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August 7, 2018

Ohio's manufacturing exemption and the treatment of employment services are the subject of recent court decisions

Ohio taxpayers should be aware of two recently decided sales and use tax cases. In East Mfg. Corp.,1 the Supreme Court of Ohio (Court) considered the application of aspects of Ohio's manufacturing exemption. In Career Staffing, LLC,2 the Ohio Board of Tax Appeals (BTA) addressed the application of an exemption from otherwise taxable employment services. These rulings are discussed below.

Manufacturing exemption — East Mfg. Corp. v. Testa

Ohio Rev. Code Section 5739.02(B)(42)(g) provides an exemption for things primarily used in a manufacturing operation. However, Ohio Rev. Code Section 5739.011(C)(5) provides that property used for ventilation, dust or gas collection, humidity or temperature regulation, or similar environmental control is not entitled to exemption unless it totally regulates the environment in a special and limited area of the manufacturing facility where that regulation is essential for production to occur.

The BTA upheld the assessment of additional sales tax by the Ohio Department of Taxation (Department) with respect to the taxpayer's purchases of natural gas. The taxpayer noted that the gas was purchased to maintain a temperature of at least 50 degrees Fahrenheit in the plant in order for the manufacturing process, in this case certain welding operations, to occur. The taxpayer noted that welding at such temperatures was necessary to prevent condensation from infecting the welds and steadied the welders' hands. The Ohio Department of Taxation (Department) disputed this testimony arguing that as long as the temperature of the metal matched the ambient air temperature such condensation would not occur. Accordingly, there was no particular ambient temperature requirement. The Department also noted that the natural gas at issue regulated the environment in the taxpayer's entire plant and not in a special and limited area.

In reviewing the applicability of the exemption, the Court reviewed the Department's rule set down in Ohio Admin. Code 5703-9-21(D)(6), which provided that the only exception to taxing environmental regulation equipment, was equipment that regulated a special and limited area of the facility, "such as a clean room or paint booth," where such regulation was essential for manufacturing to occur. The Court noted that the statute reflected a legislative decision to allow exemption in very limited circumstances and that the taxpayer was attempting to apply that exemption more expansively. Because the natural gas regulated the taxpayer's entire facility, the Court upheld the BTA's conclusion that the taxpayer's "special and limited area" arguments were incorrect. The Court noted that holding otherwise would result in the exception "swallowing" the general rule.

Employment services — Career Staffing, LLC. v. Testa

Ohio generally imposes sales tax on employment services, which are defined as providing or supplying personnel, on a temporary or long-term basis, to perform work under the supervision of another, when the personnel supplied are paid by the employment service provider.3 Ohio law (Ohio Rev. Code Section 5739.01(JJ)(3)) provides for an exemption from the general rule of taxability in situations where personnel are supplied pursuant to a contract of at least one year in duration when the contract specifies that the personnel supplied are assigned to the customer on a permanent basis — the (JJ)(3) exemption.

This case involved the appeal of the Department's assessment of additional sales tax upon a provider of employment services. The taxpayer argued that its services were exempt from taxation by reason of the (JJ)(3) exemption. The Department denied the exemption on the ground that the employees provided to the two customers at issue fluctuated constantly and that the contract did not specify the number of employees to be provided. The taxpayer appealed the assessment to the BTA.

The BTA noted that the (JJ)(3) exemption had two requirements: (1) there must be a contract of at least one year; and (2) the assignment of employees must be on a permanent basis. The BTA also noted that the Court had recently addressed the "permanent assignment" aspect of the (JJ)(3) exemption and rejected an analysis that focused on whether the contract specifies permanent assignment in favor of a broader facts-and-circumstances test. Based on its prior decisions in H.R. Options, Inc. v. Zaino, 100 Ohio St.3d 373, 2004-Ohio-1 and Accel, Inc. v. Testa, Slip Opinion No. 2017-Ohio-8798, the BTA noted that there is permanent assignment where the contract does not specify an ending date (i.e., personnel are supplied on an indefinite basis) and the employees provided are not substitutes for current employees or needed to meet seasonal or short-term workloads.

In applying these cases to the taxpayer, the BTA concluded that one of the contracts at issue met the requirements for the (JJ)(3) exemption. The BTA received testimony from the plant manager of the taxpayer's customer, a cold storage facility, who said that the positions at issue were physically demanding as they required working in cold and wet conditions. This contributed to the fluctuation in the number of employees. The plant manager testified that the employees supplied by the taxpayer were not substitutes for existing employees or needed to fulfill seasonal needs. The plant manager also noted that the taxpayer, due to these difficult conditions, had never been able to fully satisfy its staffing needs. The BTA found this testimony credible and concluded that the taxpayer had met its burden in establishing entitlement to the (JJ)(3) exemption. The BTA did deny application of the exemption to the second contract at issue as there was little evidence presented to it by the taxpayer.


The ruling in East Mfg. indicates that Ohio courts will continue to take a narrow view of the "special and limited area" exclusion to the general rule of taxation of environmental regulation property. While the exception may not be limited to a clean room or paint booth, it will be necessary for a taxpayer to show that the area subject to regulation must be segregated from other areas of the facility and that the regulation is necessary for production to occur.

The Career Staffing decision is another in a line of taxpayer victories on the permanent assignment issue. The BTA and the Court have been rejecting an interpretation that the exemption requires a static number of employees be provided pursuant to the agreement. In audits, the Department has typically asserted taxability over most temporary labor arrangements. Companies should carefully review their purchases of such services to determine if refunds may be available. Ohio has a four-year statute of limitations on refunds.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
Bill Nolan(330) 255-5204;
Nick Longo(216) 583-8386;
Chris Futscher(513) 612-1481;


1 East Mfg. Corp. v. Testa, Slip Op. 2018-Ohio-2293 (Ohio S.Ct. July 26, 2018).

2 Career Staffing, LLC. v. Testa, BTA No. 2016-2617 (Ohio BTA Aug. 2, 2018).

3 Ohio Rev. Code Section 5739.01(B)(3)(k), (JJ).


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