Corporate Staffing Resources, Inc. v. Zaino - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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[Cite as Corporate Staffing Resources, Inc. v. Zaino, 95 Ohio St.3d 1, 2002-Ohio-1486.]

CORPORATE STAFFING RESOURCES, INC., APPELLANT, v. ZAINO, TAX COMMR.,
APPELLEE.
[Cite as Corporate Staffing Resources, Inc. v. Zaino (2002), 95 Ohio St.3d 1.]
Taxation -- Use tax -- Resale exception -- R.C. 5739.01(E)(1) not applicable to
company that uses technicians supplied by a temporary employment
service to satisfy maintenance and repair contracts for products sold to
its customers.
(No. 00-2127 -- Submitted November 13, 2001 -- Decided April 3, 2002.)
APPEAL from the Board of Tax Appeals, No. 97-M-538.
__________________

COOK, J. This appeal presents the question whether a company that uses
technicians supplied by a temporary employment service to satisfy maintenance
and repair contracts for products sold to its customers meets the R.C.
5739.01(E)(1) resale exception to the state use tax. Because we conclude that the
company does not resell the benefit obtained from the temporary employment
service in the same form in which it was received, we hold the resale exception
inapplicable.
I

Sarcom, Inc. is a computer hardware provider that, among other products,
offers its customers a "full insurance plan" service agreement. Under this
agreement, Sarcom contracts with its customers to provide all maintenance and
repair service for specified computer hardware. Because Sarcom's need for
technicians under this plan exceeded its own technical personnel, Sarcom
supplemented its workforce during a portion of 1994 and the entirety of 1995 with
computer technicians provided by Corporate Staffing Resources, Inc. ("CSR"), a
temporary employment service.

SUPREME COURT OF OHIO

Under the arrangement between Sarcom and CSR, CSR would pay the
technicians an hourly rate and Sarcom would in turn pay CSR a fee consisting of
a percentage above that rate. The technicians would report each day to Sarcom,
unless Sarcom had previously dispatched them to a worksite, where a Sarcom
employee managed them. When computer hardware covered under the Sarcom
plan needed on-site repair, Sarcom would then dispatch from its offices an
appropriate technician.

In 1996, CSR filed on Sarcom's behalf an application for a refund of use
tax collected and remitted by CSR for its sale of employment services to Sarcom
from October 1, 1994 to December 31, 1995. Among other grounds since
abandoned on appeal to this court, CSR asserted a right to a refund because the
services that Sarcom sold were in the same form as the services that CSR
provided, thus falling within the resale exception set forth in R.C. 5739.01(E)(1).

The Tax Commissioner denied the refund application, finding in part that
Sarcom did not resell in the same form the benefit of the temporary employment
services provided by CSR. CSR then appealed to the Board of Tax Appeals
("BTA"). Relying upon our decision in Bellemar Parts Industries, Inc. v. Tracy
(2000), 88 Ohio St.3d 351, 725 N.E.2d 1132, the BTA affirmed the Tax
Commissioner's denial of the refund. The cause is now before this court upon an
appeal as of right.
II

R.C. 5741.02(A) levies "an excise tax * * * on the storage, use, or other
consumption in this state of tangible personal property or the benefit realized in
this state of any service provided."1 Specific exceptions exist to this general rule

1.
Both parties refer to the statutes involved, R.C. 5739.01 and 5741.02, without specifying
which versions were in effect for the claimed refund period. Because there is no difference
between the former versions of the relevant subsections involved and the current versions, we
refer here to the statutes in their present forms. See 1995 Am.H.B. No. 61, 146 Ohio Laws, Part I,
383, 407 (effective October 25, 1995); 1994 Am.Sub.H.B. No. 632, 145 Ohio Laws, Part IV,
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January Term, 2002
of taxation, such as that found in R.C. 5741.02(C)(2). That statute exempts from
the use tax the acquisition of services that, "if made in Ohio, would be a sale not
subject to the tax imposed by sections 5739.01 to 5739.31 of the Revised Code."
R.C. 5739.01(E)(1) provides an exception to both R.C. 5739.02 sales taxation and
R.C. 5741.02 use taxation by excluding from the definition of retail sales (and
therefore from taxation) "all sales * * * in which the purpose of the consumer is *
* * [t]o resell the thing transferred or benefit of the service provided, by a person
engaging in business, in the form in which the same is, or is to be, received by the
person."

CSR contends that Sarcom qualifies for the exception because Sarcom's
use of CSR technicians to satisfy its service plans constitutes the resale of the
benefit, in the same form, that Sarcom receives from CSR. We disagree with this
proposition.
In
Bellemar, we explained that "[t]he benefit of the services of a
temporary work force must include and focus upon its most obvious benefit--that
provided by the labor itself." Id. at 353, 725 N.E.2d at 1135. Thus, the actual
benefit to a company using temporary employees is "their contribution of
temporary, flexible, and less costly labor to its work force." Id. Other such
benefits also exist, including screening candidates for future employment and
controlling the costs of benefits. Id. Applying this "actual benefit" inquiry to the
facts before us, we conclude that Sarcom did not resell the benefit of its
transactions with CSR in the same form to its customers.

The BTA found that during 1994 and 1995, Sarcom could not satisfy its
service agreements without supplementing its technical personnel. By using
CSR-provided technicians, Sarcom was able to achieve control over a sufficient
number of technicians to meet its contractual obligations. Therefore, the actual

6568, 6572 (effective July 22, 1994); 1991 Am.Sub.H.B. No. 298, 144 Ohio Laws, Part III, 3987,
4460-4461 (effective August 1, 1991).
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SUPREME COURT OF OHIO
benefit to Sarcom was not the product of the workers' labor--consistently
operating computer hardware--but a temporary and flexible work force of
sufficient size and expertise. Further, although the hourly cost of CSR technicians
exceeded the hourly wage of Sarcom technicians, Sarcom did not provide benefits
for the temporary workers. And the Sarcom employee who managed the CSR
technicians testified before the BTA that, after a certain period of time, he had
hired CSR technicians on as Sarcom technicians--thus realizing the screening
benefit.

These benefits contrast with the benefit that Sarcom provided to its
customers. The Sarcom employee responsible for negotiating the sale of service
plans with Sarcom customers testified before the BTA that "[w]e were selling a
service to our customers that basically were [sic] telling them we would keep their
computers up and running." This offered benefit--functioning hardware--
matched what the Sarcom employee described as the customers' desired benefit:
"What the customers were negotiating for in the proposal period were the services
to keep their computer up and running." The benefit to Sarcom's customers, then,
was not the labor of CSR technicians, but the end product of that labor:
consistently operating computers. Sarcom's customers purchased a service to
ensure a result, not the addition of service personnel to their own work forces. To
say that the actual benefit to Sarcom's customers was the CSR technicians would
be to ignore that no customer would purchase a service plan simply to employ
technicians. Rather, the customers purchased the service plans to realize the
benefit of having functioning hardware, with the technicians being a means to an
end.

CSR argues that our decision in Bellemar is distinguishable. In Bellemar,
a company obtained workers from a temporary employment service to work at the
company's place of operations. The company then sold the tangible results of that
work--wheel assemblies--to its customers. Bellemar, 88 Ohio St.3d at 351, 725
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January Term, 2002
N.E.2d at 1133. CSR argues that here, however, "the CSR technicians performed
their duties at Sarcom's customers' locations upon equipment owned by the
customers." Therefore, CSR reasons, "[i]t logically follows that Sarcom's
benefit--deployed technicians to perform repair services under the customers'
supervision--was the same benefit received by its customers, the ultimate
consumers." CSR thus urges us to conclude that "Sarcom and its customers were
joint beneficiaries of the deployment of CSR technicians to customer sites. The
same benefit was received at the same location and at the same time by both
Sarcom and its customers."

CSR's reasoning is flawed. While the proper focus of our inquiry should
encompass all material factors, which could include the site at which the various
actors realize their benefit, the geographic location of the realization of the benefit
is not dispositive. Such a narrow focus fails to account for the fact that Sarcom
and its customers have different interests and ultimately realize different, although
related, benefits--regardless of where the laborers perform their work.

Our prior cases involving the resale exception provide examples of the
proper analytical framework. We described these cases in Bellemar:
"In
Hyatt [Corp. v. Limbach (1994), 69 Ohio St.3d 537, 634 N.E.2d 995],
the taxpayer purchased laundry services, received laundered linens as the benefit
of those services, and resold them in that form to the customers. Likewise in
CCH [Computax, Inc. v. Tracy (1993), 68 Ohio St.3d 86, 623 N.E.2d 1178], the
taxpayer purchased tax return preparation, received completed tax returns as the
benefit, and resold the returns unchanged to its customers." Bellemar, 88 Ohio
St.3d at 354, 725 N.E.2d at 1135-1136.

In both cases, the benefit received at each step in the transactional chain
was the same. The resale exception therefore applied. These cases contrast with
the facts of Bellemar, in which the benefit to the taxpaying company--or the
manufacturer's receipt of a supplemented work force--did not match the benefit
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SUPREME COURT OF OHIO
to its customer--or wheel assemblies, the product of the supplemented work
force's labor. There, because the character of the actual benefit realized by each
party did not remain consistent throughout the transactional chain, the resale
exception did not apply. In each of the three cases, the proper inquiry is a focus
on the actual benefit received and not on the service purchased.

CSR's dual-benefit/site-focused approach thus fails to comport with our
analysis in Bellemar and related cases, which follows the plain language of R.C.
5739.01(E)(1). We therefore reaffirm our prior holding that "[w]here a consumer
contracts for temporary employees to add to its workforce, the benefit of that
service is the labor of the employees, not the product of their work. Because it is
the consumer of the services, not its customer, that receives the benefit of the
service, the benefit is not resold in the same form and the resale exception from
the sales tax does not apply." Bellemar, 88 Ohio St.3d 351, 725 N.E.2d 1132,
paragraph one of the syllabus. Accordingly, we hold that Sarcom did not resell in
the same form the actual benefit it realized from its transactions with CSR to
those customers who had purchased the service agreement.
III

For the foregoing reasons, we conclude that CSR failed to prove that
Sarcom satisfied the requirements of the resale exception. We therefore affirm
the decision of the BTA.
Decision affirmed.

MOYER, C.J., DOUGLAS, RESNICK and F.E. SWEENEY, JJ., concur.

PFEIFER and LUNDBERG STRATTON, JJ., dissent.
__________________

LUNDBERG STRATTON, J., dissenting. The majority holds that Sarcom's
use of technicians supplied by Corporate Staffing Resources Inc. ("CSR") to
satisfy maintenance and repair contracts was not subject to the resale exception in
R.C. 5739.01(E)(1) and thus was subject to use tax. I disagree.
6

January Term, 2002

As the majority recognizes, Ohio law imposes a use tax on a "benefit
realized in this state of any service provided," R.C. 5741.02(A), but exempts
services that would not qualify as a sale in Ohio as defined in R.C. 5739.01 to
5739.31 of the Revised Code. R.C. 5741.02(C)(2).

A "sale" includes "[a]ll transactions by which * * * [e]mployment service
is or is to be provided." R.C. 5739.01(B)(3)(k). " `Employment service' means
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." R.C. 5739.01(JJ).

R.C. 5739.01(E) defines the resale exception. It excludes from the
definition of a sale sales in which the purpose of the purchaser is to resell the
benefit of a service in the same form in which it was received. R.C.
5739.01(E)(1).

The majority dismisses CSR's contention that Sarcom resold the benefit of
the CSR technicians in the same form that it received the benefit from CSR, based
primarily on two conclusions. First, the majority finds that the actual benefit of
CSR technicians that Sarcom received was "a temporary and flexible work force
of sufficient size and expertise." Second, the majority finds that the benefit of the
CSR technicians to Sarcom's customers "was not the labor of CSR technicians,
but the end product of that labor: consistently operating computers." (Emphasis
sic.)
A. No Actual Benefit to Sarcom

The resale exception, R.C. 5739.01(E)(1), reads:

"(E) `Retail sale' and `sales at retail' include all sales except those in
which the purpose of the consumer is:
"(1)
To
resell the * * * benefit of the service provided * * * in the form in
which the same is * * * received by the person." (Emphasis added.)
7

SUPREME COURT OF OHIO
"Purpose"
means "something that one sets before himself as an object to
be attained: an end or aim to be kept in view in any plan, measure, exertion, or
operation." Webster's Third New International Dictionary (1986) 1847. I believe
that evidence before the BTA indicated that the purpose of Sarcom's purchase of
the temporary use of the CSR technicians was to resell the benefit of the
technicians' labor to Sarcom's customers.

The decision to acquire technicians from CSR was made out of necessity.
Because of its success in selling computer hardware, the demand for Sarcom's
repair services also increased. Because of this increased demand for service and a
tight labor market, Sarcom had to resort to filling its staffing needs through CSR,
a temporary employment service. Despite this, Sarcom's service account
manager testified that Sarcom preferred to use its in-house technicians for repair
service. This position was reiterated by Sarcom's field service supervisor, who
testified, "The advantage of using the Sarcom employee, they knew the Sarcom
way." In fact, at least three of Sarcom's customers prohibited Sarcom from
contracting out their repair services. Further, Sarcom paid a higher hourly rate for
CSR technicians than for its own technicians. To quote from Justice Pfeifer's
dissent in Bellemar Parts Industries, Inc. v. Tracy (2000), 88 Ohio St.3d 351, 357,
725 N.E.2d 1132, I would find that any benefit received by Sarcom from hiring
the CSR technicians was "ephemeral at best."
B. The Benefit to Sarcom's Customers Was the Labor of the CSR Technicians

I disagree with the majority's characterization of the benefit of the CSR
technicians received by Sarcom's customers as "the end product of [the
technicians'] labor: consistently operating computers." (Emphasis sic.) Sarcom
purchased the service of temporary employees from CSR. The benefit of that
service was the labor of the CSR technicians. Sarcom did not use the technicians'
labor, but rather resold it to its customers to repair the customers' computers.
8

January Term, 2002
Therefore, I believe that Sarcom resold the benefit of the CSR technicians in the
same form in which Sarcom received it.

Even accepting the majority's characterization of the benefit of the labor
of CSR technicians to Sarcom's customers as "the end product of that labor:
consistently operating computers," such a benefit is consistent with an example
set out in Bellemar that defined a situation where the resale exception applied. In
Bellemar the court recognized that its holding did not eliminate the resale
exception where the benefit of a purchased service is sold. In characterizing the
nature of the benefit that fit within the resale exception, the court in Bellemar
gave the following example: "[I]f a service such as landscaping is purchased, the
taxpayer need not resell landscaping services to meet the exception, but need only
resell the benefit of those services, i.e., cared-for grounds." Id., 88 Ohio St.3d at
354, 725 N.E.2d 1132.

In this case, the majority holds that the benefit of the CSR technicians to
Sarcom's customers "was not the labor of the CSR technicians, but the end
product of that labor: consistently operating computers." (Emphasis sic.) I fail to
see how that benefit differs from the cared-for grounds, which would also appear
to be the end product of the landscaping services. Therefore, pursuant to the
example in Bellemar, the benefit of the CSR technicians, even if characterized as
the end product of their labor, should be subject to the resale exception.
C. The Majority's Holding Leads to an Unreasonable Result

This court has a duty to construe legislation to avoid unreasonable results.
State ex rel. Commt. for the Referendum of Ordinance No. 3543-00 v. White
(2000), 90 Ohio St.3d 212, 218, 736 N.E.2d 873. As the dissenting member of
the Board of Tax Appeals stated, "If Sarcom had sufficient personnel to provide
the same service, no tax would have been levied." Sarcom hired the CSR
technicians to do work that Sarcom employees would have done had Sarcom been
able to foresee the demand for computer repair. Sarcom did not receive anything
9

SUPREME COURT OF OHIO
more from the CSR technicians than it would have from its own employees.
Sarcom should not be penalized from a tax standpoint for being unable to foresee
staffing needs.

Further, I believe that the majority's holding results in double taxation.
Not only was a use tax imposed on the labor of the CSR technicians, but Sarcom
also collects a sales tax from customers for the repair services. Thus, the labor of
the CSR technicians was taxed twice. Accordingly, I believe that the majority's
holding leads to an unreasonable result.
D. Conclusion

Because I believe that (1) Sarcom did not receive a benefit from its hiring
of the CSR technicians and (2) Sarcom resold the benefit of the CSR technicians,
i.e., the technicians' labor, to its customers in the same form in which it was
received, I believe that the resale exception set out in R.C. 5739.01(E)(1) applied.
As a result, I do not believe that Sarcom should be taxed on its purchase of the
labor of the CSR technicians. Accordingly, I dissent.

PFEIFER, J., concurs in the foregoing dissenting opinion.
__________________

Vorys, Sater, Seymour & Pease, L.L.P., Anthony L. Ehler and Renee C.
Khoury, for appellant.

Betty D. Montgomery, Attorney General, and Robert C. Maier, Assistant
Attorney General, for appellee.
__________________
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