Pennsylvania and Ohio are two states that have long taxed temporary employment services, also known as help supply or employment agency services. Both states have recently made significant changes to their laws. Pennsylvania has expanded their application of the tax effective September 16, 2021 while Ohio repealed the tax effective October 1, 2021.
The tax is imposed on the service fee charged by the service provider. The service fee is defined as the gross fee charged to the customer by the service provider less employee costs. The employee costs must be separately stated. If they are not, the entire charge is subject to tax. Employee costs include items such as an employee’s base salary, benefits, and taxes paid on the employees behalf.
Pennsylvania taxes employment agency services when the service is delivered or used in Pennsylvania. Temporary employees that report to out-of-state locations have typically not been subject to tax. However, the Pennsylvania Department of Revenue has updated their guidance to specify that the services are taxable when the benefit of the service is received in Pennsylvania regardless of where the service is provided.
This change presents several difficulties for businesses. Businesses must now track where the benefit of help services is received to determine if use tax is due on the charges, which is more subjective than determining the physical location of a worker. Pennsylvania companies must also have bills that separately state employee costs and services fees in order to pay the correct tax due. Many out-of-state help supply service companies may not understand this requirement and might be unwilling or unable to issue detailed bills. Businesses should also review their accrual procedures to determine if they are automatically paying tax for temporary help workers that are physically in Pennsylvania. It is possible that a temporary employee in Pennsylvania is actually providing their services for delivery or use in another state which is not taxable by Pennsylvania.
Unlike Pennsylvania, Ohio repealed their temporary help law. This law had been expanded through court decisions over the years because it was difficult for businesses to document exclusions from the tax. It was also criticized as a penalty for employing workers because the tax was imposed on the entire charge for the temporary employee instead of just on the service fee as in Pennsylvania. This is a substantial change for businesses that rely heavily on temporary labor including manufacturers and distributors. Businesses that utilize temporary employment services in Ohio should review their invoices to be sure sales tax is no longer charged after October 1. Taxpayers, especially direct pay permit holders, should also review their use tax accrual procedures to be sure they discontinue remitting use tax on these purchases.
By Nic Schatte and Kimberly Vance