Ohio Sales & Use Tax: Employment services are not taxable when outsourced staff is controlled by the staffing agency’s on-site management.

Cropped image of businessman's hands covering paper team on wooden tableThe Ohio Supreme Court has held that services provided by a staffing agency (Seaton Corp) to a manufacturer were not taxable when the staffing agency provides on-site management. The controversy centered on whether Seaton Corp was providing “employment services” under 5739.01(B)(3)(k)—specifically whether the personnel were performing work under the “supervision or control” of the manufacturer. See Seaton Corp. v. Testa, 2018-Ohio-4812. In this context, the supervision and control must be “specific to the work or labor performed by the personnel provided – not an overall production process.” Seaton Corp. maintained control over training, scheduling, workplace assignments, and work tasks performed at the job site. Conversely, the manufacturer had no work related interaction with the Seaton Corp. workers.

The Tax Commissioner asserted that the manufacturer’s control over its own production process and manufacturing lines equated to supervision or control over the Seaton-supplied personnel who worked in those areas. However, the Court rejected this position based upon Seaton Corp.’s continued control over the workers at the manufacturing facility. Further, the applicable contracts specifically granted Seaton Corp. the exclusive right to control its employees and prohibited each party from directing each other’s employees.

This decision creates potential for refund claims where staffing agencies provide personnel with on-site managers who control the basic workforce functions and day-to-day tasks. These situations mostly likely occur when a company outsources an entire division or function to the third-party staffing agency, including the management of the division / function. Obviously, it is best if the contract and actual performance are consistent with this arrangement. Remember, even if the purchaser does supervise or control the workers, it may be able to claim the permanent assignment exception for leased employees, as explained here.

If you have questions concerning employment services and minimizing taxation related to your staffing needs, please contact us.

Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC and chair of the taxation practice group. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reach at [email protected] or 330.258.6460. Buckingham Partner Richard B. Fry III is a member of the taxation practice group with a focus on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. He also represents clients in federal income tax controversies with the Internal Revenue Service (IRS).

About Buckingham, Doolittle & Burroughs:

Buckingham is a corporate law firm that counsels Middle Market executives and business leaders all over Ohio and beyond. With offices in Canton, Akron, and Cleveland, Buckingham offers clients Business Law Reimagined through sophisticated and practical legal services. Serving the region for over 100 years with nearly 70 attorneys, Buckingham’s mission is to deliver meaningful experiences through the practice of law, exceed expectations in terms of service, counsel and business sense, and to offer continuous value to the industries, communities and clients they serve. See all of our news and updates by visiting our website.