- A manufacturing business using an employment agency to provide workers under a master services agreement (“MSA”) claimed the arrangement was not subject to sales tax as the provision of temporary employment services.
- The Ohio Board of Tax Appeals (the “Board”) reviewed both the contract and the facts and circumstances surrounding the use of the workers under the MSA and determined that the services were subject to tax.
- The sales tax on temporary employment services has been repealed in Ohio subsequent to the onset of this litigation; however, several states impose taxes on these services, including a recent enactment by Washington State (Washington Enacts Significant B&O and Sales Tax Changes.)
Background
The Whirlpool Corporation (“Whirlpool”) manufactured consumer appliances at five locations in Ohio. Each plant utilized Kelly Services (“Kelly”), who provided workers to Whirlpool who worked alongside its own employees. The MSA between Whirlpool and Kelly provided that the services were for at least one year and that each contract worker was considered assigned to Whirlpool on a permanent basis.
The Contractual Arrangement
The concept of permanent basis in the contract was defined with reference to the use of the term in the Ohio statutes; however, the parties agreed that it merely meant that there was no time duration to the contract worker’s employment, nor was there a guarantee of employment for any specific period of time. In statements of work attached to the contract, Kelly personnel were referred to as “temporary employees.”
Whirlpool sought a refund for use taxes paid, since as ostensible permanent employees, they qualified for a safe harbor exception in the statute providing for the taxation of temporary services. Additionally, Whirlpool claimed that the Kelly personnel did not perform their services under the supervision or control of Whirlpool as was required under the statute.
The Tax Commissioner (the “Commissioner”) rejected these arguments. The Commissioner found that the employees were neither intent nor in fact, permanent in nature, as required by Ohio Rev. Code § 5739.01(JJ)(3). Kelly, according to the Commissioner, only performed ministerial human resources functions while Whirlpool managed all other parts of the employment relationship.
The Board of Tax Appeals Proceedings
Whirlpool presented evidence from two witnesses at the hearing. An operations manager at one of the plants testified as to the nature of the manufacturing process and the roles of both Kelly and Whirlpool personnel in that process. Kelly personnel constituted between 10 and 15 percent of the workers on the line. Although Kelly personnel had a higher turnover rate, the employee cost was less than Whirlpool personnel, and Kelly employees were less qualified than Whirlpool employees. Kelly employees filled less skilled jobs on the line If available labor exceeded needs for the day, Whirlpool employees were allowed to leave but still received full pay. Conversely, if overtime was needed, both Kelly and Whirlpool personnel were eligible for overtime.
The operations manager testified that only about 30 percent of the Kelly employees completed employment on mutual terms – the rest either left voluntarily or were fired. A portion of that 30 percent were hired directly by Whirlpool. An employee from the tax department also testified with respect to some of the technical tax issues with respect to the underlying evidence.
The Board looked at the Commissioner’s denial of the refund claim de novo as required by Ohio law. It focused its analysis on the permanent assignment exception to the general rule of taxability for temporary reemployment services. It noted that an analysis of this provision, and its applicability in the instant case, was not merely governed by the contract language, but also by the facts and circumstances surrounding the arrangement. According to the Board, the permanent assignment exception has two requirements: the contract in question must not specify an ending date for employment, and the employee must not be a substitute for a current employee on leave or to meet seasonal or short-term workload needs. The Board found that the contract term noted a period of employment of at least a year, that Whirlpool intended permanent placement, and that the scope of work used the phrase “temporary workers.” It found none of these facts to be dispositive.
The Board denied the refund based upon the fact that, in practice and as indicated by the intent of the parties to the contract, the Kelly employees were used for short-term needs caused by repeated turnover of the Kelly employees or planned leave of the Whirlpool employees. Therefore, according to the Board, the employment was not indefinite and did not qualify for the permanent assignment exception.
Forvis Mazars Insight:The Board’s decision highlights the importance of both the contract language and following that contract language in practice; failure to do so may result in unintended tax consequences due to the contradiction introduced by extrinsic evidence.
How Forvis Mazars Can Help
While Ohio has repealed its tax on temporary employment services, many other states still impose tax on these services, as well as certain other services. We can help you understand the sales tax implications of current service arrangements and assist you in considering modifications to those services to ameliorate potential tax liabilities.