United States: Supreme Court Of Ohio Provides Sales Tax Guidance On Employment Services

Last Updated: December 7 2017
Article by Paul E. Melniczak and Matthew L. Setzer

The Supreme Court of Ohio issued a decision in Accel Inc. v. Testa, in which it determined that some of a taxpayer's purchases of employment services were not subject to Ohio sales tax, because those purchases fell within an exception for service provided under permanent contracts of at least one year ("Permanent Exception").1 The so-called Permanent Exception may provide an opportunity for any Ohio taxpayer purchasing employment services for a period of at least one year.


Ohio imposes sales and use tax on a taxpayer's purchases of "employment services" from a service provider. However, unlike other states—including Pennsylvania—that only impose sales and use tax on the service fee, Ohio imposes tax on both any reimbursement of the wages paid to the supplied personnel by the service provider, plus any markup.2 Under O.R.C. § 5739.01(JJ), "employment services" are 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 so supplied receive their wages, salary, or other compensation from the provider of the service.

By contrast, employment services do not include: acting as a contractor or subcontractor, Medicare and health care services, permanent contracts of at least one year ("Permanent Exception"), or members of an affiliated group supplying employment services to each other.

Transactions at Issue and Court's Decision

The taxpayer in the Accel case ("Accel") assembles gift sets, including health and beauty products for major retailers such as Bath & Body Works and Victoria's Secret. Accel purchased employment services from Resource Staffing and Manpower (collectively, the "Vendors"). The Ohio Board of Tax Appeals ("BTA") concluded that: Resource Staffing supplied employees on a permanent basis to Accel, and as a result, the purchases of employment services were not subject to tax; and Accel did not present sufficient evidence for the BTA to determine whether Manpower provided employees on a permanent basis.

Both of the BTA's determinations concerning the employees that the Vendors provided to Accel were at issue in the appeal to the Supreme Court of Ohio. (The Tax Commissioner contested the BTA's finding with respect to the employees Resource Staffing provided, and Accel challenged the BTA's finding concerning the employees that Manpower provided.)3

Employees from Resource Staffing

The Commissioner argued that Accel's transactions with Resource Staffing did not meet the Permanent Exception because its contract with Resource Staffing did not contain a provision showing that Resource Staffing provided the employees for a period of at least one year. In rejecting the Commissioner's argument, the Supreme Court of Ohio relied on prior precedent, looking to the facts and circumstances of each employee relationship, rather than merely considering the explicit language in the contract.4

Specifically, the court noted that in prior cases, it developed a two-prong test for determining whether a vendor supplies employees to a taxpayer on a permanent basis:

  • The contract does not specify an ending date
  • The employee must not be provided as a substitute for a current employee who is on leave, or to meet seasonal or short-term workload needs

Applying that test, the court affirmed the BTA's decision concerning the employees from Resource Staffing. This was despite the fact that some of these workers were seasonal workers. The court reconciled this fact concerning the seasonal workers with its prior precedent by stating that the "distinction between seasonal or short-term-workload employment and more regular employment is one of degree, not kind."5 Because Accel continually brought back the same workers to handle the extra work needed during the ebbs-and-flows of its business, the court concluded that these workers were not seasonal workers.

Employees from Manpower

The court rejected Accel's argument that the BTA erred in finding that Accel's transactions with Manpower met the Permanent Exception. That's because Accel did not have a written agreement with Manpower. Instead, Accel provided only an affidavit from its CEO in order to establish that it contemplated a long-term relationship with Manpower. Without a written contract, the Supreme Court of Ohio found that the BTA's denial of the exclusion for Manpower was reasonable.


The Supreme Court of Ohio's decision in the Accel case will affect many taxpayers. Appeals are currently pending administratively and at the BTA involving the scope of the Permanent Exception. Here are some takeaways from the Supreme Court of Ohio's decision:

  • The decision indicates that to qualify for the Permanent Exception, a business purchasing employment services needs to have a written contract in place with a service provider.
  • If a business purchasing employment services has a written contract in place with a service provider and the contract does not specify an ending date, the services provided under the contract may qualify for the Permanent Exception, even if the contract does not contain any "magic words" specifying that the employees are being assigned on a permanent basis.
  • Even if a business purchases employee services on a seasonal or short-term basis, the services may still qualify for the Permanent Exception.


1 See Slip Opinion No. 2017–Ohio–8798 (Decided Dec. 6, 2017).

2 The Ohio General Assembly previously considered proposals to exempt or limit the tax on employment services; those measures have not gained much traction, in part, because the tax on employment services produces tax revenue of  $100 million per year.

3 The Supreme Court of Ohio also held that certain materials purchased by Accel to be used and incorporated into its gift sets qualified for the exemption for assembly of tangible personal property for sale.

4 See Bay Mechanical & Electrical Corp. v. Testa, 978 N.E.2d 882 (Ohio 2012); H.R. Options, Inc. v. Zaino, 800 N.E.2d 740 (Ohio 2004).

5 See Accel, Inc. v. Testa, Slip Opinion No. 2017–Ohio–8798, page 18 (Decided Dec. 6, 2017).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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