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Company's Staffing Service Not Taxable, Ohio High Court Holds

Posted on Dec. 14, 2018

The provision of employees to a manufacturing plant is not a taxable service for purposes of the sales and use tax because the provider supervises and controls the employees, the Ohio Supreme Court has held.

In a December 12 opinion, Seaton Corp. v. Testa, the court ruled that an agreement entered into by Seaton Corp. to furnish and supervise supplemental staffing to a pet food manufacturing plant was not subject to Ohio's sales and use tax because it did not meet the definition of “employment service.”

In 2003 Seaton contracted with the parent company of Kal Kan Foods Inc. — a division of Mars Inc. — and with Mars itself in 2009 to hire workers to assist in production operations at Kal Kan’s manufacturing plant. Under the contract, Seaton maintained an on-site office and screened, hired, and trained workers for the plant.

After an audit, the tax commissioner determined that the service provided by Seaton was a taxable employment service and issued a sales tax assessment against Seaton and a use tax assessment against Kal Kan.

Both companies appealed the assessments to the Ohio Board of Tax Appeals (BTA), and the appeals were consolidated. Concluding that Seaton maintained supervision and control over the workers, the BTA found in favor of the taxpayers.

Finding that the BTA’s decision was reasonable and lawful, the state supreme court first determined that the BTA was not required to give deference to the tax commissioner’s findings, noting that it rejected the same argument in Accel Inc. v. Testa.

The court held that R.C. 5739.01(JJ) establishes three requirements for a service to qualify as an employment service: the service must supply personnel on a temporary or long-term basis; the personnel must perform work under the supervision or control of another; and the personnel must be compensated by the provider of the service.

The tax commissioner argued that Kal Kan controlled Seaton’s workers because it controlled the manufacturing process and production lines.

But the court rejected the commissioner’s argument, ruling that “the supervision or control exercised must be specific to the work or labor performed by the provided personnel — not to an overall production process.”

The court noted that evidence before the BTA showed that Seaton determined the number of workers needed for each shift, scheduled its workers, and monitored their work production. The court also pointed out that the service contracts gave Seaton the exclusive right to control its employees and “prohibited both Seaton and Kal Kan from assigning, directing, or overseeing the activities of the other party’s workforce.”

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