Ohio – Supreme Court Upholds Use Tax Assessment on Employee Service Contracts

SALT Report 2005 – The Ohio Supreme Court upheld a use tax assessment on a Taxpayer’s purchase of employment services because the Taxpayer failed to provide the appropriate evidence. The Taxpayer in this case operates a construction contracting business in Ohio. During the course of business the Taxpayer purchased employment services from two separate entities and claimed the Ohio exemption for permanent assignment employees under R.C. 5739.01(JJ)(3).

During a subsequent audit, the agent rejected the Taxpayer’s use of the exemption because the Taxpayer failed to provide “facts and circumstances” evidence in regards to individual employee assignments.  Upon review of the employee contracts, the agent noted that several contracts did not qualify for the exemption because they referred to “nonpermanent assignments.”  Further, the agent noted that although the remaining contracts in dispute referred to “indefinite or permanent assignment” of the employees, they did not qualify for the exemption because they failed to specify which employees or positions the contracts were referring to.

In challenging the auditor’s decision, the Taxpayer could not provide any employment service invoices that would verify an employee’s assignment or position.  Instead, the Taxpayer relied on the testimony of its controller and on alternative exhibits relating to individual assignments.   Further, the Taxpayer claimed that the contract terms “permanent” and “indefinite” were sufficient to entitle it to use the exemption.  However, Ohio law requires that both the employment services contract and the facts and circumstances of the assignment be examined in order to determine whether a particular employee assignment is actually indefinite or permanent.

In their decision, the Supreme Court stated that it was important to consider both the terms of the employment contracts, as well as the facts and circumstances surrounding each transaction. Further, the Court noted that it was important that the contract be for a term of at least one year and that it establish that the employee’s “assignment is indefinite and not to replace existing employees or to fill a temporary or seasonal need.”

Therefore, because the Taxpayer refused to provide the requested documentation during the audit and at the subsequent hearing, the Court ruled that the auditor “did not act unreasonably, arbitrarily, or unconscionably in disregarding the Taxpayer’s exhibits” and upheld the use tax assessment.

For Further Information:

Ohio Supreme Court – Slip Opinion Number 2012-Ohio-4312


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