On December 6, 2017, the Ohio Supreme Court (Court) issued its decision in Accel, Inc. v. Testa,¹ and held that a taxpayer's purchases of temporary labor from an employment staffing agency are exempt from Ohio's sales and use tax when the employees are assigned on a permanent basis. In determining whether an employee is assigned on a permanent basis, the Court will review both the contract and the facts and circumstances of the employee's assignment. The Court's decision brings some clarity around what otherwise taxable employment services arrangements may qualify for exemption from the statutorily defined term. Moreover, the ruling might provide taxpayers with a potential refund opportunity if they have procured temporary employment services.

On an unrelated point, the Court also held that the assembly of the gift boxes constituted "manufacturing," entitling the taxpayer to the Ohio manufacturing exemption on certain purchases used in creating the gift boxes.

Background

The taxpayer is a contract hand-assembly manufacturer that combines various toiletry items, such as soaps and lotions, into gift sets for its customers to resell. The taxpayer procured temporary labor from two employment staffing agencies: Resource Staffing and Manpower. The taxpayer had entered into contracts with these staffing agencies and claimed exemption from Ohio sales/use tax under Ohio Rev. Code Section 5739.01(JJ)(3), which exempts otherwise taxable employment services provided under certain long-term contracts. The Ohio Department of Taxation (Department) denied application of the exemption and assessed these purchases. The Ohio Board of Tax Appeals (BTA) reversed the assessment with regard to the Resource Staffing transactions, but affirmed the assessment of the Manpower transactions. The Department appealed the BTA's decision to the Court.

Employment services — Ohio sales/use tax treatment

Ohio Rev. Code Section 5739.01(B)(3)(k) imposes sales/use tax on employment services. Ohio Rev. Code Section 5739.01(JJ) defines "employment services" as "providing or supplying personnel, on a temporary or long-term basis, to perform work or labor under the supervision or control of another, when the personnel so provided or supplied receive their wages, salary or other compensation from the provider or supplier of the employment." Ohio Rev. Code Section 5739.01(JJ) provides a number of exemptions from the definition of otherwise taxable employment services. The exemption relied upon by the taxpayer in this matter, Ohio Rev. Code Section 5739.01(JJ)(3), exempts services when personnel are supplied under "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."

Court's analysis

The Court affirmed the BTA's reversal of the assessment of the Resource Staffing transactions. In so doing, the Court addressed a number points raised by the Department. First, the Court said that the fact that the contract did not provide an express statement that personnel were "permanently assigned" was not controlling. Instead, citing its prior decisions in this area, held that the presence or absence of "magic words" in the agreement is not controlling. Instead, the Court will look to see if the contract assigns the employee for an indefinite period and that the employee not be provided as a substitute for a current employee on leave or to meet seasonal work-load needs. This requires both the contract and the facts and circumstances of the employee's assignment to be reviewed.

With regard to the Resource Staffing transactions, the Court rejected the Department's argument that the number of employees fluctuated on a seasonal basis. The Court cited testimony provided at the BTA by the CFOs of both the taxpayer and Resource Staffing that the fluctuations in headcount were based on the fluctuating business needs of the taxpayer and were not seasonal. The Court also noted that in periods when lesser amounts of work was needed, Resource Staffing would not reassign personnel to other clients but would reduce the hours worked by the employee. The Court affirmed the assessment on the Manpower transaction as there was insufficient evidence presented to the BTA that would support the taxpayer's claim for exemption.

On an unrelated point, the Court also held that the assembly of the gift boxes constituted "manufacturing." The Court concluded that the combination of the toiletry items into the gift set resulted in a new item being created. As such, the taxpayer was entitled to the Ohio manufacturing exemption on certain purchases used in creating the gift boxes.

Implications

The Court's decision makes clear that a static number of employees is not required to be entitled to the (JJ)(3) exemption. That question had been addressed by the BTA in A.M. Castle and Co. v. Testa, Ohio BTA Case No. 2013-5851 (March 9, 2015) (see Tax Alert 2015-590)), but that decision had not reached the Court. What is required for the (JJ)(3) exemption is that employees be indefinitely assigned by the staffing agency to the customer and that the employee not be provided as a substitute for an employee on leave or for seasonal demands. Whether any fluctuations in the number of personnel provided is seasonal (taxable) versus changing customer business conditions (exempt) will require a careful review of the facts and circumstances of staffing arrangements to determine if refund opportunities exist. Ohio's statute of limitations for claiming refunds is four years and generally runs on a monthly basis.

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ENDNOTES

¹ Accel, Inc. v. Testa, Slip Opinion No. 2017-Ohio 8798 (Ohio S. Ct. Dec. 6, 2017).