Reminder: Ohio eliminates sales/use tax on employment and employee placement services

For almost three decades, Ohio has been one of the only states in the country to impose sales and use tax on employment services. However, this changed when Ohio Governor Mike DeWine signed Ohio’s biennial budget bill, Amended Substitute House Bill 110. As part of the bill, sales and use tax on employment services and employment placement services was eliminated. The elimination of the tax will take effect for transactions on or after Oct. 1, 2021.

History of the taxability of employment services

“Employment services” were defined as transactions in which a service provider furnishes personnel on a temporary or long-term basis to perform work under the supervision of the purchaser. The determination of whether a company was providing or receiving “employment services” has been a hotly contested issue during audits and in litigation for years. Sales and use tax on these services has historically hit hard industries that rely on temporary employment, including manufacturing and information technology.

Ohio law defined “employee placement services” as the service of finding employment for a person or finding a prospective employee to fill an open position. The taxability of employee placement services imposed sales or use tax on outside recruiting services.

Next steps

Companies that have historically paid sales tax to their vendors on these transactions should review their purchases after Oct. 1, 2021, to ensure sales tax is no longer being charged. If the services were performed prior to Oct. 1, 2021, but not billed until after Oct. 1, 2021, it’s proper for the vendor to charge sales tax on the transaction. Companies that review purchases and manually file use tax returns should ensure that use tax is no longer being accrued on these services starting on Oct. 1, 2021. Lastly, companies that have automated accruals for certain vendors or accounts should analyze their transactions to determine if processes should be changed going forward.

There were other significant tax changes resulting from Ohio’s budget bill as we previously summarized.

Questions about how this law change or other Ohio tax changes affect your business? Please feel free to contact us.