Ohio imposes sales tax on employment services and temporary labor. An exclusion is available when the contract between the service provider and purchaser provides that both:
- The term of the contract is at least one year.
- Each individual providing services under the contract is assigned to the customer on a permanent basis.
Historically, the Ohio Department of Taxation (OH DOT) has taken an aggressive approach to meet the exclusion: Not only did a taxpayer’s contract need to meet the requirements noted above, any deviation in the number of employees provided could deem the entire contract to not meet the permanent-basis test. In a recent development, the OH DOT withdrew its appeal to the Ohio Supreme Court in A.M. Castle v. Testa, which means the Ohio Board of Tax Appeals (OH BTA) decision stands.
A.M. Castle (Castle) is a distribution company that gets truck drivers from D.C. Transportation (D.C.) to drive trucks owned and leased by Castle. Castle’s contract with D.C. stated that D.C. would provide a sufficient number of drivers on a required basis. At the OH BTA, Castle successfully demonstrated that it outsourced the transportation function within the company and that the employees provided to Castle were provided on a full-time basis. Castle argued that while some drivers left and were replaced because they were fired, resigned, or retired did not mean that the drivers were not assigned on a permanent basis. The OH DOT took the position that because the number of employees Castle used was not static, Castle could not maintain the position that the employees provided to them were maintained on a permanent basis.
The OH BTA did not look for the specific wording the OH DOT normally requires to be in the contract and instead applied facts and circumstances indicating that at the time parties enter into a contract, future business requirements are not known. The OH BTA concluded that the truck drivers were assigned to Castle on a permanent basis and were full-time employees who work only for Castle; therefore, they were not considered temporary, seasonal, short term, or substitute in nature. As a result, the exclusion from sales tax for employment services applies.
The tax commissioner appealed to the Ohio Supreme Court. With oral arguments set for early March, the OH DOT withdrew its appeal on Feb. 11, 2016. While there is another case pending at the Ohio Supreme Court with similar merits, the Castle case has provided potential opportunity to revisit this issue and potentially file protective refund claims.