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Tax on Temporary Labor in Ohio; A Not So Temporary Headache!

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For various reasons, many businesses use employment service companies to fill their labor needs. Employment service companies provide skilled and unskilled employees to meet the needs of these businesses; be it on a temporary or permanent basis. Perhaps the need is to cover employees who are on leave. Others may have the need for increased headcount resulting from business structural changes, the economy relative to their industry grows or they have grown through acquisition. Given the significant risks associated with the hiring process, employment service companies fill an important need.

Some states, like Ohio subject employment services to sales tax. While tangible property is always subject to sales tax; unless a proper exemption applies, services are exempt from sales tax unless the law specifically makes them taxable. The law in Ohio specifies employment services are subject to sales tax. However the law in Ohio is poorly worded; resulting in much controversy over what employment services are in Ohio. The following are the key provisions of employment services which make them taxable in Ohio.

1) Employees Are Provided on a Temporary or Long-Term Basis:

This provision may seem a bit confusing…you can only provide employment services on a temporary or long-term basis. Essentially this is meant to cover most if not all situations where employees are provided by an employment services company.

2) Under the Supervision or Control of Another:

This is a critical part of the rule; as the person provided by the employment services company must be under the supervision or control of the consumer of the services, or an agent of the consumer. The person provided must act as if they are an employee of the consumer and not of the employment services company.

This also differentiates a service provider providing taxable employment services and a contractor. If the contract provides for the completion of a specific project, where the accomplishment of a specific task is required, and the person provided is under the control of the service provider, the service provider is a contractor providing exempt services.

3) Compensation Is Paid by the Provider of the Service:

This is important as it separates the person provided to the consumer from being an employee of that consumer. The employment services company compensates the person provided, is responsible for all employment taxes related to the person, and any benefits provided to that person; while the consumer of the services provided by that person pays a negotiated fee to the employment services company. The employment services company is considered the “employer of record” with respect to that person.

4) Employees Are NOT Provided to the Consumer Under a Contract One (1) Year or Greater in Length - AND Assigned on a Permanent Basis:

By far this provision has caused the greatest amount of controversy and litigation relative to employment services in Ohio. It is related to an amendment to the law shortly after employment services were made subject to sales tax in Ohio.

If the employment services company provides the person to the consumer under a contract that is at least one (1) year in length AND the person is assigned to the consumer on a permanent basis, then those services are not subject to sales tax in Ohio.

By far, the easiest part of this provision to determine is the contract length. If the contract by its terms has a duration of at least one year, the contract meets the first part of the exemption requirement. As we will see below however, contract language alone is not sufficient to render the entire transaction exempt from sales tax.

The second requirement; the person is assigned on a permanent basis is more challenging. When one reads the phrase “assigned on a permanent basis” it’s easy to come away with the impression that person must be assigned to that consumer indefinitely.

Case law has held permanency in this context means the person provided is assigned to the consumer for an indefinite period i.e. the length of the contract. The person provided also is NOT assigned as a substitute for an employee who is on leave, or is assigned to provide increased bandwidth on a seasonal basis.

5) Facts and Circumstances Test:

The facts and circumstances test further complicates the analysis. This test looks at the actual assignment itself to see if the person provided is assigned on a permanent basis or if the assignment is seasonal or temporary; notwithstanding any language in the contract which indicates the person is assigned permanently.

As such, even though the contract itself contains the “magic words” of permanency, if the person provided is assigned to temporary or seasonal workloads, it will likely be determined these services are taxable employment services. Likewise, even though the contract may not contain language providing permanency, if the person is assigned to the consumer to handle increased workload as a result of a growth in the consumers business, has contact with the consumers customers or in any way represents the consumer to the public, it will likely be determined these services are exempt from sales tax.

6) Exemption Certificates:

The determination that a service provider is providing taxable or exempt employment services is most challenging. A review of the contracts, as well as an analysis of what the person provided is doing for the consumer must be done in order to determine the taxability of these services. However, while that analysis may lead to a proper conclusion that the services are exempt from sales tax, it’s all for naught if there are no properly completed exemption certificates are on file to document the exemption. Exemptions are a matter of legislative grace, and without exemption certificates documenting the exemption claimed, otherwise exempt employment services become taxable.

If you think you have an issue with employment services in Ohio, give me a shout. Feel free to submit a question or comment below - or go to my Firm Profile page to submit a question or consultation request directly to me. This is a very difficult area of sales tax law in Ohio, and a second pair of eyes can help avoid surprise assessments.

Guy J. Nevers CPA MT is a member of the AICPA, Ohio Society of CPA's and a Sales Tax Affiliate member of the Institute for Professionals in Taxation.

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