Ohio State Tax Blog

Current developments, commentary and helpful resources regarding Ohio state and multistate taxes from attorneys Steven A. Dimengo and Richard Fry. We concentrate on all aspects of Ohio state taxation, including sales/use tax, income tax and commercial activity tax, from audits to appeals before the Ohio Board of Tax Appeals and Ohio Supreme Court, and have significant experience in multistate tax planning. Contact us.

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Ohio Sales and Use Tax - Proper Use of Exemption Certificates by Construction Contractors PDF Print E-mail
Monday, 03 December 2012 17:50

Depending on the nature of the project, contractors may claim an Ohio sales / use tax exemption on material purchases using several different exemption certificates. If installing a business fixture (i.e., permanent attachment to real property that primarily benefits the specific business operated on the premises), the contractor, acting as a retail vendor in this situation, can claim the resale exemption by providing suppliers with a standard exemption certificate when purchasing materials that will be transferred to the customer. The contractor may use a blanket exemption certificate, which covers all purchases from that vendor unless specified otherwise, or a unit exemption certificate, which only covers a single purchase. Assuming the contractor will make future taxable purchases from the supplier of materials to be incorporated into real property improvements, a unit exemption certificate is likely more appropriate. Alternatively, contractors can also use the multi-state Certificate of Exemption adopted by the Streamline Sales and Use Tax Governing Board. To be valid, any exemption certificate must contain the information set forth in O.A.C. § 5703-9-03(G). 

When installing a business fixture, the contractor must collect sales tax from its customer unless an exemption is available. If claiming an exemption on its sale, such as when the customer is a government agency or charitable organization, or the property will be used directly in manufacturing, the contractor should obtain one of the aforementioned exemption certificates from its customer to evidence the exempt nature of the transaction. 

On the other hand, contractors may purchase materials exempt from Ohio sales and use tax based upon an exempt real property improvement. These include construction contracts whereby building materials are incorporated into real property under a contract with a government agency, or into a horticulture or livestock structure, a house of public worship or a hospital, among others. O.A.C. § 5703-9-14(D)(1). To properly claim the exemption in these cases, the contractor should obtain a Sales and Use Tax Construction Exemption Certificate (Form STEC CC) from the property owner or general contractor, and then issue a Sales and Use Tax Contractor’s Exemption Certificate (Form STEC CO) to its supplier. 

Refer to our earlier post for protecting contractors from misclassifying real property improvements.

Last Updated on Tuesday, 05 February 2013 13:10
 
Protecting Construction Contractors From Erroneous Property Classifications - Real versus Personal PDF Print E-mail
Tuesday, 13 November 2012 14:53

The rules concerning which components of a construction project become real property upon installation and those that are business fixtures (remaining personal property) are often confusing. Even the Ohio Department of Taxation has taken an inconsistent approach at times – for example, arguing (albeit unsuccessfully) that golf bunkers and tee boxes were personal property in a 2007 Board of Tax Appeals decision, while a 2007 Tax Commissioner’s Opinion found that bunkers were land and, thus, real property. Likewise, in the two seminal decisions concerning business fixtures, the Ohio Supreme Court found that roller coasters and station houses at Geauga Lake Amusement Park were personal property, while the Board of Tax Appeals later ruled that Polaris amphitheater and other structures were real property. Suffice it to say, it is often difficult to determine the portions of a construction project representing business fixtures, upon which the contractor must collect sales tax from its customer, versus those which become real property upon which the contractor must pay use tax on its materials.

Ohio Revised Code Section 5739.03(C) provides a procedure which protects the contractor from misclassification by requesting a certification from its customer – the contractee – as to the real property and personal property components of the project. The request must be sent via certified mail, return receipt requested, prior to entering into the contract or agreement. The contractor will be protected from a misclassification if it relies upon in good faith, and acts consistent with, the contractee’s certification. And if the contractee fails to provide the requested certification, the contractor may rely upon its good faith determination as to its Ohio sales and use tax obligations. However, since this procedure shifts the exposure of a misclassification to the contractee, it would be prudent to advise the contractee prior to requesting such a certification.

If you need help complying with the procedures for requesting a certification for your customer, or classifying components of a construction contract as real or personal property, contact us as we have extensive experience in this area. In fact, Steve represented the taxpayer in the controlling Ohio Supreme Court case (Funtime v. Wilkins) governing this area.

Last Updated on Tuesday, 13 November 2012 15:19
 
Ohio Supreme Court clarifies the support needed to claim the permanent assignment exception for taxable employment services PDF Print E-mail
Wednesday, 10 October 2012 17:41

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.

Last Updated on Wednesday, 10 October 2012 17:42
 
Ohio Sales and Use Tax - Agriculture Exemption PDF Print E-mail
Wednesday, 26 September 2012 14:09

Generally, Ohio sales and use tax is not imposed upon tangible personal property used or consumed directly in agricultural activities. R.C. 5739.02(B)(42)(n). Similar to the manufacturing exemption, the following items purchased by persons engaged in farming, agriculture, horticulture or floriculture are exempt from Ohio sales / use tax:

  • Items to be incorporated into tangible personal property produced for sale;
  • Items used or consumed directly in producing tangible personal property for sale;
  • Items used or consumed directly in producing, or incorporated into, tangible personal property which will be used directly in producing products for sale;
  • Items used or consumed in conditioning or holding products produced for sale; and
  • Products used to cultivate or stimulate growth of crops or flowers to be sold.

O.A.C. § 5703-9-23. Where a direct use in the agricultural activity is required, the item’s particular use is crucial as it must directly act upon the product being produced for sale. Ohio Tax Comm’r Opinion 93-0004 (Aug. 26, 1993). The agriculture exemption is consistent with the overriding intent of sales and use taxes to tax sales to consumers or end-users, but not property used in producing, or in this case growing, such consumer products.

Notwithstanding, property incorporated into real property is not exempt from Ohio sales / use tax. For example, irrigation pipes purchased and installed by a farmer and building materials incorporated into a storage silo for agricultural products are subject to tax because the items become real property upon installation. However, likely through successful lobbying efforts, portable grain bins, field tile, and livestock and horticulture structures, and items incorporated into such structures, are exempt from tax. Ohio Information Release ST 2002-02 (Issued April 2002; Revised May 2007).

Please contact us if you need help determining which items are entitled to the agriculture exemption. 

 
Ohio State Bar Association Sales/Use Tax Subcommittee Report For September 21, 2012 PDF Print E-mail
Friday, 21 September 2012 12:28

Click here to view Steve's September 21, 2012 report which will be presented to the Taxation Section of the Ohio State Bar Association as Chair of the Sales/Use Tax Subcommittee.

Last Updated on Monday, 31 December 2012 15:07
 
ABA Blawg 100 Nominations! PDF Print E-mail
Tuesday, 21 August 2012 19:40

The American Bar Association (“ABA”) is now accepting nominations for the 2012 Blawg 100 to identify the best 100 legal blogs, or “Blawgs”. We at the Ohio State Tax Blog are asking for help from our loyal readers to be recognized amongst the leading Blawgs. You can nominate the Ohio State Tax Blog by using the ABA’s Blawg 100 Amici Form, available here. Filling out the form should only take a couple of minutes, as your comments are limited to 500 characters. Friend-of-the-blawg briefs are due before Friday, September 7th.

ABA editors make the final decisions as to who is included in the Blawg 100, but we are confident they will be impressed with what our readers have to say. Thank you!

Steve and Rich

Last Updated on Wednesday, 29 August 2012 19:36
 
Sales Tax on Employment Services... Taking a Deep Dive into the Tax Businesses Love to Hate PDF Print E-mail
Wednesday, 08 August 2012 12:27

Leased employees often come under scrutiny during Ohio sales tax audits. While many arrangements are exempt from sales tax, businesses should be proactive in documenting the transaction to properly evidence the exemption. Click here to view the outline from the presentation by Steven A. Dimengo and Phyllis Shambaugh (Ohio Department of Taxation Legal Counsel, Sales and Use Tax Division) at the 2012 Annual Ohio Tax Course on August 9, 2012 regarding Ohio sales tax on employment services.

Please contact us if you have questions concerning Ohio sales tax on your leased employee or properly documenting an exemption.

Last Updated on Wednesday, 08 August 2012 12:30
 
Ohio Job Creation Credit Expanded To Include Telecommuting Employees PDF Print E-mail
Monday, 06 August 2012 14:32

Ohio has expanded its job creation credit to employers of “home-based employees.” Sub. H.B. 327 (effective Sept. 6, 2012). A “home-based employee” is an employee who works primarily from the employee’s Ohio residence exclusively for the benefit of a qualifying project and is paid at least 131% of federal minimum wage. To qualify for the credit for telecommuting employees, the employer must employ 200 more employees than it employed on June 30, 2011. The Director of Development may require employers to make health care benefits and tuition reimbursement available for all employees to receive the credit.

Separate applications must be submitted if the employer seeks the credit for both telecommuters and employees working on-site. The credit can be taken against the employer’s Ohio commercial activity tax, franchise tax (for financial institutions) or insurance company premium tax.

The job creation credit based upon home-based employees is available for a six-year trial period, with the Director of Development to report to the Ohio Governor, Senate President and Speaker of the House regarding the effect thereof and nationwide trends for telecommuting employees after the trial period. See Final Analysis of Sub. H.B. 327.

Last Updated on Monday, 06 August 2012 14:34
 
Gov. Kasich Discusses Significant Tax Reform Potentially on the Horizon for Ohio PDF Print E-mail
Friday, 03 August 2012 17:49

As reported by the Columbus Dispatch, Gov. Kasich is strongly considering reforming Ohio taxes, again. Over the last decade, Ohio’s tax structure dramatically changed due to the advent of the commercial activity tax, while Ohio corporate franchise and personal property taxes were eliminated and the Ohio personal income tax rate reduced. Gov. Kasich now seeks to further cut Ohio’s personal income tax rate, which he described as “ridiculously high for our state.” To fund this tax cut, Ohio sales and use tax would undergo substantial changes, including the elimination of several exemptions, referred to by the Governor as “loopholes.”

Stay tuned as there will certainly be much debate and controversy to come over Gov. Kasich’s proposals. In the meantime, review our posts and outline describing how to maximize Ohio’s sales and use tax exemptions.

Last Updated on Friday, 03 August 2012 19:09
 
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Ohio State Tax Attorney, Steven A. Dimengo

Steve Dimengo is recognized as one of the leading tax attorneys in Ohio, where he has been serving clients for over twenty-five years. Full Profile. Cases. Email.

 

Ohio State Tax Attorney, Richard B. Fry III

Richard Fry is an Associate focusing on business law, specifically taxation. He holds a J.D. and Masters of Taxation from the University of Akron. Full Profile. Email.

News

Steve will be speaking at the Lorman Sales and Use Tax in Ohio Seminar to be held in Akron on January 21, 2014.  He will be discussing Manufacturing Exemptions, Transfer of Business and Personal Liability for Sales tax.  Click here to see more (and register).

 

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