Ohio Supreme Court clarifies the support needed to claim the permanent assignment exception for taxable employment services
In Bay Mechanical & Elec. Corp v. Testa, the Ohio Supreme Court recently denied an Ohio sales tax exception based upon the taxpayer’s failure to provide sufficient evidence to support the permanent assignment of the personnel at issue. The Court integrated prior decisions in clarifying the required support for claiming the exception.
As an exception or exemption to taxation, the permanent assignment exception to taxable employment service characterization contained in R.C. 5739.01(JJ)(3) must be strictly construed with the taxpayer bearing the burden to prove it is entitled to the exception. The Court reiterated that assignment on a permanent basis is present when “an employee is ‘assign[end] to a position for an indefinite period’, which in turn means that (1) the assignment has no specified ending date and (2) the employee is not being provided either as a substitute for a current employee who is on leave or to meet seasonal or short-term workload conditions“. Bay Mechanical, at ¶ 18 citing H.R. Options, Inc. v. Zaino, 100 Ohio St.3d 373, 2004-Ohio-1. Historically, taxpayers established the permanent assignment exception based heavily, if not solely, upon language in the employment service contract. However, in Bay Mechanical, the Court downplayed the importance of specific contractual language stating that it was simply “one element that, along with the facts and circumstances of the individual assignments, established whether the provider was truly ‘supplying personnel’ in an exempt manner.” (underlined added). Yet, this “one element” seems critical in light of the statutory language that the “contract…specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis“.
While is it always recommended to include “permanent assignment” language in the contract when claiming the exception, the Court’s decision supports that such language may not be required if the personnel were in fact permanently assigned and the contract language did not conflict with the exception. Therefore, regardless of whether explicit contractual language exists, a permanent assignment of personnel should be exempt from Ohio sales/use tax as long as:
(a) The contract has at least a one year term and language consistent with permanent assignment, without the need to use specific wording (and without containing terms inconsistent with permanent assignment); and
(b) The personnel are actually assigned indefinitely, rather than serving as seasonal workers, substitutes for regular employees on leave, or labor to meet a short-term workload.
Bay Mechanical failed to satisfy (b) above by refusing to produce evidence requested by the Tax Commissioner concerning the facts and circumstances of the particular employees’ assignment – mainly, the employment service invoices.
Please feel free to contact us if you need help determining whether a particular situation is entitled to the permanent assignment exception to Ohio sales tax.