In another decision on the sales and use tax treatment of employment services (Seaton Corp. v. Testa),¹ the Ohio Supreme Court (Court) held that a company's staffing services are exempt from Ohio's sales and use tax under Ohio Rev. Code Section 5739.01(JJ)(1), which exempts services when personnel "performing the work are not under the direct control of the purchaser."

Under a contract, the taxpayer, Seaton Corp., agreed to "furnish, manage and supervise" supplemental staffing to Kal Kan, a pet food manufacturer with a plant in Ohio. While Kal Kan controlled the entire manufacturing process, Seaton provided personnel to handle certain manual tasks such as loading tubs into feeders and palletizing product. For this function, Seaton provided on-site management operations, including hiring, training and supervising the workers being provided. Under the contract, Seaton maintained the exclusive right to control all of its workers, monitored productivity and safety, maintained attendance policies, and maintained an on-site office. Personnel under the control of Seaton had no interaction with Kal Kan personnel unless a safety violation was observed.

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) exempts certain employment services from Ohio's sales and use tax. The exemption on which the taxpayer relied, Ohio Rev. Code Section 5739.01(JJ)(1), exempts services when personnel "performing the work are not under the direct control of the purchaser." The Ohio Department of Taxation (Department) assessed these transactions, arguing that Kal Kan asserted supervision or control over the personnel provided by Seaton. The Ohio Board of Tax Appeals (BTA) reversed the assessment and the Department appealed.

In affirming the BTA's reversal of the assessment, the Court focused on the scope of the "supervision or control" requirement of the statute. The Department had argued that Kal Kan's control over the manufacturing process equated to control over the Seaton personnel. The Court concluded that the "supervision or control" requirement was specific to the work performed by the Seaton personnel. In so doing, the Court distinguished one of its prior decisions, Crew 4 You, Inc. v. Wilkins.² In that case, a company provided personnel to broadcasters televising certain events. The broadcasters decided what needed to be done at the events and "really called every shot" during the broadcasts, including providing guidelines on equipment needs and schedules for preproduction meetings, rehearsals and event start times.

In the instant case, the Court observed that Seaton determined the number of workers needed for any shift, scheduled the workers, made job assignments, and monitored production. Seaton also was obligated to provide comprehensive on-site management of the workers, including pre-employment screening, orientation and training, performance management, and other administrative functions. Since Seaton maintained direction and control over the personnel provided, the Ohio Rev. Code Section 5739.01(JJ)(1) exemption applied.

Implications

The Court's decision is another in a string of Department losses in sales and use tax cases addressing the taxability of employment services. This ruling, however, differs from earlier ones in that it was the "direction or control" test that was at issue. The Court's holding in this case illustrates that certain outsourced functions within a larger operation may nonetheless qualify for the (JJ)(1) exemption. Taxpayers should carefully analyze their staffing arrangements for taxability and 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 Seaton Corp. v. Testa, Slip Opinion No. 2018-Ohio-4911.

² Crew 4 You, Inc. v. Wilkins, 105 Ohio St.3d 356, 2005-Ohio-2167.