Title: H.R. Opinions, Inc. v. Zaino

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as H.R. Opinions, Inc. v. Zaino, 100 Ohio St.3d 373, 2004-Ohio-1.] 
 
 
H.R. OPTIONS, INC., APPELLEE, v. ZAINO, TAX COMMR., APPELLANT. 
[Cite as H.R. Options, Inc. v. Zaino, 100 Ohio St.3d 373, 2004-Ohio-1.] 
Taxation — Sales tax on company that provides third-party employment services 
for its clients — Exclusions — R.C. 5739.01(JJ)’s definition of an 
“employment service” applied — Board of Tax Appeals’ decision 
reversed when unreasonable and unlawful. 
(No. 2002-1477 — Submitted October 8, 2003 — Decided January 7, 2004.) 
APPEAL from the Board of Tax Appeals, No. 01-M-808. 
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LUNDBERG STRATTON, J. 
{¶1} 
H.R. Options, Inc. (“HRO”) is a California-based human resources 
firm that provides third-party employment services for its clients.  HRO serves as 
the employer of record for persons whose services its clients want to utilize but 
whom the clients do not want to hire as employees or as independent contractors.  
By having HRO hire the desired personnel and furnish them for the clients’ use, 
the clients are able to avoid various potential tax and pension problems.  HRO 
hires persons referred to it by the clients, puts them on its own payroll, and 
provides them for use by its clients. 
{¶2} 
HRO pays the employee’s wages, as well as all the taxes and other 
costs associated with being an employer.  HRO bills the client for reimbursement 
of the wages and all other costs (taxes, FICA, etc.) it pays as the employer.  As 
compensation for its services, HRO also charges its clients a fee, which is a mark-
up based on the wages paid to the employee and other factors. 
{¶3} 
HRO and the five clients it had in Ohio entered into written 
agreements that provided that the client desired to retain HRO as the common-law 
employer of employees with appropriate qualifications and skills to provide 
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services to be utilized by the clients.  The agreements further provided that the 
clients would refer candidates to HRO for employment.  HRO does not fill the 
employment needs of any of its clients from its own pool of available employees.  
Most of the agreements between HRO and its clients provided for a term of two 
or three years.  However, some of the contracts included the right to terminate 30 
days after written notice. 
{¶4} 
The agreements between HRO and its employees provided that the 
employees could be terminated at any time, without cause, with or without notice, 
at the option of HRO or the employee.  With only a few exceptions, the 
employment agreements between HRO and the employees it provided contained a 
starting date, but no ending date. 
{¶5} 
The Tax Commissioner assessed HRO a sales tax for the audit 
period January 1, 1993, through June 30, 1997.  HRO filed a petition for 
reassessment.  After a hearing, the Tax Commissioner affirmed his assessment, 
finding that HRO services constituted an “employment service” as defined in R.C. 
5739.01(JJ).  The Tax Commissioner further found that HRO’s contracts with its 
clients did not meet the requirements for exclusion from the tax on “employment 
service” found in R.C. 5739.01(JJ)(3).  HRO appealed to the BTA. 
{¶6} 
The BTA reversed the Tax Commissioner, finding that HRO’s 
activities did not meet R.C. 5739.01(JJ)’s definition of an “employment service.”  
The BTA found that HRO did not provide or supply personnel as required by that 
definition.  Instead, the clients referred personnel to HRO.  Moreover, even if 
HRO were an employment service, the employees were assigned to the clients on 
a permanent basis, within the meaning of the exclusion contained in R.C. 
5739.01(JJ)(3), because the employees were never reassigned by the service 
provider and were assigned for an indefinite duration. 
{¶7} 
This cause is before the court upon an appeal as of right. 
January Term, 2004 
3 
{¶8} 
In his brief, the Tax Commissioner contends that the BTA did not 
have jurisdiction to consider whether the transactions between HRO and its 
clients constituted an employment service.  Although the Tax Commissioner 
raised this jurisdictional issue for the first time in his brief to this court, we will 
treat the Tax Commissioner’s contention as preserved because a party cannot 
waive subject-matter jurisdiction, regardless of procedural deficiencies.  Mid-
States Terminal, Inc. v. Lucas Cty. Bd. of Revision (1996), 76 Ohio St.3d 79, 82, 
666 N.E.2d 1077. 
{¶9} 
When an appeal is filed with the BTA from a final determination 
of the Tax Commissioner, R.C. 5717.02 requires that the notice of appeal  “shall 
also specify the errors therein complained of.”  This court has previously stated 
that in resolving questions regarding the effectiveness of a notice of appeal, we 
are not disposed to deny review by a hypertechnical reading of the notice.  MCI 
Telecommunications Corp. v. Limbach (1994), 68 Ohio St.3d 195, 197, 625 
N.E.2d 597.  We find that under a fair reading, the notice of appeal filed by HRO 
with the BTA does raise the issue of whether HRO was providing an employment 
service and, therefore, we deny the Tax Commissioner’s challenge to the BTA’s 
jurisdiction to decide the issue of whether HRO was providing an employment 
service. 
{¶10} The Tax Commissioner next contends that the BTA erred in 
finding that the services provided by HRO do not constitute an “employment 
service.”  R.C. 5739.01(JJ) defines the term “employment service” as “providing 
or supplying personnel, on a temporary or long-term basis, to perform work or 
labor under the supervision or control of another, when the personnel so supplied 
receive their wages, salary, or other compensation from the provider of the 
service.” 
{¶11} When the BTA considered the facts of this case, it determined that 
its decision in Moore Personnel Serv., Inc. v. Zaino (Apr. 12, 2002), B.T.A. No. 
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99-R-2098, 2002 WL 595178, was dispositive.  The business of Moore Personnel 
Services, Inc. was conducted in essentially the same manner as that of HRO.  In 
both cases, the taxpayers served as employer of record for employees that were 
sent to them by their clients.  In both cases, the taxpayers contended that, since 
they did not recruit the employees, they were not “providing” or “supplying” the 
personnel within the meaning of R.C. 5739.01(JJ). 
{¶12} This court decided Moore Personnel Serv., Inc. v. Zaino, 98 Ohio 
St.3d 337, 2003-Ohio-1089, 784 N.E.2d 1178, after HRO had filed this appeal.  
We reversed the BTA’s decision in Moore and held that Moore’s activities 
constituted an “employment service.”  In that decision we stated: 
{¶13} “The relevant facts are that Moore was providing and supplying 
personnel on a temporary or long-term basis to perform work for another.  The 
personnel supplied by Moore were Moore’s employees, although they worked 
under the supervision or control of Moore’s clients.  The personnel supplied to 
Moore’s clients received their compensation from Moore, the ‘provider of the 
service.’  Thus, Moore’s services meet the definition of ‘employment service’ set 
forth in R.C. 5739.01(JJ).”  Moore Personnel Serv., Inc. at ¶ 20. 
{¶14} The facts in this case are essentially identical to those in Moore.  
The only basis for the BTA’s decision that HRO’s activities did not constitute an 
employment service was its decision in Moore, and since that decision has been 
reversed by this court, the BTA’s decision finding that HRO’s activities did not 
constitute an “employment service” is also reversed.  Thus, we conclude that 
HRO is an employment service under R.C. 5739.01(JJ). 
{¶15} Because HRO’s activities constitute an “employment service,” 
then the separate and distinct issue arises of whether the BTA erred in finding that 
HRO’s services were excluded from the definition of “employment service” by 
R.C. 5739.01(JJ)(3), which became effective July 1, 1993.  Am. Sub.H.B. No. 
152, 145 Ohio Laws, Part III, 4297.  After setting forth the definition for 
January Term, 2004 
5 
“employment service,” R.C. 5739.01(JJ) sets forth four exclusions.  The exclusion 
at issue here, R.C. 5739.01(JJ)(3), excludes from the definition of “employment 
service,” and therefore from taxation, transactions where the provider of the 
service is:   
{¶16} “(3) Supplying personnel to a purchaser pursuant to a contract of at 
least one year between the service provider and the purchaser that specifies that 
each employee covered under the contract is assigned to the purchaser on a 
permanent basis.” 
{¶17} Because R.C. 5739.01(JJ)(3) represents an exclusion from 
taxation, it must be construed most favorably to the taxpayer.1 
{¶18} Thus, to be excluded from taxation under R.C. 5739.01(JJ)(3), an 
employment service must prove two elements: (1) a contract of at least one year 
between the service provider and the purchaser, and (2) a contract that specifies 
that each employee covered under the contract is assigned to the purchaser on a 
permanent basis. 
{¶19} The Tax Commissioner does not challenge element one above and 
the parties agree that the word “permanent” does not need to appear in the 
contract.  However, the Tax Commissioner does challenge the BTA’s decision as 
to element two. 
{¶20} The primary dispute between the parties in this case centers on the 
word “permanent” in R.C. 5739.01(JJ)(3).  To fill the void for a definition of 
“permanent” in R.C. 5739.01(JJ)(3), the BTA found that permanency connotes 
the expectation that the employees supplied are intended to remain for the 
contracted-for period.  Thus, the BTA determined permanency based on whether 
the employees are ever reassigned by the service provider. 
                                          
 
1 Reporter's Note: This paragraph was modified in H.R. Options, Inc. v. Wilkins, 102 Ohio St.3d 
1214, 2004-Ohio-2085, 807 N.E.2d 363, at ¶ 2. 
SUPREME COURT OF OHIO 
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{¶21} We do not find that such an interpretation represents the plain or 
workable meaning of the word “permanent” within the context of R.C. 
5739.01(JJ)(3).  We start with the understanding that an employee assigned on a 
permanent basis need not be assigned to an employer forever.  We believe that in 
the context of R.C. 5739.01(JJ)(3), assigning an employee on a permanent basis 
means assigning an employee to a position for an indefinite period, i.e., the 
employee’s contract does not specify an ending date and the employee is not 
being provided either as a substitute for a current employee who is on leave or to 
meet seasonal or short-term workload conditions.  Thus, both the contract and the 
facts and circumstances of the employee’s assignment are factors that must be 
reviewed to determine whether the employee is being assigned on a permanent 
basis. 
{¶22} When the Tax Commissioner’s agents examine an employment 
contract, they must be able to determine at that time whether an employee has 
been assigned on a permanent basis.  The contract, along with the facts and 
circumstances of the assignment, should permit the Tax Commissioner’s agent to 
determine permanency.  The actual length of the employee’s assignment is only 
one of the factors to be used.  Where the assignment is of a seasonal nature or 
serves to meet short-term workload conditions, these factors are also relevant. 
{¶23} In this case, the contracts between HRO and its clients 
incorporated a blank, standardized employee contract form.  However, a review of 
the actual employee contracts is required to determine whether the employee was 
assigned for a definite or an indefinite term.  The employee contracts for HRO 
client Elkem Metals Company set forth a starting date but no ending dates.  Three 
of the 10 contracts for client Henkel Corporation set forth starting and ending 
dates.  The remaining contracts for employees referred by Aris Isotoner, 
Swarovski American Ltd., and Champion Jogbra set forth starting but no ending 
dates. 
January Term, 2004 
7 
{¶24} The Elkem and Henkel contracts (with the exception of the three 
with ending dates) provided for assignments “on a permanent basis” within the 
meaning of R.C. 5739.01(JJ)(3).  Thus, these transactions are excluded from 
taxation. 
{¶25} Nearly all of the 30 Iris Isotoner contracts refer to the positions as 
“seasonal,” and the testimony of HRO’s president clearly sets forth that 
employees assigned that client by HRO were seasonal employees. As such, these 
employees cannot be considered as being assigned on a permanent basis.  
Whether the employees assigned to Swarovski and Champion Jogbra were 
seasonal only is not clear. 
{¶26} For all of the foregoing reasons, we hold that the decision of the 
BTA that HRO is not an employment service is unreasonable and unlawful and 
we reverse it.  As regards the application of the R.C. 5739.01(JJ)(3) exclusion to 
HRO’s transactions with Elkem Metals and Henkel (with the exception of the 
three contracts with starting and ending dates), we conclude that the decision of 
the BTA is reasonable and lawful, but for reasons different from those stated by 
the BTA.  As regards the application of the R.C. 5739.01(JJ)(3) exclusion to 
HRO’s transactions with Aris Isotoner, and the three Henkel contracts with 
starting and ending dates, we hold that the decision of the BTA is unreasonable 
and unlawful and reverse it.  Finally, as regards the BTA’s decision regarding the 
Swarovski and Champion Jogbra contracts, we remand that portion of the cause to 
the BTA for further testimony to determine whether either or both of those 
contracts were for seasonal employees. 
Decision affirmed in part, 
reversed in part 
and cause remanded in part. 
 
MOYER, C.J., RESNICK, F.E. SWEENEY, PFEIFER, O’CONNOR and 
O’DONNELL, JJ., concur. 
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__________________ 
 
Bricker & Eckler, L.L.P., and Mark A. Engel, for appellee. 
 
Jim Petro, Attorney General, and Robert C. Maier, Assistant Attorney 
General, for appellant. 
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