Board found it significant that the taxpayer’s process included a design phase where it worked with clients to brainstorm how the gift set will be presented in an aesthetic form. The Board next addressed whether the taxpayer’s operations constituted “manufacturing” or “assembling.”  The Board agreed with the Commissioner that the taxpayer was not engaged in manufacturing as commonly understood for sales and use tax purposes. However, it determined that the taxpayer was engaged in assembling, as it attached or fitted “together parts to form a product.”  As such, the Board concluded that the taxpayer’s purchases of materials were exempt.

Next, the taxability of the taxpayer’s labor purchases was addressed. Under Ohio law, purchases of “employment services” are generally taxable. There is an exception for the purchase of personnel pursuant to a contract of at least one year when employees are assigned on a permanent basis. With regard to the first company, the board noted at the outset that the parties did not dispute that the contract was for at least a year. At issue was whether the employees were hired on a “permanent basis.” While the Commissioner pointed to the high turnover rate of employees assigned to the taxpayer, the board determined that high turnover does not necessarily defeat a claim that the employment services are exempt. In addition, during slower periods, the taxpayer adjusted its labor needs by decreasing each employees’ hours, rather than by accepting a smaller number of assigned employees. Ultimately the Board concluded that personnel hired from the first company were hired on a permanent basis. With respect to the second company, there was insufficient evidence in the record to conclude that the Commissioner erred in determining that the employment services were taxable. For more information regarding Accel v. Commissioner, 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.