At a Glance…
Effective October 1, 2021, employment services and employment placement services are no longer subject to sales and use tax in Ohio. However, refund opportunities may still be available for taxpayers who utilized employment services in prior periods where the services purchased qualify for exclusion.
Prior to this month, Ohio imposed sales and use tax on a taxpayer’s purchases of “employment services” from a service provider.1 Under former Ohio R.C. 5739.01(JJ), “employment services” were defined 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 receive their compensation from the provider of the service or a third-party that provided the personnel. However, while the tax was in effect, there were multiple exceptions to taxable employment services that taxpayers should be aware of, including permanent contracts of at least one year, and acting as a contractor or subcontractor not under the direct control of the taxpayer.
Permanent contract exception
Supplying personnel to a purchaser pursuant to a contract of at least one year that specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis is not taxable as an employment service.2 Here, courts have looked beyond the contractual language to consider the facts and circumstances surrounding the contract.3 For example, a contract’s lack of specified end date or specific contractual terms indicating how an employee can be removed can be indicative of a permanent contract.4 Another factor to consider is whether the taxpayer, rather than the service provider, has the right to cancel assignment of employees under the contract. Other provisions allowing the taxpayer to reduce the hours of the employees if there is a decrease in demand or restricting the service provider’s ability to reassign workers while under the current contract may also be suggestive of a permanent contract.
Direct control of provider
Additionally, the supplying of personnel is nontaxable if the personnel performing the work are either acting as a subcontractor or otherwise under the direct control of the service provider, rather than the purchaser.5 To show a lack of control, taxpayers must demonstrate that they do not supervise employees on a day-to-day basis; rather, it is the service provider who manages the employees by performing tasks such as prescreening, hiring, training, making job assignments, monitoring productivity of work, reviewing safety of operations, communicating new procedures to workers, maintaining attendance policies, conducting performance reviews, paying employees, or maintaining on site dedicated office space at its own cost.6 Furthermore, demonstrating significant delineation between a taxpayer’s oversight of the service provider’s employees and its own employees would further strengthen a taxpayer’s lack of control argument.
The repeal of the employment services tax provides a significant benefit to Ohio taxpayers because Ohio, unlike many other states, imposed its tax on the full charge made to the customer, including any reimbursement of the wages paid to the supplied personnel, not just the service fee. Companies that paid tax on employment services in Ohio should review all open periods under Ohio’s four-year statute of limitations for refunds to determine whether employment services purchased in Ohio might fall under either exception described above.