Sales Tax State Activity Update - August 2004

Development Of Application Software Taxable in Ohio

Services rendered in the development of application software were recently ruled as a taxable employment service in Ohio.

A taxpayer provided computerized information services to its customers. It also developed its own application software in order to deliver its services. When the taxpayer’s regular employees did not constitute a sufficient work force to develop the application software, the taxpayer hired outside help from other companies.

The outside companies did not oversee the work performed - regular employees as well as outside employees reported to the taxpayer’s project manager. The hours worked by the outside or temporary employees were arranged to correspond with the regular employees as required.

Upon audit, the taxpayer was assessed tax on the services it purchased from outside vendors used in connection with developing the application software. The Tax Commissioner determined that all three tests to define an employment service were met as outlined in R.C.5739.01 (jj). Namely,

• the outside vendors provided personnel;
• they were under the supervision of the taxpayer; and,
• were paid by the outside vendors.
  
  

The taxpayer argued that the Commissioner should examine the true object of the services, which is the development of application software. In addition, the taxpayer said it relied upon Account’s Computer Services, Inc. v. Kosydar (1973), 35 Ohio St. 2 nd 120, and Emery Industries, Inc. v. Limbach (1989), 43 Ohio St. 3 rd 134.

The Commissioner found the taxpayer’s reliance on those two cases to be misplaced. In determining those cases, the true object surrounded the tax consequences of transactions that included both the transfer of tangible personal property and the provision of personnel.

The case is available at: http://bta.ohio.gov/03j1083.pdf

( BOARD OF TAX APPEALS, { CASE NO. 2003-J-1083} Reed Elsevier, Inc., vs Zaino, Tax Commissioner of Ohio) 08/04

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