United States

Ohio Supreme Court affirms decision on employment service exemption

Temporary labor assigned on a permanent basis is exempt from sales tax


On Dec. 6, 2017, the Ohio State Supreme Court held in Accel, Inc. v. Testa, that a taxpayer’s purchase of temporary labor from a staffing agency was exempt from the Ohio sales and use if the temporary employee is assigned on a permanent basis. The court established that both the contract between the parties and the facts and circumstances will be used in determining whether the temporary employee has been assigned on a permanent basis.


The taxpayer was a manufacturer that created toiletry gift sets for its customers. After purchasing temporary labor from a staffing agency to work in the manufacturing operations of the business, the taxpayer claimed exemption from Ohio sales tax under Ohio Rev. Code Section 5739.01(JJ), which defines taxable and exempt employment services. Under audit, the Ohio Department of Taxation denied the exemption and assessed sales tax on the total amount of the temporary labor purchases. The taxpayer appealed the decision to the Ohio Board of Tax Appeals (BTA) which ruled in favor of the taxpayer and reversed the assessment of tax on the purchases of temporary labor.

Ohio Rev. Code Section 5739.01(JJ)(3) states that otherwise taxable “employment services” do not include, “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” (emphasis added).  

Ohio Supreme Court Appeal

On appeal to the Ohio Supreme Court, the department argued that the contract between the taxpayer and the staffing agency did not explicitly state that the personnel were “permanently assigned” and; therefore, the employment services exemption did not apply. The court ruled that the fact the contract did not explicitly state that the employees were “permanently assigned” was not controlling. The court stated that if, after review, the contract assigns the employees indefinitely and the intention is not that of a seasonal employee or substitute for a current employee, that the contract qualifies the taxpayer for the exemption.

The department also argued that the temporary employees were hired with the intent of being seasonal employees by citing a fluctuation of temporary employees during different seasons. This claim, if verified, would have automatically disqualified the taxpayer from claiming the exemption. However, the court ruled that this was not the case for the taxpayer. The court cited the fact that when the business needs had fallen for the taxpayer, the temporary employees were not reassigned by the staffing agency but rather worked fewer hours, maintaining assignment with the taxpayer.

The court was ultimately convinced by the taxpayers arguments, affirming the BTA decision reversing the sales tax assessment on the purchases of temporary labor by the department.


Two important considerations come out of this decision by the court. First, the court’s decision that the contract between a taxpayer and a staffing agency does not have to include the phrase “permanently assigned” establishes the possibility of sales tax refunds. Employment services purchasers should review older contracts that were once deemed taxable to see if any wording would imply assignment indefinitely to the taxpayer while also reviewing the facts and circumstances of how the contract was performed.

The court also establishes that the taxpayer’s temporary employment level does not need to be constant. Accordingly, employment levels can fluctuate depending on what happens to the temporary employees in slower months of the year. If a taxpayer once thought it did not qualify for the exemption due to fluctuating employment levels, the taxpayer should review the circumstances of the staffing arrangement to determine if refund opportunities exist on previous contracts while also claiming exemption on further arrangements.


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