Lead Opinion
{¶ 1} In this case, Bay Mechanical & Electrical Corporation, a specialty mechanical contractor, challenges a sales-tax assessment issued by the tax commissioner with respect to Bay’s purchase of allegedly taxable “employment services.” During the audit period, which extends from January 1, 2003, through December 31, 2005, Bay purchased the services from two entities. Bay treated the personnel supplied by Tradesmen International, Inc. and Construction Labor Contractors (“CLC”) as “permanent-assignment” employees and therefore re
{¶ 2} On audit, the commissioner overruled Bay’s exempt treatment of the transactions on the primary ground that Bay had failed to supply “facts and circumstances” evidence in relation to the assignment of individual employees. On appeal, the BTA found that the testimony and the summary exhibits offered by Bay were insufficient to prove entitlement to the exemption, with the result that the BTA affirmed the commissioner’s denial of the exemption. Bay Mechanical & Elec. Corp. v. Levin, BTA No. 2008-K-1687,
{¶ 3} Before this court, Bay renews its contention that the language of its contracts and the testimony offered satisfy the one-year and permanent-assignment criteria of R.C. 5739.01(JJ)(3). We disagree, and we therefore affirm the decision of the BTA.
I. Course of proceedings
{¶ 4} Bay Mechanical & Electrical Corporation is a construction contractor that provides various services such as plumbing, piping, HVAC, electrical wiring, and maintenance work. Bay directly employed “core employees” to carry out its projects, but additionally relied on labor supplied by third parties — in other words, Bay purchased “employment services,” which are generally subject to sales tax unless specifically excepted.
{¶ 5} During the audit period, which stretches from January 1, 2003, through December 31, 2005, Bay held a direct-payment permit. Although the sales-tax law usually requires vendors to charge the tax to their consumers and then remit the collected tax to the state, see R.C. 5739.03 and 5739.29, another section — R.C. 5739.031 — empowers the commissioner to issue direct-payment permits to consumers. Under such a permit, the consumer files monthly sales-tax returns that ascertain its own liability to pay the tax on its own purchases.
1. The audit and assessment
{¶ 6} The tax commissioner commenced his audit of Bay’s purchases with a notification letter dated February 13, 2006. Over the course of several months, the tax agent worked out the method for the audit with Bay. On December 20, 2006, Bay representatives met with the tax agent at Bay’s Lorain headquarters,
{¶ 7} By letter dated March 7, 2007, Bay’s controller announced that Bay had decided not to produce the additional information. The letter recited that Bay had furnished to the tax agent the employment-service contracts between it and Tradesmen and CLC and that Bay had paid sales tax on employment services as to specified temporary employees supplied by other vendors. Bay took the position that it had “followed the intent and the letter of the law with regard to leased construction labor” and asked the tax agent to proceed to issue his preliminary report without the benefit of additional documentation.
{¶ 8} The tax agent’s audit remarks reveal the department’s own position. After reviewing the two CLC contracts and the three Tradesmen contracts, the tax agent concluded that two of the Tradesmen contracts were disqualified as a basis for exemption because they referred to nonpermanent assignments. In reviewing the other contracts, the agent first confirmed the existence of clauses that established that the contracts were “for at least one year” as required by R.C. 5739.01(JJ)(3). Next, the agent stated that although the remaining three contracts referred to indefinite or permanent assignment of the employees, they did not qualify as a basis for exemption because they failed to specify those employees or positions subject to such permanent or indefinite assignment. With respect to Tradesmen, the additional question arose whether employees had been assigned pursuant to the temporary-service contract or the permanent-assignment contract.
{¶ 9} As a result of the audit, the tax department issued a use-tax assessment against Bay on May 25, 2007, calling for payment of $105,078.77 of use tax, of which $74,574.65 related to employment services.
{¶ 10} On July 17, 2007, Bay filed its petition for reassessment, which challenged the employment-services portion of the assessment and stated that Bay was not requesting a hearing. An attorney with the tax department’s Office of Chief Counsel wrote to Bay’s counsel, noting that the audit agent had requested “additional information, including comprehensive invoice and time sheet information for employees supplied to the petitioner by Tradesmen International, Inc. and Construction Labor Contractors.” The attorney stated that the information was “necessary in order to determine whether or not the employees were placed with the petitioner on a permanent basis per H.R. Options, Inc. v. Zaino (2004),
{¶ 11} On July 22, 2008, the tax commissioner issued his final determination, which denied the exemption on the ground that Bay had failed to supply “facts and circumstances” evidence in the form of “comprehensive invoice and time-sheet information” and that Bay had failed to submit the tax department’s employment-services questionnaire. The commissioner additionally faulted Bay for not supplying contracts with individual employees. The commissioner concluded that he could not grant the exemption because Bay had “not supplied information regarding the employees’ contracts or the facts and circumstances regarding the employees’ assignments.”
3. The BTA appeal
{¶ 12} Bay appealed to the BTA and, at the BTA hearing, presented the testimony of Bay’s controller along with four summary exhibits. The exhibits (1) identified the assigned employees by name, (2) associated each employee with either Tradesmen or CLC, (3) set forth the precise duration of each employee’s assignment, and (4) stated the reason each employee had stopped working for Bay. The controller testified that she had prepared the documents by referring to the employment-service invoices received from Tradesmen and CLC — documents that the tax agent had requested during the audit but that were not produced.
{¶ 14} On June 14, 2011, the BTA issued its decision. The BTA stated that Bay had the burden to prove that each employee covered under the contracts was assigned to Bay on a permanent basis — meaning that the personnel were assigned for a indefinite period and not assigned either as a substitute for an employee who was on leave or to meet seasonal or short-term workload conditions. Bay Mechanical, BTA No. 2008-K-1687,
II. Legal Analysis
{¶ 15} In a claim for tax exemption, the “onus is on the taxpayer to show that the language of the statute ‘clearly expresses] the exemption’ in relation to the facts of the claim.” Anderson/Maltbie Partnership v. Levin,
{¶ 16} Also significant are two settled propositions that govern, respectively, the BTA’s review of the tax commissioner’s determinations and our review of a BTA decision. First, before the BTA, “[t]he Tax Commissioner’s findings ‘are presumptively valid, absent a demonstration that those findings are clearly unreasonable or unlawful.’ ” A. Schulman, Inc. v. Levin,
{¶ 17} With these preliminaries in mind, we turn to the exemption claim at issue. Effective January 1, 1993, Ohio imposes sales and use tax on the provision
{¶ 18} Shortly after enactment of the sales tax on employment services, the General Assembly decided to create an additional exception for “permanent assignment” employees. Am.Sub.H.B. No. 152, 145 Ohio Laws, Part III, at 4297, codified at R.C. 5739.01(JJ)(3). Under that provision, “employment service” did not include “[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.” In H.R. Options,
{¶ 19} H.R. Options is additionally significant because we construed the exemption as turning on the facts of each employee’s assignment rather than on the presence of “magic words” in the employment-service agreements themselves. H.R. Options,
{¶ 20} These legal standards furnish the basis for our analysis of Bay’s appeal.
1. Bay’s argument that its contract language entitles it to exemption without regard to the facts and circumstances is wrong
{¶ 21} Bay argues that “the plain language of the [employment service contracts] alone is sufficient” to establish the exemption with respect to the purchase of employment services associated with employees assigned under those contracts. In Bay’s view, the mere presence of “permanent” and “indefinite” assignment terminology in its contracts is dispositive: no inquiry into facts and circumstances of the assignment of individual employees is necessary.
{¶ 22} The foregoing discussion establishes that Bay is mistaken. In H.R. Options,
{¶ 23} Just as the absence of magic words is not dispositive of a permanent-assignment claim, neither does the presence of those words establish entitlement to the exemption as a matter of law. In this regard, H.R. Options adopts a consistent theme sounded by the BTA itself when reviewing exemption claims: when “determining whether an exception or exemption to taxation applies, it is not just the form of a contract that is important,” but instead, the “crucial inquiry becomes a determination of what the seller is providing and of what the purchaser is paying for in their agreement.” Excel Temporaries, Inc. v. Tracy, BTA No. 97-T-257,
2. The existence and production of contracts with individual employees is not a necessary condition for exemption under R.C. 5739.01(JJ)(3)
{¶ 25} In his final determination, the commissioner faults Bay for not producing contracts with individual employees. Although the commissioner appears to have abandoned this contention, we think it prudent to address and dispose of it.
{¶ 26} In H.R. Options,
{¶ 27} We hold that the existence of contracts with individual employees was not a necessary condition for exemption under R.C. 5739.01(JJ)(3).
3. Claiming an exemption in the context of a direct-payment audit calls for producing appropriate documentation on request
{¶ 28} It'is significant that the present claim for exemption from the sales tax arises in the context of an audit of purchases made by a taxpayer that holds a direct-payment permit under R.C. 5739.031. As noted, that section authorizes the issuance of permits that allow the taxpayer to avoid paying sales tax to vendors and instead report and remit tax on its purchases directly to the state.
{¶ 29} Under R.C. 5739.031(D), the holder of a direct-payment permit has the duty to “keep and preserve suitable records of purchases together with invoices
{¶ 30} In this case, the commissioner fulfilled his duty by specifically requesting facts-and-circumstances evidence — notably, the employment-service invoices. But Bay made a deliberate decision to refuse to honor that request. Under these circumstances, the commissioner acted reasonably and lawfully when he denied the exemption because of Bay’s failure to produce the requested pertinent documentation.
{¶ 31} In so holding, we acknowledge that cases may arise where a taxpayer’s good-faith efforts to produce documentation could lead to failure. In a given case, for example, a fire may have destroyed the relevant records or the records may be in the possession of someone other than the taxpayer and unattainable by the taxpayer. Such circumstances might in a proper case justify suspending the requirement that facts-and-circumstances evidence be produced and reviewed. Nor do we hold that a taxpayer must comply with arbitrary requests by the commissioner — indeed, the commissioner’s power to require production is constrained by the principle that the information request be reasonably calculated to lead to the production of matter relevant to whether personnel have been permanently assigned within the intendment of R.C. 5739.01(JJ)(3) as construed by II.R. Options.
{¶ 32} This case, however, presents a straightforward refusal by Bay to produce clearly relevant documents on request, some of which the taxpayer itself later used to prepare summary exhibits at the BTA. The commissioner therefore acted appropriately in denying the exemption.
I. The BTA acted reasonably and, lawfully in affirming the commissioner’s denial of the exemption
{¶ 33} As discussed, at the BTA, Bay took a step beyond its reliance on the employment-service contracts when it presented not only the testimony of its controller, but also four summary exhibits concerning the individual assignments that were referable to the contracts at issue. The summary exhibits purport to show the names and periods of employment of particular employees pursuant to the employment-service contracts. The testimony establishes that their founda
{¶ 34} Because (as already discussed) the BTA’s determinations of the credibility of witnesses and its weighing of the evidence are subject to a highly deferential abuse-of-discretion review on appeal, we will reverse only if we find an abuse of discretion. HealthSouth Corp.,
{¶ 35} First, although the taxpayer’s evidence in HealthSouth showed substantial evidential weaknesses, we nonetheless affirmed the BTA’s decision to order the commissioner to issue a reduced assessment based on the totality of the record. The same broad deference that we exercised toward the BTA’s judgment in HealthSouth is merited in this case as well.
{¶ 36} Second, HealthSouth was a case in which the record contained not only the taxpayer’s summary exhibits presented at the BTA, but other documentation to support the taxpayer’s claim that had been submitted contemporaneously with the original tax returns on which the commissioner had predicated his assessment. HealthSouth, ¶ 23, 25-26. By contrast, the underlying facts-and-circumstances evidence in the present case was neither shown to the tax agent during the audit, nor presented in support of Bay’s petition for reassessment, nor offered as an exhibit at the BTA hearing. Accordingly, the record in this case was devoid of documentation that would corroborate the summary exhibits on which Bay chose to rely.
{¶ 37} Bay suggests that by producing the underlying documentation to the tax commissioner’s counsel on CDs during discovery at the BTA, it cured its earlier failure to produce it during the audit or in connection with the petition for reassessment. According to Bay, it “should not be penalized for producing the requested information for the first time during proceedings before [the BTA].” But imposing a penalty is completely beside the point. The issue is: did the primary documentation ever become part of the record so that the BTA could review it in deciding Bay’s appeal? It did not. Neither Bay nor the commissioner presented the documentation as a hearing exhibit. And because Bay had the burden of rebutting the commissioner’s determination, it was not the commissioner’s responsibility to offer the documents as evidence, even if he did obtain them through discovery. Moreover, a taxpayer at the BTA is not entitled to relief merely because the commissioner adduces no evidence contra his claim. Higbee Co. v. Evatt,
{¶ 39} Finally, Bay suggests that by virtue of admitting the summary exhibits under Evid.R. 1006, the BTA was constrained to accord them some evidential weight. We disagree. The Rules of Evidence are not binding at the BTA, even though they may be consulted for guidance. Plain Local Schools Bd. of Edn. v. Franklin Cty. Bd. of Revision,
III. Conclusion
{¶ 40} For the foregoing reasons, the BTA acted reasonably and lawfully when it upheld the tax commissioner’s sales-tax assessment against Bay. We therefore affirm the decision of the BTA.
Decision affirmed.
Notes
. After the audit period at issue, the General Assembly amended the definition of “employment service” at R.C. 5739.01(JJ) and added an exception at paragraph (5). Sub.H.B. No. 293, 151 Ohio Laws, Part V, 8842, 8864. The amendment is not material to the analysis of the statute in this opinion, and it did not change the language of paragraph (3) at all. In this opinion, however, R.C. 5739.01(JJ) and 5739.01(JJ)(3) refer to the version in effect during the audit period. 145 Ohio Laws, Part III, 4009, 4297.
. The commissioner assessed the tax owed as use tax, not as sales tax. The distinction has no practical significance in this context, because the undisputed realization of the benefit of the employment services within Ohio means that the purchases entail a taxable “use” as long as the separate sales-tax obligation remains unpaid. See R.C. 5741.02(C)(1) (transactions subject to the sales tax are exempted from the use tax, but only if the sales tax has been paid). Moreover, if the purchases are excepted from sales tax, there is no use tax, either. R.C. 5741.02(C)(2).
. In its reply brief, Bay argues that its production of the invoices in discovery at the BTA should substitute for its failure to produce them during the audit. We address this contention in the legal analysis below.
. As Bay points out, the H.R. Options contracts contained no such language themselves. The contract language in that case was significant to the extent that it provided a contract term of at least one year and that it did not otherwise conflict with the conclusion that the personnel were assigned on a permanent basis.
. If such contracts do exist and are in the possession of the taxpayer, however, they ought to be produced on request.
Dissenting Opinion
dissenting.
{¶ 41} The issue before us is a close one. It boils down to whether Bay Mechanical & Electrical Corporation has submitted evidence of its claim for an R.C. 5739.01(JJ)(3) exclusion from sales tax. Bay Mechanical believes that submitting the contracts and a summary of the work assignments at issue to the Board of Tax Appeals (“BTA”), having its controller testify regarding the contracts and work assignments before the BTA, and submitting the underlying
{¶ 42} It would have been better if Bay Mechanical had submitted the information earlier — to the tax commissioner before the necessity of an appeal to the BTA. It would have been better if Bay Mechanical had submitted the underlying documentation to the BTA as well as the tax commissioner. But the bottom line is that the information is now readily available, was available at the time of the appeal to the BTA, and is sufficient to establish Bay Mechanical’s entitlement to the tax exclusion. I dissent.