Information Release

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ST 1993-08 - Employment Service - Issued September, 1993; Revised October, 1993; Revised December, 2000; Revised May, 2006

This release supersedes all previous versions of information release ST 1993-08 addressing the specifically enumerated taxable service of “employment service.”

The purpose of this release is to clarify the law with regard to employment service. Employment service became a transaction subject to sales and use tax on January 1, 1993. Later, on July 1, 1993, changes were made in the statute as to what is an employment service. Since that time, decisions made by the Ohio Board of Tax Appeals and the Ohio Supreme Court have interpreted the definition of this service. To help you understand these developments and how they may affect you as a potential provider or consumer of employment service, the Department of Taxation has prepared this information release. If after carefully reading it you have any questions or require more specific assistance on your responsibility as a vendor or consumer of this service, please contact any office of the Department of Taxation.

Section 5739.01(B)(3)(k) of the Ohio Revised Code (“R.C.”) includes within the definition of a “sale” and “selling” the providing of employment service. Employment service is defined in R.C. 5739.01(JJ) 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. “Employment service” does not include:

  1. Acting as a contractor or subcontractor, where the personnel performing the work are not under the direct control of the purchaser.
  2. Medical and health care services.
  3. Supplying personnel to a purchaser pursuant to a contract of at least one year between the service provider and the purchaser that specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis.
  4. Transactions between members of an affiliated group, as defined in division (B)(3)(e) of this section.

Exclusions

A: R.C. 5739.01(JJ)(1)

“Employment service” does not include “[a]cting as a contractor or subcontractor, where the personnel performing the work are not under the direct control of the purchaser.” To determine whether a transaction would qualify for this exclusion it needs to be determined whether the consumer is purchasing qualified personnel to work at the consumer’s direction or whether the consumer is purchasing the accomplishment of some specific task which the provider is obligated to perform. The key is the true object of a particular transaction. If the true object of the consumer is to receive personnel to work at the consumer’s direction, the transaction is an employment service. On the other hand, if the true object of the consumer is to enter into a contact for a completed task or project, it is not an employment service. While it is true that both situations require work or labor, the difference between them depends on the express or implied responsibilities of the provider of the service as typically stated in the contract. The following are examples:

Example A1: A general contractor engages various subcontractors to complete the construction of a building. The subcontractors are charged with the responsibility of completing certain aspects of the project. The subcontractors use their own crews whose performance and responsibilities are guided by a contract to perform a specific task. The labor of the crew is spent in completing certain phases as required by the contract.

While the subcontractor may invoice periodically on an hourly basis, it is the completion of the job that is sought and required by the contract, not the hours of labor to accomplish it. Since the "true object" in a construction contract is the completed project, the transaction does not meet the definition of employment service.

Example A2: Using the same facts as in Example A1 except that the subcontractor does not have its own employees to accomplish the project that it has agreed to complete. The subcontractor obtains personnel from an employment agency.

The relationship between the general contractor and the subcontractor is unchanged. The transaction between these two parties is not an employment service as stated in Example A1. However, the transaction between the subcontractor and the employment agency is a taxable employment service. The true object of the subcontractor is to obtain personnel, a work force, that will work at the subcontractor’s direction to complete its contractual obligations to the general contractor.

Example A3: An employment agency supplies secretarial staff as needed to its customers. The customers engage its services seeking personnel to handle secretarial duties at its direction.

While there may be some skill requirements to accomplish the general secretarial duties needed, there is no responsibility on the part of the agency to perform a specific task. The agency’s commitment is limited to supplying personnel capable of doing the work. The true object of the customer here is the receipt of personnel to work as it directs. This is an employment service.

Example A4: An engineering company is engaged by a client to prepare equipment and structural drawings which will be used to solicit bids. The client provides general direction and periodic constructive criticism, but does not provide any other direction to the engineers. The engineering company’s work is performed both on and off-site.

 

This transaction is not a taxable employment service. The true object of the client and the responsibility of the engineering company under the contract is the accomplishment of a specific task.

Example A5: A firm specializing in providing engineering personnel is engaged by a client to furnish it with a qualified engineer who will work at the direction of the client on a project or projects as needed. The engineer may or may not work with other engineers of the client.

In contrast to Example A4, the true object of this transaction is the receipt of a person to work as directed. The engineering firm is supplying a professional. The person will work under the direction of others, and the firm is not responsible for any specific results or accomplishments. This is an employment service. The fact that the person is a professional has no bearing on taxability.

Example A6: A talent agency provides models and other talent as requested for its clients. Client hires the agency to provide models to model the client’s clothes at its direction.

This is an employment service. The agency is providing models who will work at the direction of the client.

Example A7: An agency provides models and other talent as requested for its clients. Client hires the agency to provide a specific person to perform a particular act or routine; such as a motivational speaker.
This is not an employment service. Here the client wants a particular performer who will perform a specific task. The true object of the client is not to obtain individuals who will work as it directs.

B: R.C. 5739.01(JJ)(2)
“Employment service” does not include ‘[m]edical and health care services.” Included under this exclusion are both professionally trained and licensed medical practitioners and others who provide patient care to persons or otherwise have an active role in patient diagnosis, treatment or care. For example doctors, dentists and nurses qualify as do nurse’s aides, x-ray technicians, medical assistants, orderlies, and lab technicians engaged in human tissue/fluid analysis. Such services may be performed in hospitals, clinics, doctor and dentist offices, off-site in laboratories or wherever else patient care is required. Other related “medical and health care services” personnel include pharmacists dispensing drugs for treatment, nursing home patient care staff, and in-home care or companion personnel who are engaged to sustain the health or well-being of individuals of diminished physical or mental capacity.

Not considered medical and healthcare services, even though they may be purchased by a medical practice, are clerical, secretarial, accounting and computer programming personnel as well as other personnel who are not engaged in patient care. Also included in the non-patient care category are medically trained and licensed personnel employed to review and administer the handling of medical insurance claims or to do research, test or to provide other services not related to the treatment, diagnosis or care of a particular patient. The following are examples:

Example B1: A client of a home companion service engages the company to supply a person to care for an ailing parent while the client is away.

This is a medical and health care service within the exclusion. Therefore, it is not an employment service.

Example B2: A dentist hires an employment agency to provide a dental hygienist to fill in for a regular employee who is on vacation.

This is a medical and health care service worker who is involved with patient care. This is not an employment service.

Example B3: A medical clinic hires an employment agency specializing in providing medical personnel to provide a trained nurse to help on a temporary basis to perform non-patient care service such as the submission of medical claims.

This transaction does not fit within the exclusion because, although medically trained, the individual is not providing care to the clinic’s patients. This is an employment service.

C: R.C. 5739.01(JJ)(3)

“Employment service” does not include “[s]upplying personnel to a purchaser pursuant to a contract of at least one year between the service provider and the purchaser that specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis.” Some employee leasing situations will fall within this category. Various examples are discussed below. Typically, the service provider, in exchange for reimbursement of employee wages, salaries and benefits plus a commission, agrees to employ personnel who conduct the business of the client. The direction of the daily work activities of the employees are at the discretion of the client, while payment of the employees’ wages is made by the service provider.

For purposes of the Ohio sales and use tax, such service is not an employment service subject to tax if the contract between the service provider and the purchaser is for a duration of at least one year and if the contract specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis. Permanent basis means that employees are intended to be assigned for an indefinite or for an unlimited period of time. Further, the parties’ performance under the contract is subject to review. In H.R. Options, Inc. v. Zaino 100 Ohio St.3d 373, 2004-Ohio-1, the Ohio Supreme Court stated the following:

When the Tax Commissioner’s agents examine an employment service contract, they must be able to determine at the time whether an employee has been assigned on a permanent basis. The contract, along with the facts and circumstances of the assignment, should permit the Tax Commissioner’s agent to determine permanency.

Situations where the performance of the parties do not conform to the terms of the contract may be subject to tax. Also, if at least one employee covered under an employment service contract is not assigned on a permanent basis, then the entire contract may be considered taxable.

Contracts that do not provide for a term of at least one year and/or that each employee is assigned permanently are considered contracts for taxable employment service. The following are examples:

Example C1: Company A is a small manufacturing company that has outsourced its human resource functions by entering into a written contract with an employment agency. The terms of the contract include that all provided employees are indefinitely assigned to Company A and that the duration of the contract will be two years. Company A and the professional employee organization both operate under the contract as the terms require.

Because the contract meets the third exception to the definition of an employment service and the parties are operating under the contract in conformance with the terms of the contract, this is not an employment service.

Example C2: Using the same facts as in Example C1 except that the contract is not in writing but instead is an oral contract. In Excel Temporaries, Inc. v. Tracy (Oct. 30, 1998), BTA No. 97-T-257, the Ohio Board of Tax Appeals determined that an oral contract may be considered valid for purposes of R.C. 5739.01(JJ)(3). The Board stated that:

. . . this does not mean that parol evidence may in itself be sufficient in all cases to prove that the taxpayer’s assignment of personnel is excluded from the definition of an employment service. Corroborating evidence may be necessary to establish that such contract exists and that performance under the contract meets the requirements contained within R.C. 5739.01(JJ)(3).

Accordingly, for the purpose of this example, if Company A can provide corroborating evidence that the contract was indeed for a period of two years and that each employee covered by the contract is assigned to Company A on a permanent basis, the transaction will not be an employment service. It is strongly advised that employment service contracts be in writing. While the Ohio Board of Tax Appeals has determined that a contract may be oral, it has yet to examine a factual situation where the taxpayer has been able to prove that such contract meets the exclusion found in R.C. 5739.01(JJ)(3).

Example C3: Using the same facts as in Example C1 except that upon audit, the tax auditor finds from review of company records that the parties are not operating according to the terms of the contract. The employment agency has not permanently assigned any employees to Company A, but instead only furnishes employees to Company A based upon the company’s needs, which fluctuate substantially from week-to-week.

Since the exclusion found in R.C. 5739.01(JJ)(3) is subject to the performance of the parties, the transactions between Company A and the service provider in this example would be an employment service.

Example C4: Company B is a small manufacturing company with fluctuating sales. It enters into a written contract with an employment agency. The terms of the contract provide that the contract is for a duration of one year and that the employment agency will be the exclusive provider of all employees to Company B as needed.

This situation does not meet the third exclusion because the employees are not permanently assigned to Company B. Accordingly, this is an employment service.

Example C5: Company AB enters into a contract with an employment agency. The terms of the contract indicate that the employees will be permanently assigned and the contract is for the length of one year. Upon audit, the company records indicate that the service provides six full time workers under the contract that are indeed permanently assigned as well as additional workers as needed.

In this example the contract would not fit within the third exclusion because each worker covered by the contract is not assigned on a permanent basis to Company AB. This is an employment service.

D: R.C. 5739.01(JJ)(4)
“Employment service” does not include “[t]ransactions between members of an affiliated group, as defined in division (B)(3)(e) of this section.” To qualify as a member of an affiliated group, one person or business must own or control the business operations of another member of the group. In the case of corporations with stock, one corporation owns or controls another if it owns more than fifty percent of the other corporation’s common stock with voting rights. See R.C. 5739.01(B)(3)(e). In determining the relationships of the parties the federal attribution rules do not apply. The following are examples:

Example D1: Company G’s entire workforce are employees of Company H. Company G and Company H are wholly owned subsidiaries of the same parent corporation.

In this example the companies qualify as members of an affiliated group and, therefore, the transactions are specifically excluded from being an employment service.

Example D2: The Smith family is the owner of several companies including Smith Trucking and Smith ES. Smith Trucking is equally owned by the father and his three sons. Smith Trucking needs qualified drivers. Seeing this need, the three sons organize and start an employment service company, Smith ES, which provides the drivers to Smith Trucking and other companies on a temporary as needed basis. Smith ES does not have a contract with Smith Trucking that would qualify for the exclusion found in R.C. 5739.01(JJ)(3). The question is whether transactions between Smith Trucking and Smith ES are excluded from the definition of a taxable employment service as the transactions are between members of an affiliated group?

In this example, the transactions are not excluded from the definition of employment service because no one person or business owns or controls the business operations of another member of the group. Accordingly, the transactions between Smith Trucking and Smith ES are subject to tax.

Additional Examples


E: Additional examples related to employment service are provided below.

Example E1: Company H hires an individual to shovel snow, as needed during the winter months, from its sidewalk for a given hourly rate. This transaction is not an employment service. The individual performing the work is not working for an employer who in turn provides him to a client. The individual is being paid directly by the purchaser of the service.(Footnote 1)

Example E2: Company I obtains temporary clerical, accounting, data entry and similar personnel as needed to fill in for vacationing employees who work under varying degrees of supervision by a client.
This is the prime example of an employment service.

Example E3: In order to mount an air conditioning unit on a roof, an HVAC contractor requires a crane. The crane rental company furnishes the equipment along with an operator necessary to complete the task. The billing from the crane company breaks down the total cost between the crane and the operator’s time.

This is a nontaxable service. Despite the probability of considerable direction of the crane operator by the contractor and a breakdown of the crane operator’s time, the crane rental company is not providing an employment service. It is providing a crane service. The service it provides is the moving, lifting and positioning of objects with its own equipment.(Footnote 2)

Example E4: A real estate broker headquartered in Cincinnati engages an employment agency located in Cincinnati to furnish a person to answer the telephone and provide other clerical duties in its Covington, Kentucky branch office.

This transaction is not taxable. Although this is an employment service, it is not subject to Ohio tax since the job site (post-of-duty) of the temporary worker is not in Ohio. A company in this situation is advised to keep records that accurately identify where this type of service is rendered to prevent future problems in the event of an audit.

Example E5: An Ohio employment agency moves its headquarters from Cincinnati to Covington Kentucky. The agency then provides a temporary employee to a client in Cincinnati. The employee’s post-of-duty is in Cincinnati, Ohio.

This is a taxable employment service. As in the previous example, the location of the employment agency is irrelevant to the taxability of the service being rendered. The agency clearly has “substantial nexus” with the State of Ohio. Since an employee of the agency is providing the company’s service in Ohio, substantial nexus exists with Ohio. The Kentucky agency must register as a seller with Ohio and it must collect and remit the tax on all taxable sales located in Ohio.

Example E6: Company J has several small offices throughout the country and outsources all of its personnel from an employment agency. Company J does not have a contract with the employment service agency that qualifies for the exclusion found in R.C. 5739.01(JJ)(3). The temporary employees are located in various states throughout the country.

Although the entire transaction is an employment service, only those employees with an Ohio post-of-duty would be subject to tax in Ohio.

Example E7: Company K is a trucking operation. It contracts with Company L to provide drivers as needed. Company K schedules each driver’s vehicle, load, and return trip assignments and pays Company L for the supplying of the drivers. Company L pays the drivers’ wages.

In this situation Company L is providing an employment service. It should also be noted that the exemption Company K may have for “highway transportation for hire,” R.C. 5739.02(B)(32), applies to transportation equipment and its repair, not to employment service.

Using the same facts, but adding the fact that Company L is providing drivers pursuant to a contract of at least one year that specifies that each employee under the contract is assigned on a permanent basis; subject to actual performance, this transaction is not an employment service.

Example E8: A nonprofit charitable purpose organization needs additional clerical personnel to help with a fundraising event. It contracts with an employment agency to provide the needed personnel.

Although this is an employment service, the nonprofit charitable organization may claim exemption from the tax under R.C. 5739.02(B)(12). The employment agency must obtain a certificate of exemption as provided for in R.C. 5739.03(B)(1).

Example E9: Company M is a manufacturer that desires to outsource all of its human resource needs. It contracts with an employment agency that places Company M’s current personnel on its roll of employees.

The employees are then assigned back to Company M. Because Company M is unsure of how this arrangement will workout, the contract runs from month-to-month. The exclusion found in R.C. 5739.01(JJ)(3) does not apply because the contract is not for at least one year.

This is an employment service. The fact that the employment agency did not find and hire the personnel but instead received personnel referred to it from its client does not change the fact that the transaction is an employment service.

Example E10: Company N is a manufacturer purchasing employment service from employment agency C. Agency C will provide personnel to Company N as needed. The personnel work on Company N’s assembly line putting together the items that Company N manufactures for sale.

The transactions are taxable employment service. Company N may not claim the resale exception. In this situation, the actual benefit that Company N receives is the benefit of the employment service; that is, the employees’ contribution of a temporary and flexible work force. Company N is using the employment service in the making of its finished product along with the materials and everything else that goes into making the product.

Neither can Company N claim the manufacturing exemption. The exemption in R.C. 5739.02(B)(42)(g) applies to the “thing” transferred. A “thing” for purposes of R.C. 5739.02(B)(42) includes only those enumerated services listed in R.C. 5739.01(B)(3)(a), (b) and (e). The section defining employment service as taxable is R.C. 5739.01(B)(3)(k). Accordingly, employment service is not included within the definition of a “thing” and cannot qualify for the manufacturing exemption. This answer is consistent with the holding of the Ohio Supreme Court in Bellemar Parts Industries, Inc. v. Tracy, 88 Ohio St.3d 351, 2000-Ohio-343.

Example E11: Company O routinely hires new employees as needed to fill positions in its company. Company O however does not want to make a commitment on the hiring of any new employee until such time as it is convinced of the suitability of the individual. Company O contracts with employment agency D to provide employees as needed on a temporary basis to fill these positions. If after a three month trial period, Company O likes the individual, it will hire the individual as a regular employee. If Company O does not feel the individual is suitable, it will have the employment agency D provide another temporary to try to fill the position. During the trial period, the temporary is paid by employment agency D, who in turn charges Company O for supplying the employee.

This is an employment service and the service provider should charge tax to Company O on the transactions during the trial period. Further, if Company O pays the service provider an additional fee when it hires an individual as a regular employee, such charge is a taxable employment placement fee under R.C. 5739.01(B)(3)(l).

Note that given the facts in this example, it is irrelevant as to whether the terms of the contract between Company O and the employment agency meet the exclusion to the definition of employment service found in R.C. 5739.01(JJ)(3). This is because the Ohio Supreme Court has held that “permanent” in the context of R.C. 5739.01(JJ)(3) means assigning an employee to a position for an indefinite period. See H. R. Options, supra. In the situation found in the current example, the employee will be assigned only for the trial period. After the trial period the employee will either be hired by Company O or will be removed from the position and subject to reassignment by the employment agency. In these facts there is no “permanent” or indefinite assignment and the transaction cannot qualify for the exclusion to the definition of employment service found in R.C. 5739.01(JJ)(3).

Example E12: Company P is an employment agency. It contracts with its clients to provide them with employees. All transactions are subject to Ohio’s taxing jurisdiction. The employees assigned will receive their daily direction from the clients. The results of an audit find that Company P’s contracts with its clients fall into three distinct categories:

 

  1. Written contracts with clients that qualify on their face for the exclusion found in R.C. 5739.01(JJ)(3), but Company P’s records indicate that the employees are not permanently assigned to the clients but instead are routinely shuffled from client to client as Company P dictates;
  2. Written contracts with clients that qualify for the exclusion found in R.C. 5739.01(JJ)(3) both on their face and under a test for performance; and
  3. Oral contracts where clients will call in to Company P to obtain temporary employees as needed to fill in for regular employees who are on vacation, have called in sick that day, who are on some other short term leave or are needed due to an increased demand in the client’s business.

To fill many of these positions, Company P pulls from its own employee pool. However, it also has a contract with Company Q, an employment placement service company, who will find and provide Company P with specific types of employees. Company P pays a placement fee to Company Q for each employee found and Company P adds each employee to its own employee pool. The question is which of the three types of contracts are subject to tax and whether Company P’s transactions with Company Q are subject to tax.

The written contracts described under category (1) are subject to tax. Even though a contract may on its face meet the requirements for the exclusion found in R.C. 5739.01(JJ)(3), the terms of the contract are still subject to review for actual performance. See H.R. Options, Inc. v. Zaino, supra. and the explanation regarding the third exclusion on pages 4 and 5 above. Since in this example an audit found that the parties were not performing according to the written terms of the contract, i.e. the employees were not permanently assigned, these contracts do not qualify for the exclusion found in R.C. 5739.01(JJ)(3) and the transactions are subject to tax.

The written contracts described under category (2) qualify for the exclusion found in R.C. 5739.01(JJ)(3) as the specific terms meet what is required by the statutory exclusion and a review of performance finds that the parties are operating under the terms of the contract as they are written, i.e. each employee covered under the contract is assigned to the client on a permanent basis.

The situation described under category (3) is the typical employment service situation and each transaction is subject to tax; excluding some other exemption, e.g. the purchaser is a nonprofit charitable purposes organization exempt from tax under R.C. 5739.02(B)(12).

Finally, the transactions between Company P and Company Q are taxable employment placement services, R.C. 5739.01(B)(3)(I) and R.C. 5739.01(KK).(Footnote 3) Company P must pay tax on the placement fees it pays to Company Q. Company P may not claim the sale for resale exception found in R.C. 5739.01(E) as it is not reselling the employment placement service it received. Instead, Company P is the consumer of the service as it received the benefit of the employment placement service. Its benefit is the receipt of personnel that it can add to its employee pool and use to fulfill its contractual obligations of providing employment service to its clients.

Example E13: Employment agency A is an out-of-state company that has no employees located in Ohio. It desires to provide employees to a client in Ohio. To do this it contracts with employment agency B that is located in Ohio to provide employees to employment agency A’s client. Agency B bills agency A for the employees.

Pursuant to the decision of the Ohio Supreme Court in Crew 4 You, Inc. v. Wilkins, 105 Ohio St.3d 356, 2005-Ohio-2167, the transaction between employment agency A and employment agency B is a taxable employment service. Agency B is required to charge and collect tax from agency A on its employment service provided to agency A. The reason for this is because agency B is paying the compensation to the personnel provided. The Ohio Supreme Court stated in Crew 4 You, Inc. that “[a] seller of ‘employment service’ as that term is used in Ohio pays the “wages, salary, or other compensation” of the personnel.” R.C. 5739.01(JJ).

In this example, the transaction between agency A and its client is nontaxable service in Ohio.(Footnote 4)

Example E14: Company R contracts to have Company S provide fifteen temporary employees to Company R. At the time, Company S only has ten of its own employees available to perform the contract, so Company S goes to an unrelated employment service provider, Company T, to obtain the five additional employees needed to fulfill its contract with Company R. The five employees remain on the payroll of Company T.

For the ten employees of Company S that are provided to Company R, Company S is providing an employment service.

Company T is providing a taxable employment service to Company S. Employees are being provided to Company S to work under Company S’s direction and control and the employees receive their compensation from the provider, Company T. Company S cannot claim resale on its purchase of employment service from Company T even though it provides those employees to Company R. That transaction is not an employment service under the Crew 4 You case, supra., because the employees are not receiving their compensation from Company S, the provider of the service.

In its billing to Company R, Company S should separately state the charges for the ten employees it is providing and charge tax on that amount. No tax should be charged to Company R on the separately stated amount billed for the five employees obtained from Company T. However, if there is no separation on the billing from Company S to Company R, tax must be charged on the entire price of the transaction.

If you have any questions regarding this matter, you should direct your questions to one of our taxpayer service centers or call 1-888-405-4039.

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THE HEARING OR SPEECH IMPAIRED
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Footnotes:
1. Effective August 1, 2003 certain snow removal services became subject to tax. See Information Release ST 2003-02 - Landscaping, Lawn Care Services, and Snow Removal - January, 2004.
2. See also R.C. 5739.01(UU)(1)(c) which provides that “Lease” or “rental” do not include “[p]roviding tangible personal property along with an operator for a fixed or indefinite period of time, if the operator is necessary for the property to perform as designed. For purposes of this division, the operator must do more than maintain, inspect, or set-up the tangible personal property.”
3. See information release ST 1993-01 – Employment Placement Service – April, 1993 for more information regarding taxable employment placement services.
4. Due to the potential for the manipulation of employment service agreements between affiliated companies and their customers, such transactions will be closely scrutinized by the Ohio Department of Taxation under R.C. 5703.56 for possible sham transactions.