Ohio Sales and Use Tax: Taxable Services

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January 01, 2014


A. Recreation and Sports Club Service.

Findlay Country Club. v. Tracy, Ohio TA Case No. 94-H-1307 (Feb. 23, 1996). A onetime fee paid by members of a country club was not taxable. The statute contemplates taxing only on-going, continuing obligations of a member paid to maintain a membership, not a one-time charge for a physical improvement. Furthermore, the Board stated: “the assessment was unarguably imposed not for membership but for the improvement.”

Akron Mgt. Corp v. Zaino (2002), 94 Ohio St. 3d 101. R.C. § 5739.01(NN) defines a taxable recreation and sports club service as “all transactions by which a membership is granted, maintained, or renewed, including initiation fees, membership dues, renewal fees, monthly minimum fees, and other similar fees and dues, by a recreation and sports club, which entitles the member to use the facilities of the organization.” The Court held that since the payments at issue (loans and equity contributions) were required as a condition to membership, and thereby served the same purpose as initiation fees, they were taxable.

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The Court factually distinguished the Board’s earlier decision in Findlay Country Club v. Tracy BTA Case No. 94-H-1307 (February 23, 1997), yet did not state whether it was correctly decided. Presumably, if the Findlay facts were before the Court, it would hold that such payments are taxable if they were required to maintain the membership, serving the same purpose as renewal fees.

B. Employment Services.

Taxable employment services involve providing personnel, on a temporary or long-term basis, to perform work or labor under the supervision or control of another, when such personnel receive their wages, salary or other compensation from the service provider (or, effective April 1, 2007, from a third party that provided the personnel to the provider).

Exceptions include:

  • the provision of medical and health care services;
  • arrangements with contractors or subcontractors where the service personnel are not under the direct control of the purchaser;
  • supplying personnel to a purchaser pursuant to a contract of at least one year where the contract specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis;
  • transactions between members of an affiliated group as defined in R.C. 5739.01(B)(3)(e); and
  • transactions where the personnel so provided or supplied by a provider or supplier to a purchaser of an employment service are then provided or supplied by that purchaser to a third party as an employment service, except “employment service” does include the transaction between the purchaser and the third party (effective 1/1/07). R.C. 5739.01(JJ).

1. Resale/Manufacturing Exceptions.

Bellemar Parts Industries, Inc. v. Tracy (2000), 88 Ohio St. 3d 351. The Court held that neither the resale nor manufacturing exception applied to the services provided to a manufacturer by leased employees. The Court reversed the Board of Tax Appeals' decision which held that the benefit of the services rendered by a manufacturer's leased employees was resold in the manufactured product. Having found the resale exception available, the Board did not address the manufacturing exception. Specifically, the Supreme Court held that the benefit of leased employee services was "a flexible, less costly, and more efficient work force," not the product being manufactured by the work force. Since this benefit was not resold (but was consumed) by Bellemar Parts, the resale exception was not available.

The manufacturing exception was not available since employment services are not within the list of taxable services specifically enumerated within the statutory definition of "things," a necessary characteristic for the manufacturing exception. "Things" are limited to the following specific services:

computer repairs
electronic information installation
automatic data processing

Corporate Staffing Resources, Inc. v. Tracy (October 27, 2000), BTA Case No. 97-M- 538. Taxable employment services found to exist with respect to trained personnel leased to a repair company (Sarcom, Inc.) engaged in repairing computer equipment for other businesses (which was a taxable service itself). The Board held:

  • Leased employees were under the supervision and control of the repair company, receiving their assignments therefrom.
  • Although the employees were skilled, the taxpayer (lessor) was not acting as a subcontractor since it was not responsible for completion of specific tasks or projects.
  • Applying Bellemar Parts Industries, Inc. v. Tracy (2000), 88 Ohio St.3 351, the resale exception was not available since the benefit provided by the taxpayer, which was not resold, was the “labor of the employees” (and not the product of services performed by the workers).
  • For the same reasons, the services could not be considered exempt repair services purchased to meet the repair company’s warranty obligations (they were not “things” for purposes of the exception available for purchases made to fulfill obligations under a warranty).

The Supreme Court affirmed an appeal. See Corporate Staffing Resources, Inc. v. Zaino (2002), 95 Ohio St. 3d 1. Quoting Bellemar Parts Industries, Inc. v. Tracy (2000), 88 Ohio St. 3d 351, the Court stated that a company’s benefit in receiving temporary employees is “their contribution of temporary, flexible, and less costly labor to its work force.” Other benefits include screening candidates for future employment and controlling benefits costs. The benefit Sarcom received was not the product of the workers’ labor (computer repair) but a temporary and flexible work force having expertise. The screening and employee benefits were also received. Sarcom’s customers did not receive these benefits but received the actual repair/maintenance services, the product of the labor.

Crew 4 You, Inc. v. Wilkins (2005), 105 Ohio St. 3d 356. The taxpayer provided crewing service personnel to trucking companies who were then used to operate trucking company equipment under the control of the broadcasting entities for sporting events. Reversing the Board of Tax Appeals, the Court held that the trucking companies who purchased the services and then conveyed them, along with their equipment, to the broadcasting entities were not entitled to the resale exception “[because the trucking companies did not sell a taxable ‘employment service’ to the broadcasting entities – because the provider of ‘employment services’ under R.C. 5739.01 (JJ) must pay the ‘wages, salary or other compensation’ of the workers, and Crew 4 You (rather than the trucking companies) paid the workers’ wages – the trucking companies cannot be deemed to have resold the employment services that they purchased from Crew 4 You”. In other words, an employment service is not resold unless the subsequent resale is an employment service. The Court also noted that the services were not conveyed in the same form since the trucking companies purchased employment services from the taxpayer yet conveyed the underlying technicians, along with equipment they were operating, to the broadcasting entities. The Court also held that the contractor/subcontractor exception for otherwise taxable employment services was not available to the taxpayer since it was not hired to reach a final result.


Under the language quoted above, the resale exemption is never available for employment services since the provider’s customer can never provide an employment service to its customer because it does not pay their wages, salary or other compensation. The only available exemptions would appear to be those based upon the status of the user (e.g., charitable, IRC Section 501(c)(3), the state and political subdivisions thereof). However, effective January 1, 2007, sales to other employment service providers are not taxable. See Sub. H.B. 298.

2. Supervision or Control.

E.T.S., Inc. v. Tracy, Ohio BTA Case No. 97-S-1613 (April 14, 2000). Taxpayer providing consulting, engineering and design services to manufacturers at their site was not providing an employment service. The taxpayer received specific projects from the manufacturers, selected the appropriate engineers from its staff to perform the work and retained control over such assigned employees.

Sunbelt Transportation Service, Inc. v. Zaino, Ohio BTA Case No. 01-V-997 (October 30, 2002), appeal pending with Franklin County Court of Appeals. The provision of truck drivers to make deliveries was a taxable employment service because the taxpayer’s customers controlled the mode, manner and timing of the driver’s day-to-day assignments and activities. This included: when the deliveries were made, where the deliveries were made, the sequencing of the deliveries and the amount of time the drivers were on the road.

The Board also addressed whether the one year/permanent assignment exception was available. Although the contracts were for one year, they did not specify each employee was permanently assigned. Following the Board’s earlier decision in Advantage Services v. Zaino, BTA Case No. 95-T-1391 (October 30, 1998), the Board would not allow parol evidence to add terms (i.e., a permanent assignment provision) or intentions not already expressed in the written contract.

For essentially the same facts, see also, TLI, Inc. v. Zaino, Ohio BTA Case No. 01-V- 1006 (October 30, 2002). Reed Elsevier v. Zaino (June 30, 2004), Ohio BTA Case No. 2003-J-1083. The taxpayer engaged a company to provide personnel to assist its own employees in completing the development of application software pertaining to its computerized information services (Lexis-Nexis) offered to subscribers. The taxpayer’s project manager was found to have supervised the work performed by both its employees and the outside personnel, thereby making the services taxable “employment services” which did not qualify for the exception for “acting as a contractor or subcontractor”.

There were a number of unfavorable facts which appear to have facilitated an expansive Board discussion of the scope of taxable employment services. These included the following:

  • The personnel did not appear to clearly furnish special expertise unavailable from its own employees (although there was reference to using the personnel when the taxpayer’s regular employees were not sufficiently “skilled”).
  • The personnel augmented the taxpayer’s existing employment force performing the same or similar services.
  • The provided personnel were used “to fill in gaps caused by occasional workload increases”.
  • The provided personnel “took direction” from the taxpayer’s “project manager”.

The Board also worked with the premise that in resolving disputes as to whether a relationship merits employment service characterization, it must be determined who supervised or controlled the work: the provider or the taxpayer. Nonetheless, presumably, there are nontaxable circumstances when neither party supervises or controls the personnel.

It would appear that transactions involving provided personnel will not be characterized as employment services if they have any of the following facts:

  • The personnel provide services involving an expertise not readily available to the taxpayer; they bring some level of expertise/specialization the taxpayer did not already have.
  • The services are clearly task oriented. The personnel are on site to merely complete an assigned objective, and there is essentially no/little interaction with the taxpayer other than communicating the assigned task.
  • The services are provided off the taxpayer’s premises (preferably at the provider’s premises); or
  • The provider of the personnel is clearly supervising and controlling the personnel. To the extent a fixed fee and a flexible work relationship (i.e., the personnel can work at their own pace) can be incorporated into the above arrangements, that would also be helpful.

Strategic HR Partners, Inc. v. Wilkins (May 5, 2006), BTA Case No. 2005-V-100. A taxpayer’s computer staffing service was taxable since the provided personnel were under the control of the client. The resale exception was not available because the clients did not resell employment services.

3. One-Year Contract/Permanent Assignment. Excel Temporaries, Inc. v. Tracy, Ohio BTA Case No. 97-T-257 (October 30, 1998). The Board held that an oral contract may satisfy the one year exception. Excel established that the parties to the leasing arrangement clearly understood and expected that all personnel provided were assigned on a permanent basis (even though there may have been high turnover on the jobs because either the employee or employer/lessee was not satisfied).

Factors supporting this finding included evidence that:

a. the customer needed positions filled permanently to gain the benefits of a substantial learning curve;
b. leased employees were not reassigned to other customers;
c. the arrangement was to be long-term; and
d. a substantial number of leased employees were eventually hired by the customer.

Moreover, the parties specified that the personnel provided were assigned on a permanent basis. However, the Board found that the oral contract was not for at least one year. Either party to the contract had the authority to terminate the relationship at any time for any reason.

Advantage Services, Inc. v. Tracy, Ohio BTA Case No. 95-T-1391 (October 30, 1998). Oral contracts terminable within a year and performance under a subsequent written contract established that the employees were not permanently assigned. The Board noted that performance must “affirmatively demonstrate that such ongoing positions did exist and that they were filled with the expectation the employee would be placed there permanently.” The large fluctuations in leased employees supported a finding that the positions were not intended to be staffed permanently.

Labor Pool of Cincinnati, Inc. v. Tracy, Ohio BTA Case Nos. 98-A-491 and 98-A-761

(April 14, 2000). Leased industrial workers and office employees provided under oral contracts to customers were not permanently assigned under one-year contracts. There was no evidence that the oral contracts were to last for at least one year.

Success Employment Services, Inc. v. Tracy, Ohio BTA Case No. 98-A-489 (April 14, 2000). Leased production employees were exempt from tax, having been found to be permanently assigned under written contracts of at least one year in duration. Contrary to the Tax Commissioner's assertion, the names or positions of the permanently assigned leased employees were not required to be stated. Permanent assignment was established by the contract (specifying permanent assignment of "permanent core personnel") and the parties' course of dealing.

B. J. Alan Company v. Tracy, Ohio BTA Case No. 99-N-196 (March 1, 2002), appealed to the Ohio Supreme Court, Case No. 02-0500; then it was dismissed. The Board addressed whether a contract having an initial term of one year and month to month extensions (and a clause allowing termination upon fourteen days’ notice) qualified for the one year exception. The Board held that the contract was excepted for the first year since it was still in place after one year; the termination clause had no effect. However, the contract did not qualify for the exception after the first year since it had only monthly terms.

H.R. Options, Inc. v. Zaino (2004), 100 Ohio St. 3d 373. Following its decision in Moore Personnel Serv., Inc. v. Zaino (2003), 98 Ohio St. 3d, the Court concluded that an employment service includes a company’s activity of serving as employer of record for employees sent to it by its clients. The Court also reversed the Board as to the scope of the exception for otherwise taxable employment services for transactions involving “supplying personnel to a purchaser pursuant to a contract of at least one year between the service provider and the purchaser that specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis”. R.C. 5739.01(JJ). The parties agreed that the word “permanent” need not appear in the contract.

The Court reviewed the underlying contracts and performance thereunder. The Court stated, “[w]hen the Tax Commissioner’s agents examine an employment contract, they must be able to determine at that time whether an employee has been assigned on a permanent basis. The contract, along with the facts and circumstances of the assignment, should permit the Tax Commissioner’s agent to determine permanency. The actual length of the employee’s assignment is only one of the factors to be used. Where the assignment is of a seasonal nature or serves to meet short-term workload conditions, these factors are also relevant.”

After noting that an employee assigned on a permanent basis need not be assigned to an employer forever, the Court stated “. . . assigning an employee on a permanent basis means assigning an employee to a position for an indefinite period, i.e., the employee’s contract does not specify an ending date and the employee is not being provided either as a substitute for a current employee who is on leave or to meet seasonable or short-term workload conditions.” Even though the Court noted that these are “factors” and the contracts and facts and circumstances of the assignments must be considered in determining whether there is permanency, it proceeded to hold as being taxable those relationships involving “employee contracts” that specified an ending date or were clearly seasonal. The Court allowed an exception from taxation for employee service contracts between the provider and its customers even though the particular contracts had a set term, considering only the actual contract between the provider and its employees (i.e., the “employee contracts”) in determining whether the assignments had an “ending date”.

The Premium Glass Company, Inc. v. Zaino (August 5, 2005), Ohio BTA Case No. 2003-T-1475. The taxpayer did not qualify for the one-year, permanent assignment exception. The case highlights the following:

  • As a practical matter, it is very difficult, if not impossible, to establish that an oral contract meets the one-year, permanent assignment exception (since it is very difficult to support a one-year term).
  • The BTA is not very receptive to respecting temporary to hire arrangements as being consistent with permanent assignment.

J.Z.E. Electric, Inc. v. Wilkins (May 19, 2009), BTA Case No. 2006-A-2218. The Board affirmed a sales tax assessment on an electrical contractor’s leased employees. The relationship did not meet the one-year/permanent assignment exception. Since the contracts met the one-year requirement, the only issue was whether the personnel were permanently assigned to the contractor/lessee even though the contracts stated the workers were provided for “an indefinite basis as opposed to a short-term basis”. Particularly important was the contractor’s acknowledgement that some of the workers were in fact intended to be used for a temporary/limited duration, while the remaining ones were to be used indefinitely, consistent with such contract language. In addressing whether the personnel were permanently assigned the Board, citing the Supreme Court’s holding in H.R. Options, focused on whether a worker's permanence or temporary nature could be determined based upon all available evidence. Emphasis was placed on the contractor's/lessee's initial records indicating the intent for the employee’s permanent or temporary assignment. The Board stated: "There is nothing in the contracts or J.Z.E.'s work records to definitively indicate whether a worker hired under such contracts was intended to work as a long term/permanent worker or a temporary worker and, ultimately, we are unable to accept an ambiguity in the record that fails to corroborate for us the precise nature of each employee's assignment." Since the contractor/lessee could not provide support for the permanent assignment of the individuals in question the contracts were taxable.

COMMENT: If some of the personnel provided under a contract are not intended to be permanently assigned, the lessee/taxpayer has the burden of specifically identifying those persons permanently assigned, as determined at the outset of the relationship (and reiterated through actual performance consistent with permanent assignment). At least the work records identifying the individual's tenure would appear necessary to support such permanent assignment. When all personnel are intended to be provided on a permanent basis from the outset of the contract and there is no inconsistent documentation, then presumably only performance under the contract must be reviewed to confirm consistency with permanent assignment.

4. Alternative Positions.
a. Tax base: only tax fee for service of providing or supplying the personnel?
b. Sale to exempt entity or holder of direct pay permit.

5. Summary.
a. Neither the manufacturing nor resale exemptions are available for the purchase of an employment service. However, effective January 1, 2007 sales to other employment service providers are not taxable.
b. When drafting contracts, be cognizant of supporting lack of supervision and control.
c. To qualify for the permanent assignment exception:

(i) there must be a written contract (although the requirements for the exception could theoretically be met with an oral contract, as a practical matter, rarely would there be sufficient support; the taxpayer would need to be able to support that a breach of the oral contract with the provider would have occurred if the provider would not have complied with the relevant one-year, permanent assignment terms – a very difficult task);
(ii) the contract must specify permanent assignment of the employees, using such language or similar language;
(iii)there must be performance consistent with permanent assignment of the employees, and all relevant documentation must be consistent with permanent assignment (obtain letter of usage from customer supporting consistent practice?);
(iv) the contract must have an initial term of at least one year (and, if possible, automatic renewals for at least one year unless either party terminates the contract);
(v) if the service provider has a contract with its employees, it can not specify an ending date.
(vi) the provider’s contract with its customer should be for an indefinite duration and not for clearly anticipated short-term assignments/projects or seasonal work; and
(vii) employees that may potentially be considered not permanently assigned should be provided under a separate contract to avoid the Tax Commissioner’s “one bad apple” policy.

C. Landscaping and Lawn Care Service.

Maintenance Unlimited, Inc. v. Zaino, Ohio BTA Case No. 2000-N-1861 (August 9, 2002). Although taxable services include land clearing services, taxable services must be for ornamentation purposes and not for a construction / development purpose as in the instant case.

D. Building Maintenance/Janitorial Services.

Cousino Constr. Co. v. Wilkins (2006), 108 Ohio St. 3d 90. A construction company was engaged in making restoration improvements to real property damaged by fires. At issue was charges for specialized cleaning services paid to the company’s subcontractors performed on schools damaged by fires before the company commenced the restoration process. The Court found the company to be the consumer of the services and, thus, liable for tax on their purchase. The resale exemption was not available since the benefit of the services was not resold in the same form as had been received but was consumed as part of the construction services.

Two Moms & A Mop, Inc. v. Wilkins (October 27, 2006), Ohio BTA Case No. 2005-T- 1070. Taxable services include cleaning residential homes (and are not limited to cleaning commercial buildings).

E. Private Investigation and Security Services.

Beck v. Zaino (August 20, 2004), Ohio BTA Case No. 2003-14-1257. The taxpayer was in the business of selling, installing and maintaining electronic security systems for industrial, commercial and residential customers. It did not actually provide the subsequent monitoring service, but accepted payment for the service which, presumably, was remitted to the monitoring company. At issue was the taxability of the monitoring service fees collected by the taxpayer - whether the taxpayer was providing a “private investigation and security service.” The Board held that since the taxpayer accepted payment for the monitoring services, it was the “vendor” of such services, thereby requiring it to collect tax.

F. Electronic Information Services.

Marc Glassman, Inc. v. Levin, Ohio Supreme Court, Slip Opinion No. 2008-Ohio-3819 (August 5, 2008). A pharmacy’s purchase of a service involving the electronic transmission of customers’ medical insurance claim information from the relevant insurance companies was nontaxable and not an “electronic information service”. To be taxable, the pharmacy must have access to computer equipment to receive data. The Court adopted the rationale of the Ohio Board of Tax Appeals in PNC Bank, Inc. v. Tracy (1995), BTA No. 93-T-1316 involving the mere transmission of credit card authorization information which was found to be a nontaxable service. The Court concluded that the pharmacy did not receive data, but merely the insurance companies’ conclusions as to coverage. Moreover, the pharmacy did not have access to the insurance companies’ computers.

COMMENT: The Tax Commissioner was prepared to extend a taxpayer loss to many other transactions such as credit card authorization transactions.

G. Computer Services.

Global Knowledge Training, L.L.C. v. Levin, 2010-Ohio-4411 (September 23, 2010). At issue was the scope of taxable computer services. The taxpayer provided training courses with respect to the use of routers and switches, as well as training for beginning computers users (as opposed to experienced programmers). The Supreme Court held:

1. The taxpayer’s Constitutional objections (violation of First Amendment/freedom of speech and Equal Protection) could not be considered due to the Court’s lack of jurisdiction from the failure to specify the objection before the BTA. The objections could not be raised for the first time before the Court as being a "facially unconstitutional" content based violation because the statutory language making computer services taxable did not distinguish between application and system software. Only the Ohio Administrative Code made such a distinction, and per Supreme Court precedent only the text of the statute may be considered when evaluating "facial" challenges.
2. The claim that the terms "computer equipment" and "computer systems" were unconstitutionally vague could not be considered since it was not specified in the notice of appeal filed with the Court.
3. "Computer systems" include routers and switches so that training with respect to the same was taxable.
4. Two computer training courses pertained to application software and not system software, thereby making them nontaxable.
5. Taxable computer training is not limited to training core computer personnel (e.g., IS / IT type personnel). Training of any employees with respect to the operation of a computer is taxable. This effectively reverses the BTA’s decision in Mentor Technologies Ltd. Partnership v. Tracy (August 25, 1995), BTA No. 94-A-1058.

H. Satellite Television.

DirecTV, Inc. v. Levin, Slip Opinion No. 2010-Ohio-6279 (December 27, 2010). At issue was whether the statutory provision imposing Ohio sales tax on satellite broadcasting services violated the Commerce Clause of the United States Constitution since cable broadcasting services are not taxed. The Court held as follows:

1. The Commerce Clause protects interstate commerce, but not particular interstate firms or particular structures or methods of operation in a retail market, by prohibiting measures that provide a direct commercial advantage to in-state economic interests thereby discriminating against out-of-state competitors. However, differential tax treatment of two categories of companies resulting solely from differences between the nature of their business, and not from the location of their activities, does not violate the Commerce Clause.

2. Imposing a sales tax on satellite broadcasting services but not on cable broadcasting services does not violate the Commerce Clause because the tax is based on differences between the nature of those businesses, not the location of their activities.  Moreover, it does not favor in-state interests at the expense of out of state interests.

3. Ohio’s statute taxing satellite broadcasting services focuses on the technological mode of operation, not the geographic location, and while distinguishing between different types of interstate firms, it does not favor in-state interests by discriminating against out-of-state enterprises. The sale of satellite broadcasting services is subject to tax regardless of whether the provider is an in-state or out-of-state business and without regard to local economic activity or investment in Ohio. This holding is consistent with all other non-Ohio jurisdictions addressing the issue.

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