15 July 2016 Ohio board of tax appeals concludes staffing arrangement not a taxable employment service The Ohio Board of Tax Appeals (BTA) has ruled that the outsourcing of a portion of a manufacturer's operations to a third party did not constitute a taxable employment service for Ohio sales tax purposes.1 Kal Kan Foods, Inc. (Kal Kan) operates a pet food manufacturing facility in Ohio. Kal Kan contracted with Seaton Corporation (Seaton) to provide an "on-site management operation" for certain "lower skilled positions". These positions were primarily responsible for loading tubs into tub feeders and palletizing finished product. Within this portion of Kal Kan's production process, Seaton personnel made all job assignments, performed scheduling, maintained an attendance policy and monitored production activity. Kal Kan personnel generally had no work-related interaction with Seaton personnel on the production floor other than responding to safety violations that required immediate attention to avoid worker injury or damage to the product. Otherwise, Kal Kan personnel reported any problems to Seaton supervisors who would take further action. If Seaton workers observed problems, they reported to Seaton supervisors. Seaton supervisors had their own on-site dedicated office and provided all manufacturing process and safety training to Seaton workers. Seaton was responsible for payment of the workers. The Ohio Department of Taxation (Department) determined that the parties entered into a contract for the provision of taxable employment services. Ohio Rev. Code Section 5739.01(B)(3)(k) imposes sales tax on the provision of employment services, which are defined as providing or supplying personnel on a temporary or long-term basis to perform work under the supervision or control of another where the personnel provided received compensation from the service provider.2 One exception to the definition of a taxable employment service is where the service does not include acting "as a contractor or subcontractor, where the personnel performing the work are not under the direct control of the purchaser."3 The Department allows this exemption where the true object of the customer is the accomplishment of a specific task and not the supply of labor.4 This is often seen applied where consulting or advisory services are being performed. The taxpayer argued that this exemption applied but the Department rejected this argument under audit and in issuing its Final Determination. The BTA reversed the Department's determination concluding that the on-site management services arrangement met the contractor/subcontractor exclusion set forth in Ohio Rev. Code Section 5739.01(JJ)(1). In so holding, the BTA relied on the facts discussed above supporting a conclusion that Kal Kan did not exercise direction or control over the Seaton personnel. The BTA also disagreed with the Department's argument that because Kal Kan had control over the overall manufacturing process that they had effective control over Seaton's employees. It also rejected the Department's argument that Kal Kan had to expressly cede control over the Seaton personnel. The BTA concluded that Kal Kan had "given over a small portion of its authority to Seaton, but only for the supervision and control of the Seaton workers". Accordingly, this management model caused the arrangement to fall outside a taxable employment service. It is unknown at this time whether the Department will appeal this decision to the Ohio Supreme Court. The Department has historically vigorously contested adverse rulings in this area. Taxpayers that have similar arrangements should review their facts and circumstances to determine if they should contest Department assertions of taxability under audit and/or whether they may have a basis for a refund claim. Ohio has a four-year statute of limitations on refunds.
4 Ohio Department of Taxation, Information Release ST 1993-08- — Employment Service (issued September 1993, revised February 2007). Document ID: 2016-1234 | |||||
