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.