United States

Ohio: Gift-Basket Company Qualified For Assembling Sales and Use Tax Exemption; Labor Charges Were Non-Taxable

Dec 18, 2017
From KPMG TaxWatch

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The Ohio Supreme Court recently addressed whether materials used in developing gift baskets were exempt from sales and use tax and whether a taxpayer’s labor purchases were taxable. The taxpayer assembled gift sets for major retailers; the gift sets consisted primarily of health and beauty products, such as shampoos, lotions, soaps, 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 (Board). The Board ruled that the taxpayer was engaged in “assembling” and therefore qualified for the sales and use tax exemption for assembling. The Board also concluded that certain of the labor services were nontaxable. The Commissioner subsequently appealed.

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, and packaging is specifically excluded from the definition of a manufacturing operation and of assembly or assembling. The taxpayer argued that its operations constituted manufacturing or assembly, while the Commissioner argued the taxpayer was engaged in packaging. The Board had held that the taxpayer was not engaged in “packaging.” However, the court disagreed with that finding, noting that the taxpayer could be engaged in both packaging and assembling. In other words, a finding that the taxpayer was engaged in packaging did not preclude a finding that it was also engaged in assembly when it produced gift sets. After holding that the taxpayer was engaged in assembling and was entitled to the assembly sales tax exemption, the court declined to address whether the taxpayer was engaged in manufacturing.

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. There were two companies from which the taxpayer had obtained employment services. The Board found that one was providing employees on a “permanent basis.” While the Commissioner pointed to the high turnover rate of employees assigned to the taxpayer, the Board had 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, but that there was insufficient evidence in the record to conclude on the second company. On appeal, the Ohio Supreme Court upheld the Board’s determination, notably rejecting the Commissioner’s argument that the employment contact had to specifically reference “permanent’ employees.” In determining whether employees are permanently assigned, a facts and circumstance test has historically applied. 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.