Ohio Sales / Use Tax: Leased employees qualify for permanent assignment exception despite fluctuating amount spent on personnel by purchaser
R.C. 5739.01(B)(3)(k) makes “employment services” taxable. Although this includes a broad range of situations where personnel are provided to the taxpayer, there are a few exceptions. The permanent assignment exception, which applies to employees provided under a one-year contract that specifies the personnel are provided on a permanent basis, has been addressed by the Ohio Supreme Court quite a few times. Recently the Court has returned to the issue and appears to have expanded the scope of the exception.
In its decision in Accel Inc. v. Testa, the Ohio Supreme Court ruled that leased employees qualified for the permanent assignment exception under R.C. 5739.01(JJ)(3) even though the amount spent on the workers fluctuated throughout the year. The taxpayer designed and assembled gift baskets, with assembly activities increasing in the fall ahead of the holiday season. The same personnel were retained through high and low activity periods, although their hours were reduced depending how busy the assembly business was. The reduction in the leased employees’ hours was consistent with the taxpayer’s own employees who worked more during high demand periods. The Court noted that the distinction between seasonal or short term workload and permanent employment is a matter of degree, not kind.
The court stated that both the contract and facts and circumstances must be viewed to determine that the employees were:
(1) assigned for an indefinite period; and
(2) not provided to meet short-term-workload needs.
The Court shed light on how to satisfy these two prongs when employee utilization fluctuates throughout the year. To determine whether employees were assigned for an indefinite period, the employment contracts must not specify an ending date. The Court again confirmed that no magic words needed to be in the contract to qualify for the exception. H.R. Options v. Zaino, 100 Ohio St.3d 373, 2004-Ohio-1. The contract simply cannot specify an ending date. In this case, the open-ended contract language was consistent with the permanent assignment of the leased employees.
Next, the Court addressed whether the leased employee fluctuations were caused by the taxpayer leasing employees to “meet short-term-workload needs” or whether the fluctuations were the result of natural “ebb and flow” of business activity. To distinguish from activity that was for short term assignment, the Court focused on the retention of the same personnel through high and low activity periods, stating that this retention negated their status as seasonal employees. Utilizing the same workers and adjusting their hours to meet demands supported a finding of permanent assignment, while bringing in new workers for brief workload spikes would support the opposite.
Please contact us if you have any questions about leased employees or permanent assignment exception under R.C. 5739.01(JJ)(3).