Ohio Rules that Staffing Services Company Did Not Provide Taxable Employment Services

While the taxability of employment services varies among the states, each state’s factors and criteria for whether a service qualifies as an employment service may also vary.

By Jess Johannesen, SALT manager

On July 13, 2016, the Ohio Board of Tax Appeals issued a decision addressing whether a staffing services company was providing employment services subject to Ohio sales and use tax. [1] In this case, a pet food manufacturer contracted with a staffing services provider to assist in the production operations. These workers were provided for lower skilled positions to primarily handle manual tasks. While the taxability of employment services varies among the states, Ohio taxes employment services that meet three criteria: (i) the staffing services provider must supply personnel on a temporary or long-term basis, (ii) the personnel must perform work or labor under the supervision or control of another and (iii) the personnel must be paid by the service provider and not the customer. [2]

The staffing services provider contended that it did not provide an “employment service” as defined in Ohio statutes because its workers did not perform labor under the supervision or control of another. Instead, the provider argued that it operated an “on-site management operation” which hired, trained and managed the workers in question. The provider created the job assignments, maintained an attendance policy, monitored the productivity of the work, determined whether the workers were operating safely and communicated any new procedures to the workers. The specific language in the contract supported an on-site management model, as opposed to a traditional employment service. The contract language supported the notion that neither the manufacturer nor the staffing services provider could “assign, direct, or oversee” the activities of the other party’s workforce. It provided that the services company would have on-site dedicated office space and would provide the office supplies necessary to provide the services, at its own cost. In addition, the staffing company was contractually responsible for shift management, worker orientation, performance management, coaching and counseling, processing timecards/payroll and enforcing workplace rules.

The Commissioner argued that because the manufacturer controlled the entire manufacturing process, it inevitably controlled the supplied staff. The Board rejected this assertion and concluded that although the manufacturer controlled its overall manufacturing process, it ceded authority to the staffing services provider to supervise and control its workers. Based on all of these factors, the Board ultimately concluded that the contract between the parties cannot be classified as an “employment services” agreement. Therefore, the service rendered was not subject to sales or use tax.

While the taxability of employment services varies among the states, each state’s factors and criteria for whether a service qualifies as an employment service may also vary. If your company is either providing or receiving temporary labor, do you know whether or not such services are subject to sales tax in your state? Aprio has experience consulting with companies regarding the taxability of products or services being sold and can assist you in ensuring that you remain compliant with your sales and use tax obligations.

Contact Jess Johannesen, SALT manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the August 2016 SALT Newsletter. To view the newsletter, click here.

[1] Seaton Corp. v. Testa, Tax Commissioner of Ohio, 2015-224, 2015-743, 07/13/2016. This was an appeal of the Tax Commissioner’s determination that the services were taxable employment services.

[2] Ohio Rev. Code Ann. §5739.01(JJ).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.