Ohio ruling: Employment services subject to sales and use tax


Ying Lee
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Doug Kleiner
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Metisse Lutz
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On Dec. 12, 2018, the Ohio Supreme Court revisited the taxability of employment services. The Court confirmed that for employment services to be subject to the Ohio sales and use tax, the personnel supplied by the service provider must perform work under the supervision or control of someone other than the provider of the personnel.1 As a result, a transaction between a service provider specifically contracting with its customer to “furnish, manage and supervise” the staff it provided was not subject to sales and use tax.

Background Seaton Corporation, a provider of employment staffing services, entered into a contract in 2003 with pet food manufacturer, Kal Kan, to “furnish, manage and supervise” supplemental staffing. In October 2009, a new contract was executed for the same service, requiring Seaton to screen, hire, and train workers to assist in Kal Kan’s manufacturing plant’s production operations in Columbus, Ohio. The services that made up Seaton’s employment services included: maintaining an on-site office at Kal Kan’s plant, conducting interviews and testing applicants, and providing job orientation, uniforms, and safety equipment. Further, Seaton’s duties included scheduling of workers, maintenance of an attendance policy, and processing payroll. Under the contract between the two parties, Seaton maintained the “exclusive right to control” the employees and there was no ability for Kal Kan to “assign, direct, or oversee” the activities of Seaton employees, or Seaton to do the same with respect to Kal Kan’s employees.

Following an audit of both companies, the Ohio Tax Commissioner issued a sales tax assessment against Seaton and a use tax assessment against Kal Kan. In response, Seaton and Kal Kan unsuccessfully filed petitions for reassessment. The parties then appealed to the Ohio Board of Tax Appeals (BTA), during which the appeals were consolidated. In their challenge to the assessments, Seaton and Kal Kan argued that Seaton maintained supervision and control over the workers it supplied to Kal Kan, and that the services provided by Seaton did not meet the statutory definition of an “employment service.”2

At the BTA hearing, Seaton testified that its services provided at Kal Kan's plant were “an outsource for management model” and under the agreements executed between Seaton and Kal Kan, Seaton maintained its own management structure at the plant, isolated from Kal Kan's management. Additional testimony was presented that Seaton maintained an on-site presence at the Kal Kan plant, recruiting, training, and managing its employees. This daily oversight took place in the hiring, scheduling, making of job assignments, monitoring of work productivity and safety, and communication of new procedures. The testimony was supported by a Seaton supervisor, and bolstered by the fact that Seaton was responsible in determining how many of its employees needed to be available and trained to help achieve Kal Kan’s overall production goals.

Following the testimony and review of the executed agreements between Seaton and Kal Kan, the BTA rejected the Commissioner's conclusion that Kal Kan exercised supervision or control over Seaton’s employees. Further, the BTA held that Seaton did not provide a taxable “employment service” to Kal Kan. The Commissioner appealed the determination to the Ohio Supreme Court.

Court addresses supervision or control requirement In its appeal, the Commissioner initially asserted that the BTA was required to affirm his findings unless it could be proved that the findings against Seaton or Kal Kan were unreasonable or unlawful. The Court rejected this argument on the basis that the BTA was not required to defer to the Commissioner’s findings, other than putting the evidentiary burden on the taxpayer, using a preponderance of evidence standard.3

The Commissioner then focused on the requirement of “supervision or control” as defined under the term “employment service.” The BTA examined the statutory requirements of a qualifying employment service in order to determine the “supervision or control” required. Ohio imposes a sales tax on retail sales made in Ohio.4 A “sale,” in turn, includes “[a]ll transactions by which…[e]mployment service is or is to be provided.5” Finally, an “employment service” is 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 provided or supplied receive their wages, salary, or other compensation from the provider or supplier of the employment service.”6

The Court parsed this statute, noting that there are three requirements for a service to qualify as an “employment service” which were established: “(1) it must provide or supply personnel on a temporary or long-term basis, (2) the personnel must perform work or labor under the supervision or control of another, and (3) the personnel must receive their wages, salary, or other compensation from the provider of the service.”7 The Court found that the first and third requirements were satisfied due to the fact that Seaton supplied personnel on a temporary or long-term basis to Kal Kan and Seaton, among other activities, processed payroll for its employees. However, the Court determined, that the second requirement was not met, as Seaton contractually retained and exercised both supervision and control over its workers at Kal Kan's plant. The Commissioner challenged this finding on the grounds that, in his determination, Kal Kan's control over the manufacturing process and production lines served as the equivalent to exercising control over the Seaton workers themselves and, accordingly, Seaton's service qualified as a taxable employment service.

In determining whether Kal Kan exercised control over Seaton employees, the Court looked to Crew 4 You, Inc. v. Wilkins8 for guidance. This case involved whether a television crew (Crew 4 You’s employees) that assisted in the production of live television broadcasts of sporting events provided taxable employment services to the broadcasting entities televising the events. The Court endorsed the BTA’s analysis in Crew 4 You, which focused on who controlled the workers' schedules and workplace assignments. Since the broadcasting entities determined the number of crew members for the events, their work schedules, and their assignments at the job sites, and the director of the broadcasting entities “called every shot” during the broadcasts, the Court ruled for the Commissioner. Considering these factors in light of Seaton’s employment services to Kal Kan, the Court noted the factual distinctions in this matter, citing from the BTA’s opinion that “Kal Kan supervisors [had] no work-related interactions with Seaton workers on the job floor, unless a Seaton worker [was] committing a safety violation.”9

To distinguish from Crew 4 You, the Court noted that Seaton, not Kal Kan, was contractually obligated to provide comprehensive on-site management of the Seaton workers. Additionally, Seaton performed pre-employment screening of applicants, worker orientation, worker-performance management, worker coaching and counseling, interacting with workers on a daily basis, processing time cards and payroll, and enforcing workplace rules. The contracts executed between the parties expressly granted Seaton “the exclusive right to control all” over Seaton employees, prohibiting either party (Seaton and Kal Kan) from assigning, directing, or overseeing the activities of the other’s workforce. As such, Seaton contractually retained and exercised the same level of supervision and control over its employees that the broadcasting entities exercised over the workers in Crew 4 You. Accordingly, the Court held that Seaton did not provide a qualifying employment service to Kal Kan, as Kal Kan’s control over the manufacturing process and production lines did not result in control over the Seaton workers themselves.

Lastly, the Commissioner argued that the BTA added a requirement to and misapplied the Ohio taxing statute. The Commissioner noted that the BTA stated that Kal Kan had “given over a small portion of its authority to Seaton … for the supervision and control of the Seaton workers,”10 arguing that the definition of employment service was satisfied if Kal Kan either supervised or controlled the Seaton workers. The Commissioner asserted that the BTA's statement indicated that it improperly viewed the supervision or control test as supervision and control. The Court disagreed, noting that the BTA used the term “supervision and control” to describe the extent of authority that Seaton had over its own employees pursuant to the specific terms of the Seaton and Kal Kan contracts.

Further, the Commissioner stated that Seaton workers were not under “direct control” of Kal Kan, a component of the exclusion from the definition of “employment service” for contractors and subcontractors.11 Thus, when defining “employment service,” the Commissioner alleged that the BTA misapplied the statute. The Court found no merit to these assertions and distinguished that the reference to “direct control” was not made regarding the statute but to differentiate Kal Kan's authority in establishing its own manufacturing processes and procedures separate and distinct from the situation of the Seaton workers. The Court held that it properly analyzed the exercised supervision or control over the work or labor performed by Seaton's workers at Kal Kan's manufacturing plant. This finding was based upon facts supported by the record, making the BTA’s decision reasonable and lawful.

Commentary The decision in this case weighed heavily on the contractual language agreed upon between the parties in defining the staffing arrangement. It appears that some of the more recent decisions by the Court surrounding the taxability of employment services, have moved away from the Commissioner’s longstanding interpretation of what is considered to be an employment service. However, it is important to note the relatively narrow set of facts that may allow a taxpayer to successfully claim that an employment service is nontaxable. Rather than providing a clear and direct path to gaining the exemption, the Court’s jurisprudence emphasizes the importance of the facts and roles of the parties in the employment services provided, specifically which party actually controls the employees being utilized in the employment service. This case defines the focus on the “direction and control” test and the outsourcing of functions contained in a larger business operation that could qualify for the exemption. Noting that these types of arrangements have proliferated in the modern economy, taxpayers still should exercise some caution in claiming that these arrangements do not constitute taxable employment services in Ohio.


1 Seaton Corp. v. Testa, Ohio Supreme Court, Slip Op. No. 2018-Ohio-4911, Dec. 12, 2018.
2 OHIO REV. CODE ANN. §§ 5739.01(B)(3)(k); 5739.01(JJ)
3 See Accel, Inc. v. Testa, 95 N.E.3d 345 (Ohio 2017).
4 OHIO REV. CODE ANN. § 5739.02.
5 OHIO REV. CODE ANN. § 5739.01(B)(3)(k).
6 OHIO REV. CODE ANN. § 5739.01(JJ). There are five enumerated exceptions to an employment service, including “(1)[a]cting 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 [. . .]; and (5) transactions where the personnel so provided or supplied by a provider or supplier to a purchaser of an employment service are then provided or supplied by that purchaser to a third party as an employment service, except "employment service" does include the transaction between that purchaser and the third party.”
7 Moore Personnel Servs., Inc. v. Zaino, 784 N.E.2d 1178 (Ohio 2003).
8 Crew 4 You, Inc. v. Wilkins, 826 N.E.2d 817 (Ohio 2005).
9 Seaton Corp. v. Testa, Ohio Board of Tax Appeals, Case Nos. 2015-224, 2015-743, July 13, 2016.
10 Id.
11 OHIO REV. CODE ANN. § 5739.01(JJ)(1).

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