Are your consulting services subject to sales tax?

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Are your consulting services subject to sales tax?

In Ohio, when a business assigns an experienced employee to assist a client with a project, and the employee works at the client’s worksite at an hourly rate, has the business provided nontaxable consulting services or taxable employment services?

This fact pattern is common in the IT industry and reveals one of the murkier areas of Ohio sales tax law. The Tax Department’s information release ST 1993-08 offers examples of taxable employment services, but the ones involving more educated or experienced personnel don’t offer much guidance.

Taxable employment service is providing an employee to work temporarily “under the supervision or control” of the purchaser. When below-manager level personnel are provided, it’s generally clear that the purchaser is supervising or controlling the personnel, even when the personnel are assigned to assist with a particular project.  Such personnel are generally expected to work only as instructed and require day-to-day guidance.  When manager level or more experienced personnel are assigned to assist the purchaser with a project, however, who is controlling or supervising the personnel becomes less clear.  Such personnel generally work independently.

Information Release ST 1993-08 provides three guidelines for determining whether taxable employment services are being provided:

  • If the client’s intent is to supplement its workforce, the contract is for employment services
  • If the provider’s commitment is limited to supplying personnel capable of doing the work, the contract is for employment service.
  • If the client’s intent is to enter into a contract for a completed task or project, the contract is not for employment service.

These guidelines work well if there’s no project involved, or when there is a project and either the client or the personnel provider are solely responsible for its completion. In this latter situation, either the client has the know-how to complete the project and just needs more workers or the client lacks the know-how and needs the consultant to manage and complete the project.

What if, however, the client has some of the needed expertise and workers but not all, and the consultant is brought on to supplement the expertise and work hours? Under these circumstances whether employment services are being provided won’t be clear—indicia of consulting and employment services will exist.  If a provider and purchaser believe nontaxable consulting services are being provided, what can they do to show that fact?

Here are a few suggestions:

  • While the parties’ behavior will always control, having the contract clearly specify that the provider is controlling or supervising the personnel and is liable if the personnel fails their essential function helps.
  • Identify in the contract who at the provider is supervising the personnel and make sure that person regularly checks in on the project.
  • Have the contract specify what, in addition to the personnel, the provider is obligated to provide. For example, if the personnel is to complete a specific task or produce a specific deliverable, identify that task or deliverable.
  • Have the purchaser provide an exemption certificate claiming the independent contractor exception to the employment service rule. Beginning January 1, 2017, providers not charging sales tax are required to have an exemption certificate on hand.

Have questions or comments? Contact Steve.

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