Ohio Tax Ohio Sales & Use Tax In-depth Review of Major - PDF document

Digital Advertising • Mixed Transactions • If an On‐line Service Provider combines many services together for a single fee and utilizes vague description on its invoices or in its contract, the Department may see these services to be a mixed transaction. Without a breakdown of what makes up the charge, the entire amount would be subject to sales and use tax. • O.A.C. 5703‐9‐46(B)(4) 16

Dayton Physicians, LLC. v. Testa, 2016‐Ohio‐5348 (Ct. App.) • The transcriptionist does not study, alter, analyze, interpret or adjust the material – but rather transcribed word for word. • Physician ultimately signs off on the final version of the notes that go into the patient record. • Medical transcription services were found to be automatic data processing. • Appealed in the Court of Appeals of Ohio. • The BTA decision was affirmed. •17

Employment Services and Employment Placement Services • R.C. 5739.01(B)(3) includes in the definition of a “sale” and “selling” transactions by which: • (k) “Employment service is or is to be provided” • (l) “Employment placement service is or is to be provided” 18

Court Cases – Pending at the Ohio Supreme Court • Accel, Inc. vs. Testa (July 15, 2015) BTA No. 2012‐2840 • Employment services • Manufacturing/Assembly • Seaton Corp. vs. Testa (July 13, 2016) BTA No. 2015‐224, 2015‐ 743 • Employment services • Department has appealed these cases. •19

Sham Transactions • Pi in the Sky LLC purchased an airplane outside the state of Ohio with no tax being charged using the resale exemption. • Airplane was immediately leased to a commonly‐owned entity. • Owner of the Lessee who is a licensed pilot is the primary user of the plane and indirect owner of Pi in the Sky LLC and an owner of the commonly‐owned entity. • Airplane was never leased to an unrelated third party. 20 • Departments position is detailed in the Final Determination that was issued.

Business Fixtures • R.C. 5701.03 (B) • Item of tangible personal property that has become permanently attached or affixed to the land or to a building, structure, or improvement, and that primarily benefits the business conducted by the occupant on the premises and not the realty. • Includes • Machinery, • Equipment, • Signs , • Storage bins and tanks, • Whether above or below ground, and broadcasting, transportation, transmission, and • Distribution systems, whether above or below ground. “ • Portions of buildings, structures, and improvements that are specially designed, constructed, and used for the business conducted 21 in the building, structure, or improvement.

Business Fixture Examples • Computer rooms (raised floor, centralized A/C) • Solar Panels used to power machinery or equipment • Signage • Containment Dikes surrounding raw material and finished goods storage tanks • Cubicles • Fencing within a manufacturing plant surrounding tools, inventory, etc. • Parking lot lighting at car dealerships • Pipelines 22

Business Fixture Issues • If a company hires a contractor to provide and install business fixtures. • The Company has a sales and use tax audit and the invoices from this contractor were included in the auditor’s tax deficient listings. • The charges for the materials were listed as tax deficient purchases of tangible personal property. • The installation charges were held taxable because the items being installed were taxable. 23

Business Fixture Issues • If the contractor who installed the business fixture, believing such materials to be incorporated into realty, paid to the state of Ohio a use tax upon the contractors’ use of the materials in fulfilling a construction contract. • The company under audit claims that its use tax assessment should be offset by the use tax previously paid. • Are the charges for these business fixtures properly held as taxable in the company’s audit? • Should the company be given credit for tax paid by the contractor on the purchase of the materials? 24

Business Fixture Issues • If the contractor had paid use taxes to the state erroneously on the materials, the Department has no authority to grant the company’s request to apply this contractor’s overpayment of use taxes to its assessment. • The refund provisions under the sales and use tax statutes require the Tax Commissioner to refund the erroneously paid taxes to the consumer when the consumer remitted the taxes directly to the Treasurer of State, to a vendor when the vendor collected and remitted the tax or to the customer directly, when a vendor collected and remitted the tax R.C. 5739.07 Vendor or consumer refunds. 25 • The statutes contain no provision for crediting taxes paid by one consumer to the account of another.

Direct Payment Permit Audits/Reviews • ODT contacting all DPP holders (Began May 2015) • Audit Stats: 166 Complete, 113 Active, 169 to be audited • 52 Cancelled DPP • Consideration being given as to whether DPP is the optimal reporting method. • Goal: Increase accuracy of compliance of DPP holders • Significant over or underpayments of tax can result in revocation of one’s DP authority. 26

Direct Payment Permit Audits/Reviews • ODT intends to conduct follow‐up reviews on all DPP holders moving forward to verify procedures have not changed. • TP is responsible for determining the correct tax liability under the sales and use tax laws and rules. • TP must communicate to ODT any changes in accordance with the agreement within 30 days including changes in organization such as mergers, acquisitions, accounting systems, business models, locations, etc. • Direct Payment authority for paying Sales & Use tax is a privilege granted to businesses to promote the efficient administration of Ohio’s sales & use tax law pursuant to R.C. 27 5739.031.

Direct Payment Permit Audits/Reviews • Tax paid to vendors for which an exception is not documented in the DP agreement shall be considered an error and held taxable within an audit. • A refund must be filed to receive back the tax paid directly to the vendor. 28

Audit Selection • Predictive Analytical Models & Trending Models • Cross tax comparisons • Peer group comparisons • Tax filing trends • Leads are analyzed and assigned, if taxpayer appears to be non‐compliant. • Leads involve various tax types, industry sectors and geographic locations. • Selection process is objective, efficient, fair and equitable. • Ultimate goal is increased taxpayer compliance. 29

Audit Penalties • Application of statutory penalty on audits that result in a tax liability. • Reduces subjectivity of penalty application. • Increases consistency in treatment of taxpayers. • Penalty Reduction • Penalty group within the audit division reviews all requests for penalty reduction prior to assessment. • Reviews TP request, facts and findings of the audit, audit history, cooperation during the audit and other items to make fair and consistent decisions. • Moves penalty decision to the administrative level. 30

Penalty Guidelines • Audit Division applies Statutory penalties as of 02/01/2016. • Audit Division has eliminated the use of the Penalty Worksheet. • Use Tax ‐ 15% • Sales ‐ Tax collected/Not Remitted ‐ 50% • Sales – Fail to Collect/Remit – Up to 50% 31

Statute Dates • SUT – 4 years • Use Tax – Unregistered ‐ 7 years • Sales Tax – Unregistered – 10 years • Sales – Tax collected not remitted, there is no statute 32

Waivers • Reviewed by Audit Administration. • Waivers are not always approved. • Extends the statute of limitations. • Usually extends the audit period to bring the taxpayer as current as possible. • Able to use a PARSA in order to get to the most current year possible (Prior Audit Representative Sample Analysis). • Both the Department and taxpayer must complete and agree to an audit completion plan. • Extends the statute for refunds. 33

Participatory Audits (Use Tax) • A Participatory Audit is an audit where the department and taxpayer agree to perform the steps of an audit together. An agreement along with a Participatory Audit Project Plan is created stating the basis for the participatory audit, who will complete what tasks and when. • A Participatory Audit Agreement establishes the basis for conducting a participatory audit and is agreed to and signed by the department and taxpayer. • The Participatory Audit Project Plan is a document that is used to identify: (i) the steps of the audit that will be conducted, (ii) who will be conducting those steps (auditor or taxpayer/representative) and (iii) when those steps need to be completed. 34

Participatory Audits (Use Tax) • Requirements: • Written agreement and audit project plan must be approved by Audit Administration. • Cannot be taxpayer’s first audit. • A written audit project plan will be agreed to by both parties. • Taxpayer is required to do at least 50% of the work. • The Department and Taxpayer must conduct mandatory periodic meetings as outlined in the audit project plan. • There will be no penalty if a reasonable effort to follow the audit project plan. • Two, consecutive Participatory Audits may NOT be conducted on the same taxpayer. 35

Refunds • Application needs to be fully completed. • Submit documentation supporting the refund with this application following the Refund Checklists (STAR C) in the tax forms section at tax.ohio.gov. • To the extent that a refund is granted on this application, either in whole or in part, the Ohio Department of Taxation will calculate and include the appropriate amount of interest in the refund payment made to the applicant. The applicant should not include such interest in the “total amount of the refund claimed.” • Sales tax refunds are governed by Ohio Revised Code (R.C.) section 5739.07. 36

Refunds – Consumer Filed Applications • Consumer‐filed claims: “Consumer” means the person for whom the service is provided, to whom the transfer effected or license given by a sale is or is to be made or given, or to whom the admission is granted. • The following must be supplied for consumer‐filed applications: • Copies of original invoices or similar documents. • Copies of canceled checks or some other proof that the invoices were paid in full, including the tax. • A computer disc containing a Microsoft Excel or Microsoft‐ compatible spreadsheet. The spreadsheet must list every invoice separately and the total should equal the amount requested on 37 the refund application. • The reason why the payment of the tax was illegal or erroneous.

Refunds – Consumer Filed Applications Cont’d • If the invoices included with the refund request are for capitalized research and development equipment, you must prove that the equipment purchased is capitalized research and development equipment. Proof may consist of asset ledgers, depreciation schedules, etc. • Copies of your accrual sheets for the periods referenced on the refund application, if you accrued tax on purchases in error. 38

Refunds – Vendor Filed Applications • Vendor‐filed claims: “Vendor” means the person providing the service or by whom the transfer effected or license given by a sale is or is to be made. • The following information must be supplied for vendor‐filed applications. • Copies of original invoices or similar documents. • Copies of credit memos, a statement from your customer stating that they agree to await reimbursement of the tax until final determination of the refund claim, or some other proof that the accounts receivable was adjusted for the tax or account activity. • A computer disc containing a Microsoft Excel or Microsoft‐ compatible spreadsheet. The spreadsheet must list every invoice 39 separately and the total should equal the amount requested on the refund application.

Refunds – Vendor Filed Applications Cont’d • Copies of valid exemption certificates or letters of usage. • If you are amending your original return, proof must be provided of your original and amended figures for the period(s) referenced on the refund application. The proof may consist of sales journals, cash register receipts, summary reports or any other document used to prepare the tax return. 40

Refunds • Incomplete applications will not be considered for a refund. All incomplete applications, documents and supporting schedules will be returned to the sender. The request may be resubmitted when it is completed. • This application must be filed in accordance with R.C. sections 5739.07 and 5741.10 and must be filed within four years from the date of the erroneous payment of the tax. • If you choose to have someone else represent you for this refund, you must complete Taxpayer Representative section on the application or submit a Ohio form TBOR‐1. • When a refund is granted under R.C. section 5739.07 or 5741.10, it shall include interest thereon as provided by R.C. 41 section 5739.132.

Refunds • Protective Claims will not be accepted. • All documentation is required at the time the application is filed. • If the required documentation is not provided at the time the refund is filed the refund will be denied. 42

Audit ‐ Credit vs Refund • Tax paid directly to vendor will always require a refund to be filed with the Department. • Credit for erroneous use tax accrued, within an audit, are only considered within Statistical Samples. • Statistical Sample Agreements • Must be the same scope of accounts within sample. • If the net offset language is not included within the agreement, a refund will need to be filed with the Department for use tax accrued in error. • Tax accruals will need to be verified. 43

Line Item Credit vs Bulk Credit • Line Item Credit – Direct transactional credit. • Bulk Credit – Credit for all tax accrued. • Can separate credit types such as comprehensive (Capital) from sample (Expenses). • Preferred and more accurate method is line item credit over bulk credit. • Facts will determine the appropriate methodology. • Focus is on Accuracy. 44

QUESTIONS? 45

ST 2001-01 - USE TAX INFORMATION RELEASE - SALES AND USE TAX – USE TAX NEXUS STANDARDS: September, 2001; August, 2016 The purpose of this information release is to describe the standards the Department of Taxation will apply to determine whether an out-of-state seller is required to collect Ohio's use tax 1 . This release only addresses the circumstances in which an out-of-state seller can be required to collect and remit Ohio’s use tax from its customers in this state. This information release does not relieve any person of their use tax obligations as a consumer. This information release is not intended to be an all encompassing or all inclusive description of this subject. This information release may be mod- ified by changes in either federal or state laws or by decisions of the U.S. Supreme Court, the Ohio Supreme Court, the Ohio Courts of Appeals, or the Ohio Board of Tax Appeals. This re- lease may also be modified and reissued either to incorporate nexus guidelines that may be published from time-to-time by agencies such as the Multistate Tax Commission or to clarify the Department's position. Where no conflict exists between this information release and previously published posi- tions relating to use tax nexus taken by the Department, those positions will remain in effect. This release is currently being updated to reflect the changes in Am. Sub. H.B. 64 of the 131 st Gen- eral Assembly to the nexus standards. ISSUES ADDRESSED I. What is the standard the Department of Taxation will use to determine whether an out-of-state seller is subject to Ohio's use tax collection responsibility? II. What activities by or on behalf of an out-of-state seller will create nexus in Ohio? III. How does a person overcome the presumptions set forth in Issue II? IV. Are there any safe harbor activities where nexus might exist but where the Depart- ment of Taxation will not require an out-of-state seller to collect and remit Ohio’s use tax from its customers in this state? V. Are these standards prospective or retroactive? VI. When is this information release effective? VII. What are the use tax registration and filing requirements for an out-of-state seller sub- ject to Ohio's taxing jurisdiction? VIII. Once nexus is established, how long does the filing requirement last? IX. Can an unregistered out-of-state seller subject to these nexus guidelines request a Voluntary Disclosure Agreement? X. Can an out-of-state seller lacking nexus voluntarily register to collect and remit Ohio’s use tax from its customers in this state? XI. What are my obligations if I am a seller without substantial nexus with Ohio but I (or my affiliate) is selling or leasing tangible personal property or services to a state agency? DEFINITIONS The following definitions are used in this information release: 1 As with all information releases of the Tax Commisioner, this document serves to communicate with taxapyers how the Department will administer Ohio taxes mandated by the Ohio Revised Code or relevant statutory changes. No information release has any force or effect of law.

A. “Affiliated person” means any person that is a member of the same controlled group of cor- porations as the seller or any other person that, notwithstanding the form of organization, bears the same ownership relationship to the seller as a corporation that is a member of the same con- trolled group of corporations. [Ohio Revised Code (hereinafter "R.C.”) 5741.01(I)(6)(a)] B. “Controlled group of corporations” has the same meaning as in section 1563(a) of the Inter- nal Revenue Code. [R.C. 5741.01(I)(6)(b)] C. “Gross receipts” has the same meaning as in section 993 of the Internal Revenue Code. “Gross receipts” means the total receipts from the sale, lease, or rental of property held primarily for sale, lease, or rental in the ordinary course of trade or business, and gross income from all other sources. In the case of commissions on the sale, lease, or rental of property, the amount tak- en into account as gross receipts shall be the gross receipts on the sale, lease, or rental of the property on which such commissions arose. D. "Use" means and includes the exercise of any right or power incidental to the ownership of the thing used. A thing is also "used" in Ohio if the consumer gives or otherwise distributes the thing, without charge, to recipients in this state. E. “Nexus” means substantial nexus as defined in R.C. 5741.01(I). F. “Day” means a calendar day or any portion thereof. ISSUE DISCUSSION I. What is the standard the Department of Taxation will use to determine whether an out- of-state seller is subject to Ohio's use tax collection responsibility? Ohio law provides that the Department of Taxation can require an out-of-state seller to col- lect and remit Ohio use taxes under any set of circumstances allowed by Section 8 of Article I of the Constitution of the United States. Specifically, R.C. 5741.01(H) and (I) set forth the legal standard used by the Department of Taxation to determine whether an out-of-state seller is subject to Ohio use tax collection responsibilities. An out-of-state seller is subject to Ohio’s use tax collection responsibility when the out-of-state seller engages in any of the fol- lowing activities: A. The out-of-state seller uses an office, distribution facility, warehouse, storage facility, or similar place of business within this state, whether operated by the seller or any other person, other than a common carrier acting in its capacity as a common carrier [R.C. 5741.01(I)(2)(a)]; B. The out-of-state seller regularly uses employees, agents, representatives, solicitors, installers, repair people, salespeople, or other individuals in Ohio for the purpose of conducting its business or either engages in a business with the same or a similar in- dustry classification as the seller selling a similar product or line of products as the seller, or to use trademarks, service marks, or trade names in Ohio that are the same or substantially similar to those used by the seller [R.C. 5741.01(I)(2)(b)]; 2

C. The out-of-state seller uses any person other than a common carrier in this state for the purpose of (1) receiving or processing orders of its goods or services; (2) using that person’s employees or facilities in this state to advertise, promote, or facilitate sales by the seller to customers; (3) delivering, installing, assembling, or performing maintenance services for the seller’s customers; (4) facilitating the seller’s delivery of tangible personal property to customers in Ohio by allowing the seller’s customers to pick up property sold by the seller at an office, distribution facility, warehouse, stor- age facility, or similar place of business [R.C. 5741.01(I)(2)(c)]; Example Company A sells pre-fabricated furniture that is required to be assembled. Com- pany A has no physical presence in Ohio, but hires a third party that is well versed in its product. Customers may purchase through Company A, the third party home or business location assembly of Company A’s product. Because the third party is in this state and performs a service for seller’s customer, Company A now has nexus with Ohio. D. The out-of-state seller makes regular deliveries of tangible personal property into this state by means other than common carrier (For example, the out-of-state seller has goods delivered to this state in vehicles which the out-of-state seller owns, rents, leases, uses, or maintains or has goods delivered by another member of a controlled group, of which the out-of-state seller is a part of, acting as a representative of the out-of-state seller) [R.C. 5741.01(I)(2)(d)]; E. Other than those safe harbor activities described in Issue IV of this information re- lease, the out-of-state seller is an affiliated person of a person that has nexus with this state [R.C. 5741.01(I)(2)(e)]; F. The out-of-state seller owns tangible personal property that is rented or leased to a consumer in this state, or offers tangible personal property, on approval, to consumers in this state [R.C. 5741.01(I)(2)(f)]; or G. The out-of-state seller enters into an agreement with one or more residents of Ohio, where the resident receives a commission or other consideration for directly or indi- rectly referring potential customers to the seller (including by a link on a website, in- person communication, telemarketing) provided that the cumulative gross receipts from sales to consumers referred to the seller by all such residents exceed $10,000 in the preceding twelve months. [R.C. 5741.01(I)(2)(g)] This provision will herein after be referred to as “click-through” nexus. Additionally, even if a seller does not have substantial nexus with this state, the seller and and any affiliate person of such seller must register with the tax commissioner before selling or leasing tangible personal property or services to a state agency. [R.C. 5741.01(I)(5)] This requires such persons to obtain a registration through the Ohio Business Gateway as de- scribed below in Issue XI. Services means all services, not just taxable services enumerated 3

in R.C. 5739.01(B)(3) to (12). Once registered, a seller is required to file tax returns, even if the seller has no sales for the reporting period. II. What activities by or on behalf of an out-of-state seller will create nexus in this state? A. Subject to the safe harbor activities listed in Issue IV of this information release, an out-of-state seller has nexus in this state when the seller directly or through others acting on the seller’s behalf is regularly present in this state conducting ac- tivities to establish or maintain the market for the out-of-state seller. Such others can be organizations or individuals who are agents, representatives, independent contractors, brokers or any person acting on behalf of the out-of-state seller. It is irrelevant whether or not such others reside in Ohio. Activities which create nex- us, whether by the out-of-state seller or others acting on the seller’s behalf, in- clude, but are not limited to, the following: 1. Soliciting sales (Provision L under Issue IV below provides a special safe harbor that may apply to this activity); 2. Delivering property sold to customers in this state; 3. Installing or supervising installation in this state; 4. Making repairs or providing maintenance or warranty service in this state; 5. Providing any kind of technical assistance or consulting service in this state including, but not limited to, engineering assistance, design service, quality control, product inspections, or similar services; 6. Investigating, handling, or otherwise providing assistance in this state to resolve customer complaints; 7. Conducting training in this state (Provision J under Issue IV below pro- vides a special safe harbor that may apply to this activity); 8. Soliciting, negotiating, or entering into franchising, licensing, or similar agreements; or 9. Providing a commission to individuals located in Ohio for referring po- tential customers to the seller if the cumulative gross receipts from sales (and not the commissions) are greater than $10,000. B. Lawyers, accountants, investment bankers, and other similar professionals that are not employees of the out-of-state seller or an affiliated person of the out-of- state seller who in their professional capacity perform their customary services in this state for an out-of-state seller shall not be considered to be conducting activi- ties to establish or maintain the market on behalf of the out-of-state seller. This 4

provision only applies if the activity done on behalf of the out-of-state seller or an affiliated person of the out-of-state seller and the seller is not part of an activity listed in II.A, above. III. How does a person overcome the presumptions set forth in Issue II? A seller is presumed to have substantial nexus with Ohio if they perform the activities de- scribed in Issue I, but a seller may rebut these presumptions. “ Click-Through” Nexus (found in R.C. 5741.01(I)(2)(g)) A seller may rebut the presumption of substantial nexus by evidencing that each resident en- gaged by the seller did not engage in any activity in Ohio during the preceding twelve months that was significantly associated with the seller’s ability to establish or maintain the seller’s market in Ohio. This may include written statements from all of the Ohio residents with whom the seller has an agreement. The written statement should be provided and obtained in good faith and state that the resident did not engage in any solicitation in Ohio on behalf of the seller in the preceding twelve months. All Other Nexus Provisions A seller may rebut the presumption of substantial nexus by demonstrating that the activities conducted by the seller or on the seller’s behalf are not significantly associated with the sell- er’s ability to establish or maintain the seller’s market in Ohio. IV. Are there any safe harbor activities where nexus might exist but where the Depart- ment of Taxation will not require an out-of-state seller to collect and remit Ohio’s use tax from its customers in this state? If the out-of-state seller’s only contacts with this state are limited to one or more of the contacts listed below, the Department of Taxation will not require the out-of-state seller to collect and remit Ohio’s use tax from its customers in this state. Except for Issue IV.A. and B., below, these safe harbors are not mandated by statutory or case law; rather, these safe harbors are provided for purposes of administrative convenience. A. The out-of-state seller has an agency relationship with a person engaged in the business of telemarketing in this state that is engaged by the seller exclusively for the purpose of solicitation of customers in other states; B. The out-of-state seller has ownership of property that is located at the facility of a printer with which the seller has contracted for printing and that consists of the final printed product, property that becomes a part of the final printed product, or copy from which the final printed product is produced; C. The out-of-state seller has tangible personal property temporarily in this state for no more than seven days, which need not be consecutive, in a calendar year, and the seller has no more than $25,000 in gross sales in this state in that same calen- 5

dar year. Or, for purposes of click-through nexus, the out-of-state seller has tan- gible personal property temporarily in this state for no more than seven days, which need not be consecutive, in a calendar year, and the seller has no more than $10,000 in gross receipts from sales in this state in that same calendar year; D. The out-of-state seller grants a license to use software in this state, but only if the out-of-state seller and its agents, representatives, or any affiliated person, do not provide, from or at a location in this state, any technical assistance or other sup- port; E. The out-of-state seller maintains a website on a server or similar electronic equipment in this state, unless the equipment itself is owned, leased or rented by the out-of-state seller or any member of a controlled group of which the seller is a part; F. The out-of-state seller conducts meetings in this state with suppliers of goods or services; G. The out-of-state seller conducts meetings in this state with government represent- atives in their official capacity; H. The out-of-state seller enters this state for the purposes of bringing or defending a lawsuit in a court of law in this state; I. The out-of-state seller attends meetings, retreats, seminars, conferences, schools or other training in this state sponsored by others; J. The out-of-state seller holds retreats, seminars, conferences, or other training in this state for its employees (but not board of director’s meetings); K. The out-of-state seller holds recruiting or hiring events in this state; L. The out-of-state seller advertises in the state through various electronic or print media; M. The out-of-state seller rents customer lists to or from an entity located in this state; N. The out-of-state seller has no more than seven instances of nexus creating activi- ties in this state in a calendar year, and the seller has no more than $25,000 in gross sales in this state in that same calendar year. Or, for purposes of click- through nexus, the out-of-state seller has no more than seven instances of nexus creating activities in this state in a calendar year, and the seller has no more than $10,000 in gross receipts from sales in this state in the previous twelve months; O. The out-of-state seller attends trade shows in this state as a consumer; or 6

P. The out-of-state seller participates in one or more trade shows in this state as an exhibitor provided that the out-of-state seller has no more than seven instances of nexus creating activities in this state in a calendar year and does not have gross sales in this state in excess of $25,000 in that same calendar year. Or, for purpos- es of click-through nexus, the out-of-state seller participates in one or more trade shows in this state as an exhibitor provided that the out-of-state seller has no more than seven instances of nexus creating activities in this state in a calendar year and does not have gross receipts from sales in this state in excess of $10,000 in that same calendar year. V. Are these standards prospective or retroactive? This information release applies nexus standards established by the U.S. Supreme Court from 1939 to the present. Decisions of the U.S. Supreme Court are the controlling interpretation of federal law and generally will be given full retroactive effect to all cases and years still open. Accordingly, the Department of Taxation will enforce the standards described within this in- formation release, with the exception of the safe harbor activities enumerated in Issue IV of this information release, for all open cases and years. The changes regarding affiliate nexus as well as the bright-line standard of $10,000 in gross receipts described for “click-through” nexus under Issue I were effective beginning on July 1, 2015. VI. When is this information release effective? Some of the limitations enumerated in Issue IV of this information release may not be man- dated by Ohio law or U.S. Supreme Court cases. Thus, while Ohio may have a basis for as- serting nexus in these instances, the Department of Taxation will not assert nexus if a taxpay- er's contacts are limited to those safe harbor activities described in Issue IV of this infor- mation release at any time after the first issuance of this release or the revision of this release. The Department of Taxation reserves the right to modify and reissue this information release in order to reflect judicial decisions or to clarify the Department’s position. VII. What are the use tax registration and filing requirements for an out-of-state seller sub- ject to Ohio's taxing jurisdiction? An out-of-state seller which falls within this state’s taxing jurisdiction, and makes taxable sales, will be required to obtain a seller’s use tax permit, collect tax on taxable sales made to consumers in this state, and file returns and remit the appropriate tax. Information about reg- istration and permits can be obtained by calling 1-888-405-4039, or from the Department’s website by visiting tax.ohio.gov. The duty to obtain a seller’s use tax permit, collect tax on taxable sales made to consumers in this state, and file returns and remit the appropriate tax commences with the month that in- cludes the day of the contact that establishes a regular presence and applies prospectively from that date. 7

Example On May 4 th , 2013, an out-of-state seller first enters Ohio to engage in nexus-creating activities that are protected by the safe harbor provisions in Issue IV. On September 8 th , 2013, the out-of-state seller’s activities exceed the safe harbor provisions in Issue IV. The out-of-state seller would be required to obtain a seller’s use tax permit, col- lect tax on taxable sales made to consumers in this state, and file returns and remit the appropriate tax beginning on September 8 th , 2013, and would include all sales made for the entire month of September 2013. Example On October 1, 2015, an out-of-state seller enters into an agreement with a resident of Ohio, where the resident receives a commission of 1% of related gross receipts from sales for referring potential customers to the seller by providing a link on the Ohio resident’s blog. The amount of Ohio gross receipts of the out-of-state seller equals $75,000 ($10,000 of which is related to the resident receiving a commission) on December 15, 2015. The out-of-state seller would be required to obtain a seller’s use tax permit, collect tax on taxable sales made to consumers in this state, and file returns and remit the appropriate tax beginning on December 15, 2015, and would include all sales made for the entire month of December 2015. VIII. Once nexus is established, how long does the filing requirement last? When an out-of-state seller no longer has nexus creating contacts, the out-of-state seller may cancel its registration and stop collecting and remitting use tax on its sales in this state. However, if the out-of-state seller reestablishes nexus by engaging in any nexus creating con- tacts within twelve months of its registration cancellation, the Department of Taxation will presume that the new contact remains part of a regular presence in this state. Thus, the out- of-state seller continued to have nexus during the interim period. The out-of-state seller will be required to reinstate its registration and pay tax on all its sales in this state during the inter- im period, and continue collecting tax on a prospective basis. Example An out-of-state seller has had nexus with this state because it maintains a sales office, and has sales representatives in this state. On June 15 th , 2013, the out-of-state seller closes its office in this state and ceases sending salespersons into this state. Conse- quently, the out-of-state seller cancels its registration effective June 15 th , 2013. Find- ing that its Ohio sales have been seriously harmed by the out-of-state seller’s lack of presence, the out-of-state seller begins sending representatives back into this state on December 1 st , 2013. The Department of Taxation will presume that the December 1 st , 2013, contacts remain part of a regular presence within this state. The out-of-state seller’s registration will be reinstated and the out-of-state seller will be required to 8

pay tax on all its sales into this state for the period June 15 th to December 1 st , 2013, as well as collect Ohio use tax on its sales in this state on a going-forward basis. IX. Can an unregistered out-of-state seller subject to these nexus guidelines request a Vol- untary Disclosure Agreement? An out-of-state seller with a filing responsibility under these nexus guidelines but not yet reg- istered with or contacted by the Department of Taxation with respect to audit or criminal in- vestigation is eligible to request a Voluntary Disclosure Agreement (VDA). The VDA guide- lines are available on the Department’s website by visiting www.tax.ohio.gov or by calling the Department at 1-888-405-4039. X. Can an out-of-state seller lacking nexus voluntarily register to collect and remit Ohio’s use tax from its customers in this state? An out-of-state seller lacking nexus may enter into an agreement to collect use tax on its sales made to customers in this state. This agreement may provide that the out-of-state seller is not obliged to pay other Ohio taxes merely because it entered into the agreement. Nonetheless, even though the out-of-state seller may cancel its registration at any time, the out-of-state seller remains subject to audit for the periods during which the seller was registered or was collecting tax. XI. I (or my affiliate) is selling or leasing tangible personal property or services to a state agency. Even though a seller or its affiliates may not have substantial nexus with Ohio, sellers or their affiliates making retail sales of tangible personal property or services to a state agency i are required by the Ohio Revised Code to register with the tax commissioner by obtaining a sell- er’s license. The seller may obtain a license through the Ohio Business Gateway (OBG). Note: Businesses must first establish an account with OBG before using it to request a seller's license. If you have any questions regarding this matter, please contact the Department at 1-888-405-4039 (Ohio Relay Services for the Hearing or Speech Impaired: 1-800-750-0750). i “[S]tate agency,” means every organized body, office, or agency established by the laws of the state for the exercise of any func- tion of state government. "State agency" does not include the nonprofit corporation formed under section 187.01 of the Revised Code. See R.C. 1.60. 9

ST 1999-04 Updated September 2016 Page 1 of 5 | State Agencies|Online Services Information Release ST 1999-04 - On-line Services and Internet Access - January, 1999; Updated December, 2015; Updated September, 2016 This Information Release is intended to enunciate the application of Ohio sales and use tax to the provision of Internet Access and On-line Services. The update is a result of the recent addition (contained in House Bill (H.B.) 466 of the 131st General Assembly) of “ digital advertising services” to the definition of “ personal and professional services” for purposes of “ automatic data processing” , “ computer services” and “ electronic information services” . The effective date of this change is December 1, 2016. Section 5739.01(B)(3)(e) of the Ohio Revised Code provides: "(B) 'Sale' and 'selling' include all of the following transactions for a consideration in any manner, whether absolutely or conditionally, whether for a price or rental, in money or by exchange, and by any means whatsoever: * * * (3) All transactions by which: * * * (e) Automatic data processing, computer services, or electronic information services are or are to be provided for use in business when the true object of the transaction is the receipt by the consumer of automatic data processing, computer services, or electronic information services rather than the receipt of personal or professional services to which automatic data processing, computer services, or electronic information services are incidental or supplemental. Notwithstanding any other provision of this chapter, such transactions that occur between members of an affiliated group are not sales. An affiliated group means two or more persons related in such a way that one person owns or controls the business operation of another member of the group. In the case of corporations with stock, one corporation owns or controls another if it owns more than fifty per cent of the other corporation's common stock with voting rights." ( Emphasis added .) Section 5739.01(F) of the Revised Code defines “ business” broadly to include “ any activity engaged in by any person with the object of gain, benefit, or advantage, either direct or indirect.” “ ‘ Business’ does not include the activity of a person in managing and investing the person’ s own funds.” Section 5739.01(Y)(1)(c) of the Revised Code provides: "'Electronic information services' means providing access to computer equipment by means of telecommunications equipment for the purpose of either of the following: (i) Examining or acquiring data stored in or accessible to the computer equipment; (ii) Placing data into the computer equipment to be retrieved by designated recipients with access to the computer equipment." Internet Access Providers and On-line Service Providers – In General Internet Access Providers (IAPs) provide customers with access, by use of telecommunications equipment, to their computer equipment in order to be connected to the Internet. On-line Service Providers (OSPs) provide Internet access as well as access to certain proprietary services provided by the OSP. In each case, the IAPs and OSPs grant customers access to computer equipment, by means of telecommunications equipment, so the customers can examine or acquire (download) information that is either stored in the provider's computer equipment or made available through the provider's computer equipment over the Internet. Therefore, to the extent that an IAP or OSP is providing its service to a http://www.tax.ohio.gov/sales_and_use/information_releases/index_sales/st199904update... 01/05/2017

ST 1999-04 Updated September 2016 Page 2 of 5 consumer for the consumer's use in business, the IAP or OSP is providing an electronic information service that is subject to Ohio sales and use tax. Mixed Transactions Note of caution: If an OSP combines many services together for a single fee and utilizes vague description on its invoices or in its contract, the Department may see these services to be a mixed transaction. Without a breakdown of what makes up the charge, the entire amount would be subject to sales and use tax. See Ohio Admin. Code 5703-9-46(B)(4). Examples 1 Subscription Services Many types of subscription services that are available for use in business over the Internet are considered taxable electronic information services. The following are examples of services that the Department has determined meet the definition of electronic information services. [Investment Information Company].com 2 An investment company sells subscriptions to information contained on their website. Additionally, the information provided is not generated by the investment company itself, but rather third-party sources. The information cannot be manipulated by the subscribers of this service. The investment company is granting its subscribers access to its computer equipment to examine or acquire information stored in or accessible to the computer equipment. If any of those subscribers are using this service for business purposes, the service would be a taxable electronic information service. [History of an Item].com A car dealership can obtain a history of an automobile such as initial purchase date, number of owners, when the vehicle has been serviced, and if the vehicle has ever been in an accident. The car dealership purchases access to or a subscription from [History of an Item].com for the ability to access [History of an Item].com’ s databases in order to perform these types of searches by Vehicle Identification Number. This access is considered to be a taxable electronic information service. [Resume Search Service].com A company may register with and pay an OSP monthly for access to a resume search service. The purpose of this service is to find an individual to fill an available position. Through the interface, the company has access to search, retrieve, view, copy or print resumes. This service meets the definition of a taxable electronic information service. Additionally, if the company only has access to post and remove the available position, this also meets the definition of a taxable electronic information service. [Value of My Item].com A wholesaler may need to obtain the value of an item that will be accepted as a trade-in. The wholesaler may purchase from an OSP the ability to access computer equipment to obtain a range of values. Part of the subscription allows for the wholesaler to log into an account and obtain a value by entering certain parameters. The access to the data and equipment meets the definition of an electronic information service. On-line Chat Features Often an OSP, in connection with another electronic information service, will also allow its client (Company A) to connect to an individual purchaser by offering an instant chat feature for an additional monthly charge. If a potential customer locates a desired inventory item via [Inventory Specific Company].com and expresses interest, Company A has access to connect with that potential purchaser via an instant on-line chat. The access to the platform is considered an electronic information service. Mass E-mails A company may desire to send out mass e-mails as a way to send satisfaction surveys. An OSP that offers a platform to assist in the company sending out mass e-mails to their customers or potential customers is seen as offering a taxable electronic information service if the company has access to the s database of e-mail templates or the ability to store and access the company’ s customer list. OSP’ http://www.tax.ohio.gov/sales_and_use/information_releases/index_sales/st199904update... 01/05/2017

ST 1999-04 Updated September 2016 Page 3 of 5 Credit Reports (not provided by a consumer credit reporting agency for purposes of the Fair Credit Reporting Act) A vendor may obtain a credit report to discern the creditworthiness of a potential customer looking to purchase their inventory. The use of a third-party service which provides access to the results of credit rating companies is considered a taxable electronic information service. True Object Electronic information services do not include personal or professional services. Electronic information services has its own definition of personal and professional services found in section 5739.01(Y)(2) of the Revised Code. Additionally, Ohio Admin. Code 5703-9-46(B) states: For purposes of Chapter 5739. and 5741. of the Revised Code: (1) The provision of automatic data processing services, computer services, or electronic information services in this state for a consideration for use in business by the consumer is a sale that is subject to the sales tax. (2) The receipt of the benefit of these services in this state for use in business by the consumer constitutes a use subject to the use tax. (3) When a transaction includes the provision of automatic data processing, computer services, or electronic information services: (a) The true object of the transaction is the receipt of automatic data processing, computer services, or electronic information services if such services render a significant benefit to the consumer; (b) The true object of the transaction is the receipt of personal or professional services to which the automatic data processing, computer services, or electronic information services are merely incidental or supplemental if: (i) The automatic data processing, computer services, or electronic information services are merely utilized by the provider in the performance or delivery of such personal or professional services; (ii) The benefit sought to be received by the consumer is the personal or professional service; or (iii) The automatic data processing, computer services, or electronic information services themselves provide no significant benefit to the consumer. The Department must evaluate if the electronic information services renders a significant benefit or is incidental to the personal or professional services. In all of these examples above, electronic information services are a significant benefit to the business customer. Digital Advertising Services In H.B. 466 of the 131st General Assembly, “ digital advertising services” was added to an enumerated list of what was considered personal or professional services. “ Digital advertising services” , found in R.C. 5739.01(RRR), means “ providing access, by means of telecommunications equipment, to computer equipment that is used to enter, upload, download, review, manipulate, store, add, or delete data for the purpose of electronically displaying, delivering, placing, or transferring promotional advertisements to potential customers about products or services or about industry or business brands.” Advertising (digital or otherwise) is not and has not been treated as a taxable service by the Department. However, for many transactions that may contain and combine digital advertising services with electronic information services, the electronic information services may be a significant component. The Department will continue to hold taxable those components of these transactions that represent electronic information services and deem mixed transactions (described above) to be taxable. Licensing Ohio-based providers of electronic information services should be licensed as vendors. Out-of-state providers should obtain a seller's use tax account. A vendor's license may be obtained immediately through the Ohio Business Gateway (OBG). Note: A business must first establish an account with OBG before using it to request a vendor’ s license. A business may also apply for a vendor’ s license at their county auditor’ s office. http://www.tax.ohio.gov/sales_and_use/information_releases/index_sales/st199904update... 01/05/2017

ST 1999-04 Updated September 2016 Page 4 of 5 The application for a seller's use tax account (Form UT 1000) is available on the Department of s website. Taxation’ An electronic information service provider may apply for a consumer’ s use tax account or a direct pay permit. See the Department of Taxation’ s website at tax.ohio.gov for more information. Applicable Rate and Sourcing Generally, the tax rate that should be charged is the rate in effect in the county where the benefit of the service is received. See section 5739.033(C) of the Revised Code. The address of the consumer can often adequately establish the location where the service is received. It can be difficult for an IAP or OSP to determine whether a particular customer intends to use the electronic information service for business purposes or personal purposes. IAPs and OSPs should ask customers whether the service is being purchased for business use or personal use at the time the customer signs up for the service. Unless it is unreasonable on its face, the service provider may rely on the representation of the consumer in determining whether the account is taxable or exempt. Partial Refund for Providers of Electronic Information Services Pursuant to section 5739.071(A) of the Revised Code, providers of electronic information services may seek a refund of twenty-five percent of any Ohio sales or use tax paid to a vendor for purchases of: . . . computers, computer peripherals, software, telecommunications equipment and similar “ tangible personal property, primarily used to acquire, process or store information for use by business customers or to transmit or disseminate such information to such customers, the services of installing or repairing such property, and agreements to repair and maintain such property." A refund may be requested utilizing the application for sales tax refund (ST AR). Pursuant to section 5739.071(B) of the Revised Code, if the electronic information service provider is the holder of a direct payment permit, tax may be accrued and paid on seventy-five percent of the price of qualified equipment or services. In the case where a provider of electronic information services has purchased tangible personal property which qualifies for the twenty-five percent refund in section 5739.071 of the Revised Code and no Ohio tax was collected by the vendor, the provider should accrue and pay use tax on seventy-five percent of the purchase price of the tangible personal property on a consumer's use tax account. Federal Internet Tax Freedom Act Federal legislation known as the Internet Tax Freedom Act, effective October 21, 1998 and for Ohio’ s purposes, most recently extended until June 30, 2020 , imposes a moratorium on State and local taxes 3 on Internet access and on-line services. Specifically excluded from the previously temporary moratorium are taxes that were in effect prior to the effective date of the Federal statute and generally enforced. Ohio's inclusion of electronic information services in the definition of a sale was enacted in 1993, and the same services would have been considered automatic data processing under the law that existed prior to that date. The application of sales and use taxes to these services has been generally enforced. Therefore, Ohio's tax on Internet access and on-line services is not subject to the Federal moratorium. If you have any questions regarding this release, you may call us at 1-888-405-4039 or e-mail us through our website at tax.ohio.gov. OHIO RELAY SERVICES FOR THE HEARING OR SPEECH IMPAIRED Phone: 1-800-750-0750 1 Many of these identified examples are specific audits where the Department has identified electronic information services. In Marc Glassman, Inc. v. Levin , 119 Ohio St.3d 254, 2008-Ohio-2819, Glassman contracted with two companies to determine whether customers’ prescription purchases were covered by insurance. In response to the inquiries, Glassman received a yes or no. The companies did not give Glassman access to the computer equipment to examine or acquire the insurance company’ s data. Although it was found in Marc Glassman, Inc. that the service at issue was not electronic information services, the Court stated: “ It is easy to imagine a different set of facts under which the Tax Commissioner could appropriately assess the tax. For example, if the pharmacy’ s inquiry led to a list of names of insured persons appearing on the screen so that the pharmacy could determine whether the customer’ s name was on the list – that would involve accessing the database.” The following are examples of “ electronic information services” . 2 http://www.tax.ohio.gov/portals/0/legal/05st_opinion050005_www.pdf http://www.tax.ohio.gov/sales_and_use/information_releases/index_sales/st199904update... 01/05/2017

ST 1999-04 Updated September 2016 Page 5 of 5 3 In February of 2016, Congress has provided for this temporary moratorium to become permanent. The grandfathering provisions that previously had many extensions are now set to permanently end after June 30, 2020. http://www.tax.ohio.gov/sales_and_use/information_releases/index_sales/st199904update... 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st_2010_02 Page 1 of 5 | State Agencies|Online Services Information Release ST 2010-02 - Sales and Use Tax: Bundled Transactions – Issued September 2010 The purpose of this Information Release is to explain the application of Ohio sales and use tax to “ bundled transactions” as those are defined in Ohio Revised Code (“ R.C.” ) section 5739.012. That section provides: (A) As used in this section: (1) "Bundled transaction" means the retail sale of two or more products, except real property and services to real property, where the products are otherwise distinct and identifiable products and are sold for one non-itemized price. "Bundled transaction" does not include the sale of any products in which the sales price varies, or is negotiable, based on the selection by the consumer of the products included in the transaction. As used in division (A)(1) of this section: (a) "Distinct and identifiable products" does not include any of the following: (i) Packaging, including containers, boxes, sacks, bags, and bottles, and packaging materials, including wrapping, labels, tags, and instruction guides that accompany the retail sale of the products and are incidental or immaterial to the retail sale thereof; (ii) A product provided free of charge with the required purchase of another product. A product is provided free of charge if the sales price of the product purchased does not vary depending on the inclusion of the product provided free of charge. (iii) Items included in the definition of "price" under division (H) of section 5739.01 of the Revised Code. (b) "One non-itemized price" does not include a price that is separately identified by product on binding sales or other supporting sales-related documents made available to the consumer in paper or electronic form, including, but not limited to, an invoice, bill of sale, receipt, contract, service agreement, lease agreement, periodic notice of rates and services, rate card, or price list. (2) "De minimis" means the vendor's or seller's purchase price or sales price of taxable products is ten per cent or less of the total purchase price or sales price of bundled products. Vendors and sellers shall use either the purchase price or the sales price of the products to determine if the taxable products are de minimis, and shall use the full term of a service contract to determine if the taxable products are de minimis. Vendors and sellers shall not use a combination of the purchase price and sales price of the products to determine if the taxable products are de minimis. (3) "Over-the-counter drug" means a drug that contains a label that identifies the product as a drug as required by 21 C.F.R. 201.66, and the label includes either a "Drug Facts" panel or a statement of the active ingredients with a list of those ingredients contained in the drug. (B) A transaction that otherwise meets the definition of a bundled transaction is not a bundled transaction if it is any of the following: (1) A retail sale of tangible personal property and a service where the tangible personal property is essential to the use of the service, and is provided exclusively in connection with the service, and the true object of the transaction is the service; (2) A retail sale of services where one service is provided that is essential to the use or receipt of a second service, the first service is provided exclusively in connection with the second service, and the true object of the transaction is the second service; (3) A transaction that includes taxable products and nontaxable products, and the purchase price or sales price of the taxable products is de minimis; (4) A retail sale of exempt tangible personal property and taxable tangible personal property where the transaction includes food and food ingredients, drugs, durable medical equipment, mobility enhancing equipment, over-the-counter drugs, prosthetic devices, or medical supplies, and the vendor's or seller's purchase price or sales price of the taxable tangible personal property is fifty per cent or less of the total purchase price or sales price of the bundled tangible personal property. Vendors and sellers may not use http://www.tax.ohio.gov/sales_and_use/information_releases/st_2010_02.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st_2010_02 Page 2 of 5 a combination of the purchase price and sales price of the tangible personal property when making the fifty per cent determination for a transaction. (C) In the case of a bundled transaction that includes telecommunications service, ancillary service, internet access, or audio or video programming service: (1) If the price is attributable to products that are taxable and products that are nontaxable, the portion of the price attributable to the nontaxable products shall be subject to tax unless the provider, by reasonable and verifiable standards, can identify the portion from its books and records that are kept in the regular course of business for other purposes, including, but not limited to, non-tax purposes. (2) If the price is attributable to products that are subject to tax at different tax rates, the total price shall be treated as attributable to the products subject to tax at the highest tax rate unless the provider can identify by reasonable and verifiable standards the portion of the price attributable to the products subject to tax at the lower rate from its books and records that are kept in the regular course of business for other purposes, including, but not limited to, non-tax purposes. (D) In all other cases of bundled transactions, the taxability of the transaction shall be determined by the true object of the consumer entering into the transaction. For purposes of applying this provision, “ products” shall mean all types of products except real property and services to real property. “ Products” includes tangible personal property, services, intangibles, digital goods and all other types of transactions subject to Ohio sales and use tax. “ Services to real include, for purposes of example only, such services as building framing, roofing, plumbing, property” electrical, painting, and janitorial, pest control and window cleaning. A. Elements of the Definition of a Bundled Transaction 1. Distinct and Identifiable Products. As defined above, a bundled transaction is a retail sale of two or more products that are distinct and identifiable. Packaging that accompanies the retail sale of a product, products provided free of charge and items included in the definition of “ price” in division (H)(1) of R.C. 5739.01 are not distinct and identifiable products. a. Packaging is not a separate and distinct product when such packaging is the wrapping or packing that accompanies the retail sale of a product(s) and such packaging is incidental or immaterial to the retail sale of the product(s). b. A product provided free of charge is not a separate and distinct product. A product shall be considered to be provided free of charge in a retail sale if, in order to obtain the product, the purchaser is required to make a purchase of one or more other products and the price of the purchased products does not change based on the seller providing a product free of charge. Such products provided free of charge with the necessary purchase of another product (e.g. a free car wash with the purchase of gas or free dinnerware with the purchase of groceries) shall be considered promotional products. c. A retail sale is not considered to be for two or more distinct and identifiable products if the items are included in the definition of “ in R.C. 5739.01(H). For example, a delivery charge, whether price” separately itemized or not, is included in the definition of “ in R.C. 5739.01(H)(1)(a)(iv). price” Therefore, the retail sale of a product and the delivery of that product for a single price shall not be considered a bundled transaction because the delivery charges are included in the sales price of the product under the statutory definition of “ price.” 2. One Non-itemized Price. If a retail sale of two or more products is not made for one non-itemized price, then the retail sale is not a bundled transaction. A transaction shall not be considered to be a bundled transaction if, by negotiation or otherwise, the sales price varies with the purchaser’ s selection of the distinct and identifiable products being sold. A retail sale shall not be considered made for one non-itemized price if the purchaser has the option of declining to purchase any of the products being sold and, as a result of the purchaser’ s selection of products, the sales price varies or a different price is negotiated. a. A retail sale shall not be considered a bundled transaction if the price is separately identified by product on binding sales documents or other supporting sales-related documentation made available to the purchaser because the sale is not being made for one non-itemized price. The sales-related documents made available to a purchaser in paper or electronic form shall provide enough information for the purchaser to determine the price(s) of taxable and exempt products. b. A transaction shall not be considered a bundled transaction if a seller bills or invoices one price for the sale of distinct and separate products but the price invoiced is equal to the total of the individually http://www.tax.ohio.gov/sales_and_use/information_releases/st_2010_02.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st_2010_02 Page 3 of 5 priced or itemized products contained in supporting sales-related documentation, such as a catalog, price list, or service agreement. c. If the seller bills or invoices one price for a transaction that includes a bundle of products and also includes one or more additional products that are individually priced or itemized in a catalog or price list, the additional products individually priced or itemized shall not be considered to be a part of the bundled products sold for one non-itemized price. d. If a transaction does not qualify as a bundled transaction because of the provisions of paragraphs 2.a. - c., above, the transaction shall not be considered a bundled transaction as a result of the seller offering a subsequent discount of the total sales price without itemizing the amount of the discount for each product. In such a situation, if there is no sales-related documentation showing the allocation of the discount, the discount shall be considered to be allocated pro rata among the otherwise separately itemized products. B. Records Required to be Maintained by the Seller. In order to show whether a retail sale was for one or more distinct and identifiable products and whether the products were sold for one non-itemized price, a seller shall maintain copies of invoices, service agreements, contracts, catalogs, price lists, rate cards and other sales-related documents given to, or made available to, the purchaser. The Tax Commissioner shall not be restricted in assessing tax because the seller or purchaser failed to provide documentary proof that the price varied based on the purchaser’ s selections of products. C. Exclusions of Transactions that Otherwise Would Qualify as Bundled Transactions. Division (B) of R.C. 5739.012 contains exclusions for transactions that would otherwise qualify as bundled transactions. For transactions that include tangible personal property and a service, or multiple services, sellers may utilize divisions (B)(1) and (B)(2) of the definition or division (B)(3) of the definition to determine if the transaction qualifies as a bundled transaction. Division (B)(1) does not apply to transactions that include only tangible personal property. Division (B)(2) may be applied to transactions that include all types of products to determine whether the transaction qualifies as a bundled transaction. Division (B)(4) does not apply to transactions that include products that are not tangible personal property. D. True Object, divisions (B)(1) and (B(2). “ True object,” as the term is used in divisions (B)(1) and (B)(2) of R.C. 5739.012, means the main product or item in the transaction. Division (B)(1) applies to transactions that involve both tangible personal property and a service, and the true object of the transaction is the service. Division (B)(2) applies only to transactions that include two or more services and no tangible personal property. If, as a result of applying these provisions, a transaction is not a bundled transaction, then the transaction shall be considered a retail sale of the service that is the true object of the transaction. a. The true object test found in divisions (B)(1) and (B)(2) of R.C. 5739.012 shall be applied on a case- by-case basis to the particular facts involved in each situation. Some of the factors that might be considered are the business in which the seller is engaged and the purchaser’ s object in engaging in the transaction. b. In transactions where the true object is taxable tangible personal property or a taxable service, the transaction shall be taxable in its entirety. Transactions where the true object is non-taxable tangible personal property or a non-taxable service, the entire transaction will be non-taxable. E. De minimis Test, division (B)(3) To measure or quantify whether the taxable portion of a transaction is de minimis, within the meaning of Division (B)(3) of R.C. 5739.012, a vendor or seller may use the sales price or the purchase price of each product in the transaction. A seller shall not use the sales price for some products in the transaction and the purchase price for other products in the transaction to measure or quantify whether the taxable product(s) in the transaction are de minimis . a. If services have been sold under a service contract, the full contract price for the services shall be used to determine whether products in the transaction are de minimis regardless of the time period covered by the service contract. For the purpose of determining whether services in the transaction are de minimis , the price of the services shall not be prorated based on the term of the service contract. b. When the taxable products in a transaction are determined to be de minimis , the transaction is not a bundled transaction. http://www.tax.ohio.gov/sales_and_use/information_releases/st_2010_02.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st_2010_02 Page 4 of 5 c. In any non-itemized transaction where the taxable elements of the transaction are determined to be de minimis , the entire transaction shall be deemed to be non-taxable. F. Primary Test, Division (B)(4). In order to measure or quantify whether the taxable products in the transaction are the primary products (more than 50% of the total sales price or purchase price) under division (B)(4) of R.C. 5739.012, a vendor or seller may use the sales price or the purchase price of each product in the transaction. A vendor or seller shall not use the sales price for some of the products in the transaction and the purchase price for other products in the transaction to measure or quantify whether the taxable product(s) in the transaction are the primary products. a. Division (B)(4) may only be applied to transactions that contain multiple products that are all tangible personal property and one or more of the products are: food, soft drinks, candy or dietary supplements; drugs including over-the-counter and grooming and hygiene products; durable medical equipment; mobility enhancing equipment; prosthetic devices; or medical supplies. b. When the taxable products in the transaction are not the primary products (more than 50%) within the meaning of division (B)(4), then the transaction is not a “ bundled transaction.” In such a case, the transaction shall be non-taxable in its entirety. G. Application to Transactions Including Telecommunication Service, Ancillary Service, Internet Access and Audio Video Programming Service. Division (C) of R.C. 5739.012 provides for the application of tax to any bundled transaction in which at least one product is a telecommunication service, ancillary service, internet access, or audio or video programming service. 1. When applying the provisions of division (C), sales or use tax will be imposed on the total non- itemized price of a bundled transaction where the vendor or seller has failed to maintain books and records identifying through reasonable and verifiable standards that portion of the price attributable to the distinct products. 2. When determining the taxable portion of the non-itemized price of a bundled transaction that is subject to tax under the provisions of division (C), only books and records maintained by the vendor or seller in the regular course of business shall be considered. Books and records shall be considered to be maintained primarily for tax purposes, and not in the regular course of business, when such books and records identify taxable and nontaxable portions of the price, but the seller maintains other books and records that identify different prices attributable to the distinct products included in the same bundled transaction. Generally, books and records kept in the regular course of business and that are acceptable for use in subjecting the taxable portion of a bundled transaction’ s non-itemized price to taxation under division (C) include financial statements, general ledgers, invoicing and billing systems and reports, and reports for regulatory tariffs and other regulatory matters; provided, however, that the books and records named herein shall not be considered all inclusive. H. Application to Transactions Involving Optional Computer Software Maintenance Contracts. 1. As used in paragraph H of this Information Release: a. “ Computer software maintenance contract” means a contract that obligates a vendor or seller of computer software to provide a customer with future updates or upgrades to computer software, support services with respect to computer software or both, and b. ) “ Optional computer software maintenance contract” means a computer software maintenance contract that a customer is not obligated to purchase as a condition to the retail sale of computer software. 2. In any case where an optional computer software maintenance contract for prewritten computer software is sold to an Ohio consumer by a vendor or seller, the following treatment shall apply: a. If the optional computer software maintenance contract only obligates the vendor or seller to provide upgrades and updates, the contract will be deemed to be a sale of prewritten computer software, which is defined to be tangible personal property by division (YY) of R.C. 5739.01. Such a sale will be considered taxable unless the consumer has a claim of exemption. b. If the optional computer software maintenance contract only obligates the vendor to seller to provide support services, and no upgrades or updates, the transaction will be considered to be the sale of a non- taxable personal or professional service. http://www.tax.ohio.gov/sales_and_use/information_releases/st_2010_02.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st_2010_02 Page 5 of 5 c. If the optional computer software maintenance contract includes both taxable and exempt elements that are not itemized separately on the invoice or similar billing document, the contract shall be characterized as a sale of prewritten computer software, which is defined to be tangible personal property by division (YY) of R.C. 5739.01. Such a sale will be considered taxable unless the consumer has a claim of exemption. If you have any questions regarding this information release, please contact our Taxpayer Service Center at 1-888-405-4039, or e-mail us through our web site: tax.ohio.gov. OHIO RELAY SERVICES FOR THE HEARING OR SPEECH IMPAIRED Phone: 1-800-750-0750 http://www.tax.ohio.gov/sales_and_use/information_releases/st_2010_02.aspx 01/05/2017

ST 1993-01 - Employment Placement Service - April 1993, Revised November 2012 On January 1, 1993, employment placement service became a transaction subject to Ohio sales tax. See Ohio Revised Code (“R.C.”) 5739.01(B)(3)(e) (“sale” and “selling” include “employment placement service.”) That service is defined in Section 5739.01 (KK)) as “locating or finding employment for a person or finding or locating an employee to fill an available position.” This information release provides guidance regarding the application of sales tax to the provision of employment placement services. The November, 2012 revision does not reflect any change in the Department’s policy regarding this service. It merely addresses H.B. 508’s elimination of the service vendor license. The following services are taxable employment placement services: Securing employment for a person; Finding an employee for an employer; or Locating a position for a person. Here are some frequently asked questions and answers regarding licensing and tax collection. 1) If I provide an employment placement service, must I have a license and if so what type of license is required? How do I get one? Yes. An employment placement provider located in Ohio must obtain a regular county vendor's license from the county auditor’s office in the county where its business is located. Vendor’s licenses can also be obtained via the Ohio Business Gateway at business.ohio.gov. 2) If my business is headquartered in another state but I provide employment placement service at locations in Ohio, must I collect Ohio tax? Yes. You must register as an out-of-state seller, and collect and remit use tax on this service if the service is provided in Ohio. To register, go to the Ohio Business Gateway at business.ohio.gov. 3) Is my need to register based upon the total amount of sales which I make? No. This service is taxable regardless of the amount of business conducted. 4) When is the tax on employment placement service to be reported? The tax on the service must be reported on the return covering the period when the sale is made. A sale is made when performance of the service is provided or when the price is paid, whichever is first. If acceptance of an individual and payment of the fee is contingent upon the results of a trial period evaluation, the tax on the service is not due until the individual is accepted. If the fee

is due upon acceptance without such contingency, but may be fully refunded within a specified time after placement, the tax is due when the individual is placed or the fee is paid, whichever is first. 6) What price should I use in calculating the amount of tax to be charged? The total amount billed to the client for the employment service is the “price,” even though you may choose to separate certain reimbursable costs, such as travel expenses. 7) What rate of tax should be charged? The rate of taxation for a service depends upon the county where the client receives the benefit of your service; that is, where the employee is assigned for an employer-client or where the employee resides for an employee-client. The proper sales tax rate can be found on the Department’s website at http://tax.ohio.gov/online_services/thefinder.stm. If you provide a placement to an employer-client for locations in more than one county, you will need to separate the placement charges for each county and bill tax based on the appropriate rate for each county involved. 8) How will I report the tax collected on this service? Sales tax returns must be filed electronically via the Ohio Business Gateway at business.ohio.gov. A return must be filed, even if you made no sales during the period to be reported. You are entitled to a 3/4 of 1% (.0075) discount on the tax to be paid, if tax returns are timely filed with full payment of the amount due. Vendors who fail to file returns on time or who do not remit the amount due with filed returns are subject to a late filing charge of $50 or 10% of the tax due, whichever is greater. If assessed, there is a 50% penalty on any tax collected that was not paid. Failing to remit sales tax collected is a fourth degree felony. 9) Am I entitled to claim exemption on the purchase of any other taxable service? If you purchase an “employment placement service” for the purpose of reselling that service to a client, you may claim “resale” from that service supplier. However, you must properly charge tax on the total price of the employment placement service you provide. Example: Company A, an employment placement service provider, has a client looking for an engineer. Company B, also in that business, has a qualified candidate. They agree to split the fee if B’s candidate is hired. Company A may claim exemption from tax on its transaction with Company B based on its resale of B’s service. However, Company A must collect tax on the entire charge for the placement.

10) If an employment placement service is provided to a client that claims to be nontaxable, what proof does the law require? If the client is never subject to tax, such as the U.S. government; the state of Ohio; or a city, county or other political subdivision of this state, a copy of the sales invoice is all that is needed, provided that the name and address of the client are clearly identified. If the employer-client is claiming that the use of the service is not subject to tax or that it is a nonprofit charitable organization, a qualifying state veterans’ organization headquarters, or an organization described in section 5709.72 of the Revised Code, obtain a fully completed exemption certificate from the client and keep it in your files. If the client claims to hold a direct payment authority with Ohio, the client must furnish evidence of the authority. (A direct payment authority number is always 98-six digits.) Note: An employee-client cannot claim exemption based on his or her placement with an exempt organization. 11) What are my responsibilities if the consumer refuses to pay tax? As a provider of a taxable service, you are responsible for charging, collecting and remitting tax. If the purchaser of your service has no valid reason for not paying tax, you may pursue collection as you would any unpaid debt. R.C. 5739.26 and 5741.19 state, “ No consumer shall refuse to pay the full and exact tax as required by ...[statute], or refuse to comply with such sections and the rules and regulations of the tax commissioner, or present to the vendor a false certificate indicating that the sale is not subject to tax.” EXAMPLES OF EMPLOYMENT PLACEMENT TRANSACTIONS AND THEIR TAX TREATMENT: FEE PAID BY THE EMPLOYEE: EXAMPLE #1 Ohio or Out-of-State Employer Ohio Resident Ohio Job The fee paid by the employee is taxable at the rate in effect in the county where the employee lives when the job is found because the benefit of the service is received there. EXAMPLE #2 Ohio or Out-of-State Employer Out-of-State Resident Ohio Job The fee paid by the employee is not taxable because the out-of-state resident is considered to have received the benefit of the employment service in the other state.

EXAMPLE #3 Ohio or Out-of-State Employer Ohio Resident Out-of-State Job As with the analysis of Example 1, the fee paid by the employee is taxable at the rate in effect in the county where the employee lives when the job is found because the benefit of the service is received there. FEE PAID BY EMPLOYER: EXAMPLE #4 Ohio or Out-of-State Employer Ohio Resident Ohio Job This transaction is taxable at the rate in effect in the county where the employee’s post of duty is or is to be. EXAMPLE #5 Ohio or Out-of-State Employer Out-of-State Resident Ohio Job The analysis is the same as Example #4 EXAMPLE #6 Ohio or Out-of-State Employer Ohio Resident Out-of-State Job The fee paid for this job placement is not taxable because the benefit of the service received by the employer is not in Ohio. If the employer pays the employment placement provider an annual retainer, that retainer is subject to tax since the payment of the retainer anticipates the rendering of a taxable service. If in-state and out-of-state placements occur, that portion of the retainer which applies to Ohio placements is taxable and can be calculated based upon the ratio of other fees generated by the service provider for Ohio placement to all placement fees generated by the service provider. If the other fees are not related to the salary/wage of the positions filled, the allocation can be based upon the number of Ohio placements to all placements. If you have any questions regarding this matter, you should call us at 1-888-405-4039. OHIO RELAY SERVICES FOR THE HEARING OR SPEECH IMPAIRED Phone: 1-800-750-0750

Ohio Department of Taxation > sales_and_use > information_releases > st199308 Page 1 of 8 | State Agencies|Online Services Information Release ST 1993-08 - Employment Service - Issued September, 1993; Revised October, 1993; Revised December, 2000; Revised May, 2006, Revised February, 2007 This release supersedes all previous versions of information release ST 1993-08 addressing the specifically enumerated taxable service of “ employment service.” The purpose of this release is to clarify the law with regard to employment service. Specifically, this revised release as of February, 2007 provides information on the changes to the definition of “ employment service” found in R.C. 5739.01(JJ) as amended by Sub. H.B. 293, effective January 1, 2007. Employment service became a transaction subject to sales and use tax on January 1, 1993. Later, on July 1, 1993, changes were made in the statute as to what is an employment service. Since that time, decisions made by the Ohio Board of Tax Appeals and the Ohio Supreme Court have interpreted the definition of this service. To help you understand these developments and how they may affect you as a potential provider or consumer of employment service, the Department of Taxation has prepared this information release. If after carefully reading it you have any questions or require more specific assistance on your responsibility as a vendor or consumer of this service, please contact any office of the Department of Taxation. Section 5739.01(B)(3)(k) of the Ohio Revised Code (“ R.C.” ) includes within the definition of a “ sale” and the providing of employment service. As amended by Sub. H.B. 293 of the 126th Ohio General “ selling” Assembly, effective January 1, 2007, employment service is defined in R.C. 5739.01(JJ) 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 provided or supplied receive their wages, salary, or other compensation from the provider or supplier of the employment service or from a third party that provided or supplied the personnel to the provider or supplier.. “ Employment service” does not include: (1) Acting as a contractor or subcontractor, where the personnel performing the work are not under the direct control of the purchaser. (2) Medical and health care services. (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. (4) Transactions between members of an affiliated group, as defined in division (B)(3)(e) of this section. (5) Transactions where the personnel so provided or supplied by a provider or supplier to a purchaser of an employment service are then provided or supplied by that purchaser to a third party as an employment service, except “ employment service” does include the transaction between that purchaser and the third party. Exclusions A: R.C. 5739.01(JJ)(1) “ Employment service” does not include “ [a]cting as a contractor or subcontractor, where the personnel performing the work are not under the direct control of the purchaser.” To determine whether a transaction would qualify for this exclusion it needs to be determined whether the consumer is purchasing qualified personnel to work at the consumer’ s direction or whether the consumer is purchasing the accomplishment of some specific task which the provider is obligated to perform. The key is the true object of a particular transaction. If the true object of the consumer is to receive personnel to work at the consumer’ s direction, the transaction is an employment service. On the other hand, if the true object of the consumer is to enter into a contact for a completed task or project, it is not an employment service. While it is true that both situations require work or labor, the difference between them depends on the express or implied responsibilities of the provider of the service as http://www.tax.ohio.gov/sales_and_use/information_releases/st199308.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st199308 Page 2 of 8 typically stated in the contract. The following are examples: Example A1: A general contractor engages various subcontractors to complete the construction of a building. The subcontractors are charged with the responsibility of completing certain aspects of the project. The subcontractors use their own crews whose performance and responsibilities are guided by a contract to perform a specific task. The labor of the crew is spent in completing certain phases as required by the contract. While the subcontractor may invoice periodically on an hourly basis, it is the completion of the job that is sought and required by the contract, not the hours of labor to accomplish it. Since the "true object" in a construction contract is the completed project, the transaction does not meet the definition of employment service. Example A2: Using the same facts as in Example A1 except that the subcontractor does not have its own employees to accomplish the project that it has agreed to complete. The subcontractor obtains personnel from an employment agency. The relationship between the general contractor and the subcontractor is unchanged. The transaction between these two parties is not an employment service as stated in Example A1. However, the transaction between the subcontractor and the employment agency is a taxable employment service. The true object of the subcontractor is to obtain personnel, a work force, that will work at the subcontractor’ s direction to complete its contractual obligations to the general contractor. Example A3: An employment agency supplies secretarial staff as needed to its customers. The customers engage its services seeking personnel to handle secretarial duties at its direction. While there may be some skill requirements to accomplish the general secretarial duties needed, there is no responsibility on the part of the agency to perform a specific task. The agency’ s commitment is limited to supplying personnel capable of doing the work. The true object of the customer here is the receipt of personnel to work as it directs. This is an employment service. Example A4: An engineering company is engaged by a client to prepare equipment and structural drawings which will be used to solicit bids. The client provides general direction and periodic constructive criticism, but does not provide any other direction to the engineers. The engineering company’ s work is performed both on and off-site. This transaction is not a taxable employment service. The true object of the client and the responsibility of the engineering company under the contract is the accomplishment of a specific task. Example A5: A firm specializing in providing engineering personnel is engaged by a client to furnish it with a qualified engineer who will work at the direction of the client on a project or projects as needed. The engineer may or may not work with other engineers of the client. In contrast to Example A4, the true object of this transaction is the receipt of a person to work as directed. The engineering firm is supplying a professional. The person will work under the direction of others, and the firm is not responsible for any specific results or accomplishments. This is an employment service. The fact that the person is a professional has no bearing on taxability. Example A6: A talent agency provides models and other talent as requested for its clients. Client hires the agency to provide models to model the client’ s clothes at its direction. This is an employment service. The agency is providing models who will work at the direction of the client. Example A7: An agency provides models and other talent as requested for its clients. Client hires the agency to provide a specific person to perform a particular act or routine; such as a motivational speaker. This is not an employment service. Here the client wants a particular performer who will perform a specific task. The true object of the client is not to obtain individuals who will work as it directs. B: R.C. 5739.01(JJ)(2) “ Employment service” does not include ‘ [m]edical and health care services.” Included under this exclusion are both professionally trained and licensed medical practitioners and others who provide patient care to persons or otherwise have an active role in patient diagnosis, treatment or care. For http://www.tax.ohio.gov/sales_and_use/information_releases/st199308.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st199308 Page 3 of 8 example doctors, dentists and nurses qualify as do nurse’ s aides, x-ray technicians, medical assistants, orderlies, and lab technicians engaged in human tissue/fluid analysis. Such services may be performed in hospitals, clinics, doctor and dentist offices, off-site in laboratories or wherever else patient care is required. Other related “ medical and health care services” personnel include pharmacists dispensing drugs for treatment, nursing home patient care staff, and in-home care or companion personnel who are engaged to sustain the health or well-being of individuals of diminished physical or mental capacity. Not considered medical and healthcare services, even though they may be purchased by a medical practice, are clerical, secretarial, accounting and computer programming personnel as well as other personnel who are not engaged in patient care. Also included in the non-patient care category are medically trained and licensed personnel employed to review and administer the handling of medical insurance claims or to do research, test or to provide other services not related to the treatment, diagnosis or care of a particular patient. The following are examples: Example B1: A client of a home companion service engages the company to supply a person to care for an ailing parent while the client is away. This is a medical and health care service within the exclusion. Therefore, it is not an employment service. Example B2: A dentist hires an employment agency to provide a dental hygienist to fill in for a regular employee who is on vacation. This is a medical and health care service worker who is involved with patient care. This is not an employment service. Example B3: A medical clinic hires an employment agency specializing in providing medical personnel to provide a trained nurse to help on a temporary basis to perform non-patient care service such as the submission of medical claims. This transaction does not fit within the exclusion because, although medically trained, the individual is not providing care to the clinic’ s patients. This is an employment service. C: R.C. 5739.01(JJ)(3) “ Employment service” does not include “ [s]upplying 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.” Some employee leasing situations will fall within this category. Various examples are discussed below. Typically, the service provider, in exchange for reimbursement of employee wages, salaries and benefits plus a commission, agrees to employ personnel who conduct the business of the client. The direction of the daily work activities of the employees are at the discretion of the client, while payment of the employees’ wages is made by the service provider. For purposes of the Ohio sales and use tax, such service is not an employment service subject to tax if the contract between the service provider and the purchaser is for a duration of at least one year and if the contract specifies that each employee covered under the contract is assigned to the purchaser on a permanent basis. Permanent basis means that employees are intended to be assigned for an indefinite or for an unlimited period of time. Further, the parties’ performance under the contract is subject to review. In H.R. Options, Inc. v. Zaino 100 Ohio St.3d 373, 2004-Ohio-1, the Ohio Supreme Court stated the following: When the Tax Commissioner’ s agents examine an employment service contract, they must be able to determine at the 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. Situations where the performance of the parties do not conform to the terms of the contract may be subject to tax. Also, if at least one employee covered under an employment service contract is not assigned on a permanent basis, then the entire contract may be considered taxable. Contracts that do not provide for a term of at least one year and/or that each employee is assigned permanently are considered contracts for taxable employment service. The following are examples: Example C1: Company A is a small manufacturing company that has outsourced its human resource functions by entering into a written contract with an employment agency. The terms of the contract http://www.tax.ohio.gov/sales_and_use/information_releases/st199308.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st199308 Page 4 of 8 include that all provided employees are indefinitely assigned to Company A and that the duration of the contract will be two years. Company A and the professional employee organization both operate under the contract as the terms require. Because the contract meets the third exception to the definition of an employment service and the parties are operating under the contract in conformance with the terms of the contract, this is not an employment service. Example C2: Using the same facts as in Example C1 except that the contract is not in writing but instead is an oral contract. In Excel Temporaries, Inc. v. Tracy (Oct. 30, 1998), BTA No. 97-T-257, the Ohio Board of Tax Appeals determined that an oral contract may be considered valid for purposes of R.C. 5739.01(JJ)(3). The Board stated that: . . . this does not mean that parol evidence may in itself be sufficient in all cases to prove that the taxpayer’ s assignment of personnel is excluded from the definition of an employment service. Corroborating evidence may be necessary to establish that such contract exists and that performance under the contract meets the requirements contained within R.C. 5739.01(JJ)(3). Accordingly, for the purpose of this example, if Company A can provide corroborating evidence that the contract was indeed for a period of two years and that each employee covered by the contract is assigned to Company A on a permanent basis, the transaction will not be an employment service. It is strongly advised that employment service contracts be in writing. While the Ohio Board of Tax Appeals has determined that a contract may be oral, it has yet to examine a factual situation where the taxpayer has been able to prove that such contract meets the exclusion found in R.C. 5739.01(JJ)(3). Example C3: Using the same facts as in Example C1 except that upon audit, the tax auditor finds from review of company records that the parties are not operating according to the terms of the contract. The employment agency has not permanently assigned any employees to Company A, but instead only furnishes employees to Company A based upon the company’ s needs, which fluctuate substantially from week-to-week. Since the exclusion found in R.C. 5739.01(JJ)(3) is subject to the performance of the parties, the transactions between Company A and the service provider in this example would be an employment service. Example C4: Company B is a small manufacturing company with fluctuating sales. It enters into a written contract with an employment agency. The terms of the contract provide that the contract is for a duration of one year and that the employment agency will be the exclusive provider of all employees to Company B as needed. This situation does not meet the third exclusion because the employees are not permanently assigned to Company B. Accordingly, this is an employment service. Example C5: Company AB enters into a contract with an employment agency. The terms of the contract indicate that the employees will be permanently assigned and the contract is for the length of one year. Upon audit, the company records indicate that the service provides six full time workers under the contract that are indeed permanently assigned as well as additional workers as needed. In this example the contract would not fit within the third exclusion because each worker covered by the contract is not assigned on a permanent basis to Company AB. This is an employment service. D: R.C. 5739.01(JJ)(4) Employment service” does not include “ [t]ransactions between members of an affiliated group, as “ defined in division (B)(3)(e) of this section.” To qualify as a member of an affiliated group, one person or business must own or control the business operations of another member of the group. In the case of corporations with stock, one corporation owns or controls another if it owns more than fifty percent of the other corporation’ s common stock with voting rights. See R.C. 5739.01(B)(3)(e). In determining the relationships of the parties the federal attribution rules do not apply. The following are examples: Example D1: Company G’ s entire workforce are employees of Company H. Company G and Company H are wholly owned subsidiaries of the same parent corporation. In this example the companies qualify as members of an affiliated group and, therefore, the transactions are specifically excluded from being an employment service. http://www.tax.ohio.gov/sales_and_use/information_releases/st199308.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st199308 Page 5 of 8 Example D2: The Smith family is the owner of several companies including Smith Trucking and Smith ES. Smith Trucking is equally owned by the father and his three sons. Smith Trucking needs qualified drivers. Seeing this need, the three sons organize and start an employment service company, Smith ES, which provides the drivers to Smith Trucking and other companies on a temporary as needed basis. Smith ES does not have a contract with Smith Trucking that would qualify for the exclusion found in R.C. 5739.01(JJ)(3). The question is whether transactions between Smith Trucking and Smith ES are excluded from the definition of a taxable employment service as the transactions are between members of an affiliated group? In this example, the transactions are not excluded from the definition of employment service because no one person or business owns or controls the business operations of another member of the group. Accordingly, the transactions between Smith Trucking and Smith ES are subject to tax. E. R.C. 5739.01(JJ)(5) Effective January 1, 2007, “ Employment service” does not include “ Transactions where the personnel so provided or supplied by a provider or supplier to a purchaser of an employment service are then provided or supplied by that purchaser to a third party as an employment service, except “ employment service” does include the transaction between that purchaser and the third party.” This exception to the definition was added by H.B. 293 in response to the Ohio Supreme Court’ s decision in Crew 4 You, Inc. v. Wilkins, 105 Ohio St.3d 356, 2005-Ohio-2167. The Court had stated in Crew 4 You that “ [a] seller of ‘ employment service’ as that term is used in Ohio pays the “ wages, salary, or other compensation” of the personnel.” This decision left no room for a claim for resale under R.C. 5739.01(E). The amendment enacted by Sub. H.B. 293 now defines that “ employment service” does not include situations where the service is sold from one employment service agency to another employment service agency that uses the employees to fulfill its contractual obligations to a third-party customer. Further, the amended language makes clear that the transaction between the employment agency purchasing the employment service from another and the third party is a taxable employment service. Example E1: Employment agency A is an out-of-state company that has no employees located in Ohio. It desires to provide employees to a client in Ohio. To do this it contracts with employment agency B that is located in Ohio to provide employees to employment agency A’ s client. Agency B bills agency A for the employees. Agency A bills its Ohio clients. Prior to January 1, 2007, the transaction between employment agency A and employment agency B may be a taxable employment service. This is pursuant to the decision of the Ohio Supreme Court in Crew 4 You, Inc. v. Wilkins, 105 Ohio St.3d 356, 2005-Ohio-2167, Agency B is required to charge and collect tax from agency A on its employment service provided to agency A. The reason for this is because agency B is paying the compensation to the personnel provided. The Ohio Supreme Court stated in Crew 4 You, Inc. that “ [a] seller of ‘ employment service’ as that term is used in Ohio pays the ’ wages, salary, or other compensation’ of the personnel.” With the enactment of the amendment effective January 1, 2007, this is no longer the case. The transaction between employment agency A and employment agency B is specifically excluded from the definition of a taxable employment service. Absent a claim of exemption, i.e. sale to a nonprofit charitable purpose organization or the proper application of one of the other exceptions to the definition of an employment service, the transaction between employment agency A and its third party client is a taxable employment service. Employment agency A must be a licensed vendor and it must collect the tax due from its customer. Additional Examples F: Additional examples related to employment service are provided below. Example F1: Company H hires an individual to shovel snow, as needed during the winter months, from its sidewalk for a given hourly rate. This transaction is not an employment service. The individual performing the work is not working for an employer who in turn provides him to a client. The individual is being paid directly by the purchaser of the service.(Footnote 1) Example F2: Company I obtains temporary clerical, accounting, data entry and similar personnel as needed to fill in for vacationing employees who work under varying degrees of supervision by a client. This is the prime example of an employment service. http://www.tax.ohio.gov/sales_and_use/information_releases/st199308.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st199308 Page 6 of 8 Example F3: In order to mount an air conditioning unit on a roof, an HVAC contractor requires a crane. The crane rental company furnishes the equipment along with an operator necessary to complete the task. The billing from the crane company breaks down the total cost between the crane and the s time. operator’ This is a nontaxable service. Despite the probability of considerable direction of the crane operator by the contractor and a breakdown of the crane operator’ s time, the crane rental company is not providing an employment service. It is providing a crane service. The service it provides is the moving, lifting and positioning of objects with its own equipment.(Footnote 2) Example F4: A real estate broker headquartered in Cincinnati engages an employment agency located in Cincinnati to furnish a person to answer the telephone and provide other clerical duties in its Covington, Kentucky branch office. This transaction is not taxable. Although this is an employment service, it is not subject to Ohio tax since the job site (post-of-duty) of the temporary worker is not in Ohio. A company in this situation is advised to keep records that accurately identify where this type of service is rendered to prevent future problems in the event of an audit. Example F5: An Ohio employment agency moves its headquarters from Cincinnati to Covington Kentucky. The agency then provides a temporary employee to a client in Cincinnati. The employee’ s post-of-duty is in Cincinnati, Ohio. This is a taxable employment service. As in the previous example, the location of the employment agency is irrelevant to the taxability of the service being rendered. The agency clearly has “ substantial nexus” with the State of Ohio. Since an employee of the agency is providing the company’ s service in Ohio, substantial nexus exists with Ohio. The Kentucky agency must register as a seller with Ohio and it must collect and remit the tax on all taxable sales located in Ohio. Example F6: Company J has several small offices throughout the country and outsources all of its personnel from an employment agency. Company J does not have a contract with the employment service agency that qualifies for the exclusion found in R.C. 5739.01(JJ)(3). The temporary employees are located in various states throughout the country. Although the entire transaction is an employment service, only those employees with an Ohio post-of- duty would be subject to tax in Ohio. Example F7: Company K is a trucking operation. It contracts with Company L to provide drivers as needed. Company K schedules each driver’ s vehicle, load, and return trip assignments and pays Company L for the supplying of the drivers. Company L pays the drivers’ wages. In this situation Company L is providing an employment service. It should also be noted that the exemption Company K may have for “ highway transportation for hire,” R.C. 5739.02(B)(32), applies to transportation equipment and its repair, not to employment service. Using the same facts, but adding the fact that Company L is providing drivers pursuant to a contract of at least one year that specifies that each employee under the contract is assigned on a permanent basis; subject to actual performance, this transaction is not an employment service. Example F8: A nonprofit charitable purpose organization needs additional clerical personnel to help with a fundraising event. It contracts with an employment agency to provide the needed personnel. Although this is an employment service, the nonprofit charitable organization may claim exemption from the tax under R.C. 5739.02(B)(12). The employment agency must obtain a certificate of exemption as provided for in R.C. 5739.03(B)(1). Example F9: Company M is a manufacturer that desires to outsource all of its human resource needs. It contracts with an employment agency that places Company M’ s current personnel on its roll of employees. The employees are then assigned back to Company M. Because Company M is unsure of how this arrangement will workout, the contract runs from month-to-month. The exclusion found in R.C. 5739.01(JJ)(3) does not apply because the contract is not for at least one year. This is an employment service. The fact that the employment agency did not find and hire the personnel but instead received personnel referred to it from its client does not change the fact that the transaction http://www.tax.ohio.gov/sales_and_use/information_releases/st199308.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st199308 Page 7 of 8 is an employment service. Example F10: Company N is a manufacturer purchasing employment service from employment agency C. Agency C will provide personnel to Company N as needed. The personnel work on Company N’ s assembly line putting together the items that Company N manufactures for sale. The transactions are taxable employment service. Company N may not claim the resale exception. In this situation, the actual benefit that Company N receives is the benefit of the employment service; that is, the employees’ contribution of a temporary and flexible work force. Company N is using the employment service in the making of its finished product along with the materials and everything else that goes into making the product. Neither can Company N claim the manufacturing exemption. The exemption in R.C. 5739.02(B)(42)(g) applies to the “ thing” transferred. A “ thing” for purposes of R.C. 5739.02(B)(42) includes only those enumerated services listed in R.C. 5739.01(B)(3)(a), (b) and (e). The section defining employment service as taxable is R.C. 5739.01(B)(3)(k). Accordingly, employment service is not included within the definition of a “ and cannot qualify for the manufacturing exemption. This answer is consistent thing” with the holding of the Ohio Supreme Court in Bellemar Parts Industries, Inc. v. Tracy, 88 Ohio St.3d 351, 2000-Ohio-343. Example F11: Company O routinely hires new employees as needed to fill positions in its company. Company O however does not want to make a commitment on the hiring of any new employee until such time as it is convinced of the suitability of the individual. Company O contracts with employment agency D to provide employees as needed on a temporary basis to fill these positions. If after a three month trial period, Company O likes the individual, it will hire the individual as a regular employee. If Company O does not feel the individual is suitable, it will have the employment agency D provide another temporary to try to fill the position. During the trial period, the temporary is paid by employment agency D, who in turn charges Company O for supplying the employee. This is an employment service and the service provider should charge tax to Company O on the transactions during the trial period. Further, if Company O pays the service provider an additional fee when it hires an individual as a regular employee, such charge is a taxable employment placement fee under R.C. 5739.01(B)(3)(l). Note that given the facts in this example, it is irrelevant as to whether the terms of the contract between Company O and the employment agency meet the exclusion to the definition of employment service found in R.C. 5739.01(JJ)(3). This is because the Ohio Supreme Court has held that “ permanent” in the context of R.C. 5739.01(JJ)(3) means assigning an employee to a position for an indefinite period. See H. R. Options, supra. In the situation found in the current example, the employee will be assigned only for the trial period. After the trial period the employee will either be hired by Company O or will be removed from the position and subject to reassignment by the employment agency. In these facts there is no “ or indefinite assignment and the transaction cannot permanent” qualify for the exclusion to the definition of employment service found in R.C. 5739.01(JJ)(3). Example F12: Company P is an employment agency. It contracts with its clients to provide them with employees. All transactions are subject to Ohio’ s taxing jurisdiction. The employees assigned will receive their daily direction from the clients. The results of an audit find that Company P’ s contracts with its clients fall into three distinct categories: (1) Written contracts with clients that qualify on their face for the exclusion found in R.C. 5739.01(JJ) (3), but Company P’ s records indicate that the employees are not permanently assigned to the clients but instead are routinely shuffled from client to client as Company P dictates; (2) Written contracts with clients that qualify for the exclusion found in R.C. 5739.01(JJ)(3) both on their face and under a test for performance; and (3) Oral contracts where clients will call in to Company P to obtain temporary employees as needed to fill in for regular employees who are on vacation, have called in sick that day, who are on some other short term leave or are needed due to an increased demand in the client’ s business. To fill many of these positions, Company P pulls from its own employee pool. However, it also has a contract with Company Q, an employment placement service company, who will find and provide Company P with specific types of employees. Company P pays a placement fee to Company Q for each employee found and Company P adds each employee to its own employee pool. The question is which of the three types of contracts are subject to tax and whether Company P’ s transactions with Company Q are subject to tax. http://www.tax.ohio.gov/sales_and_use/information_releases/st199308.aspx 01/05/2017

Ohio Department of Taxation > sales_and_use > information_releases > st199308 Page 8 of 8 The written contracts described under category (1) are subject to tax. Even though a contract may on its face meet the requirements for the exclusion found in R.C. 5739.01(JJ)(3), the terms of the contract are still subject to review for actual performance. See H.R. Options, Inc. v. Zaino, supra. and the explanation regarding the third exclusion on pages 4 and 5 above. Since in this example an audit found that the parties were not performing according to the written terms of the contract, i.e. the employees were not permanently assigned, these contracts do not qualify for the exclusion found in R.C. 5739.01 (JJ)(3) and the transactions are subject to tax. The written contracts described under category (2) qualify for the exclusion found in R.C. 5739.01(JJ)(3) as the specific terms meet what is required by the statutory exclusion and a review of performance finds that the parties are operating under the terms of the contract as they are written, i.e. each employee covered under the contract is assigned to the client on a permanent basis. The situation described under category (3) is the typical employment service situation and each transaction is subject to tax; excluding some other exemption, e.g. the purchaser is a nonprofit charitable purposes organization exempt from tax under R.C. 5739.02(B)(12). Finally, the transactions between Company P and Company Q are taxable employment placement services, R.C. 5739.01(B)(3)(I) and R.C. 5739.01(KK).(Footnote 3) Company P must pay tax on the placement fees it pays to Company Q. Company P may not claim the sale for resale exception found in R.C. 5739.01(E) as it is not reselling the employment placement service it received. Instead, Company P is the consumer of the service as it received the benefit of the employment placement service. Its benefit is the receipt of personnel that it can add to its employee pool and use to fulfill its contractual obligations of providing employment service to its clients. If you have any questions regarding this matter, you should direct your questions to one of our taxpayer service centers or call 1-888-405-4039. OHIO RELAY SERVICES FOR THE HEARING OR SPEECH IMPAIRED Phone: 1-800-750-0750 Footnotes: 1. Effective August 1, 2003 certain snow removal services became subject to tax. See Information Release ST 2003-02 - Landscaping, Lawn Care Services, and Snow Removal - January, 2004. 2. See also R.C. 5739.01(UU)(1)(c) which provides that “ Lease” or “ rental” do not include “ [p]roviding tangible personal property along with an operator for a fixed or indefinite period of time, if the operator is necessary for the property to perform as designed. For purposes of this division, the operator must do more than maintain, inspect, or set-up the tangible personal property.” 3. See information release ST 1993-01 – Employment Placement Service – April, 1993 for more information regarding taxable employment placement services http://www.tax.ohio.gov/sales_and_use/information_releases/st199308.aspx 01/05/2017

ST 2003-01 - Direct Payment Authority Program - March, 2016 This Information Release supersedes Information Release ST 2003-01 – December, 2004. Ohio Revised Code (R.C.) 5739.031 allows the Tax Commissioner to issue a direct payment permit that authorizes the permit holder to pay sales and use taxes directly to the state and waives the collection of such tax by the vendor or seller. “ Direct payment authority ” is a privilege, which can be granted to a business to promote the efficient administration of Ohio’s sales and use tax law s. Effective May 2015, the Department of Taxation (“Department") implemented an improved “direct payment authority” sales and use tax program. This program has several key features: Each direct payment permit holder will enter into an agreement that sets forth compliance  and record keeping requirements, revocation procedures and an expectation that the permit holder will make every reasonable effort to determine the taxability of purchases accurately to avoid underpayment or overpayment of tax. Periodically (typically every four (4) years), the Department will review and validate the  business’ continuing need for the direct payment permit and their compliance with the procedures as outlined within the direct payment agreement.  A complete listing of all direct payment permit holders is included within the "Active Vendor Licenses" file on the Department’s website and is updated weekly.  Direct payment authority will be granted to each taxpayer that has entered into an agreement with the tax credit authority under R.C. 122.175, pertaining to an eligible computer data center. The following question and answer format provides general information, describes the application process, sets forth compliance requirements, and explains how direct payment authority can be relinquished or revoked. General Information Q1. What is direct payment authority? R.C. 5739.031 authorizes the Tax Commissioner to allow direct payment permit holders to  forego paying state and local sales and use tax at the time they make certain purchases. These direct payment permit holders must accrue and pay the state and local sales and use tax directly to the Department. 1

Q2. Who is a “direct payment permit holder”?  A direct payment permit holder is a taxpayer whom the Tax Commissioner has authorized to make direct payment of state and local sales and use tax to the Department on certain taxable purchases rather than paying the tax to the seller. Q3. What is Ohio “use tax”? Chapter 5741 imposes on all Ohio businesses the requirement to pay Ohio “use tax” when  the business purchases taxable goods and/or services from a seller/service provider that does not collect the Ohio and local sales tax. Use tax is also due when the proper amount of sales tax has not been paid to an in-state vendor, seller or service provider. The use tax applies to purchases of the same goods and services that are subject to the sales tax. Q4. Who is eligible for direct payment authority? A manufacturer, contractor or other consumer that purchases goods or services under  circumstances normally making it impossible at the time of the purchase to determine if the goods or services are exempt from taxation, Or A consumer (i) whose number of purchase transactions of goods and services exceed five  thousand annually or (ii) whose Ohio state sales and use tax paid on these purchases exceeds $250,000 annually. Q5. Why does the Department list all direct payment permit holders on its website? The Department frequently receives requests from vendors to confirm that a taxpayer has  direct payment authority. Placing the list on the website allows vendors to self-serve and obtain this information more quickly. R.C. 5703.21 permits the Department to disclose the following information:  The name and address of the business,  The business’s direct payment permit number, and  The effective date of the direct payment authority.  Application Process Q1. How does a business apply for direct payment authority? A business desiring direct payment authority must complete an application form  http://www.tax.ohio.gov/portals/0/forms/sales_and_use/Generic/ST_ST900_FI.pdf. Q2. What information must be provided for the direct payment authority to be granted and is a written direct payment agreement required? The business must execute a written direct payment agreement with the Department, in  which the business must state it understands and agrees to fulfill the duties and responsibilities commensurate with direct payment authority. The business must also provide a written description of the business’s accounting system  and demonstrate how the accounting system will record and reflect the proper amount of sales and use tax due. 2

A detailed diagram/schematic of the operations must be provided.  Information necessary to complete the Taxpayer Information Report and Responsible Party  Questionnaire, in particular the names and home addresses of the corporate officers/responsible parties must be provided. If an audit results in an assessment, this information may be used to generate a responsible party assessment against the responsible party or parties. Q3. What review procedure does the Department follow after the business submits the application form? This Department’s Audit Division will review all applications and will assist qualified  applicants in completing a direct payment agreement. Within 120 days of receiving the application, the Department will notify the applicant of the approval or the denial of direct payment authority, or may schedule a conference with the applicant to obtain more information. If a conference is necessary, then the Department will notify the applicant of approval or denial within sixty days after the conference. Q4. How will I know if the Department has granted/denied direct payment authority to me? You will be notified by the Department in writing.  Q5. If the Tax Commissioner decides not to grant my business direct payment authority, can I appeal? No. The Ohio Revised Code does not provide for any appeal.  Compliance Requirements Q1. What are a direct payment permit holder’s responsibilities and duties? A direct payment permit holder must furnish either (i) a copy of the direct payment  authorization or (ii) the name and address of the direct payment permit holder, the direct payment permit number (8 digit number beginning with 98), and the date the Tax Commissioner issued the direct payment authority, to each supplier or seller from whom the direct payment permit holder purchases tangible personal property or services, subject to exclusions within the direct payment agreement. A direct payment permit holder does not have to provide any exemption certificates to its  suppliers and does not have to pay any Ohio sales and use tax to its suppliers who receive either (i) a copy of the direct payment authority or (ii) the name and address of the direct payment permit holder, the direct payment permit number, and the date the Tax Commissioner issued the direct payment authority. R.C. 5739.01(B)(5) explains that the Ohio sales and use tax does not apply to construction  contracts. The law states that a construction contract is the transfer of property for the repair, modernization, or new construction of real property under a construction contract. Because such contracts are not subject to Ohio sales and use tax, a direct payment permit holder must not claim, nor should a construction contractor accept, direct payment authority for any construction contract work performed in connection with real property, 3

unless certified by the contractee that the property will retain its tangible status as a business fixture after installation. If a direct payment permit holder has a contract with a construction contractor and certifies  that a portion of a construction contract relates to personal property which remains as personal property after installation, then R.C. 5739.03(C) allows the direct payment permit holder to claim, and the construction contractor to accept, the direct payment authority with respect to the certified tangible personal property portion of the contract. Q2. What are a supplier’s/seller’s responsibilities when a busines s informs the supplier/seller that the business has direct payment authority? If the direct payment permit holder provides to the supplier/seller either (i) a copy of the  direct payment authority or (ii) the name and address of the direct payment permit holder, the direct payment permit number, and the date the Tax Commissioner issued the direct payment authority, then the supplier/seller should not collect any Ohio or local sales and use tax from the customer. However, the supplier/seller must maintain adequate records which detail the amount involved and the identity of the holder of the direct payment authority (see (i) and (ii) above). The supplier/seller is not required to confirm with the Department that the customer possesses direct payment authority. Q3. What are the record keeping requirements for a direct payment permit holder? A direct payment permit holder must maintain all records that are necessary for a  determination of the correct tax liability. The direct payment permit holder must make the required records available to the Department upon request as required under R.C. 5739.031(D). Required records include, but are not limited to, purchase invoices, bills of lading, asset  ledgers, project folders and authorizations, depreciation schedules, transfer journals, accounts payable ledgers, and any other such primary and secondary records and documents created in the course of business. The permit holder must maintain records in an electronic format and, when under audit, provide the electronic records to the Department. Additionally, the permit holder agrees to complete the audit using statistical sampling for expenses. A taxpayer granted a direct payment authority must maintain a record keeping system in a  manner that allows the Department to efficiently and effectively identify the values upon which tax is reported and the amount of tax reported thereon. In addition, whenever a taxpayer has a direct payment authority covering more than one facility, the taxpayer must keep its records in a manner that allows the Department to identify the purchases and tax reported for each facility. Q4. How and when does a taxpayer file a direct payment use tax return? Depending upon the extent of the direct payment permit holder’s purchases, some direct  payment permit holders file monthly returns while others file quarterly returns. When a business receives its direct payment authority, the Department will inform the business if it is a monthly or quarterly filer. 4

All returns are to be received by the twenty-third of the month following the close of the  filing period (either monthly or quarterly). A direct payment permit holder remits the tax due with the return. Some direct payment  permit holders are required to make payment by electronic funds transfer (see R.C. 5739.032). The Department will notify those direct payment permit holders who must pay by electronic funds transfer. Q5. How do I pay local sales and use taxes? Whenever the direct payment permit holder files its return, the direct payment permit  holder must calculate and remit the local sales and use tax based upon the rate imposed by the local tax jurisdiction where the direct payment permit holder receives the tangible personal property or service. If the direct payment permit holder subsequently moves tangible personal property to another part of the state having a higher combined state and local sales and use tax rate, then the direct payment permit holder must pay the additional local sales and use tax. Q6. Are some transactions excluded from being reported under a direct payment authority return? A direct payment permit holder may elect not to claim its direct payment authority status in  connection with the purchase of certain types of transactions. Examples of such transactions include purchases of taxable lodging, meals, and beverages, the washing and waxing of motor vehicles, purchases of telecommunications services, and purchases made with a purchasing card. The transactions for which the permit holder elects not to use the direct payment authority must be indicated in the direct payment agreement. Q7. What is the direct payment permit holder required to do if the name, structure or operations of the business changes? If only the business name changes, the direct payment permit holder must notify the  Department ’s Audit Division (by certified mail) of the name change within thirty days after the effective date of the change. If there is a change in the legal entity (e.g., a business converts from a partnership to a  corporation) but the taxpayer’s business and operations remain the same, the new entity must submit a written request to the Department ’s Audit Division for a continuation of direct payment authority status. This request must be sent to the Department (by certified mail) thirty days in advance of the status change and must set forth the name of the old entity and the name of the new entity, the effective date of the change and the permit number issued to the non-surviving entity. Generally, the Department will issue new direct payment authority and a new permit number to the surviving entity. The new entity will also need to sign a new agreement. If the new entity receives new direct payment authority with a new permit number, the  new entity must provide its supplier/sellers with notification of the new permit number. Of course, the new entity must report its taxable purchases under its new direct payment permit number. If the operations change (including, but not limited to, new line of operations, change in  accounting systems, change in responsible party, or any other change causing the method 5

of reporting to change), the permit holder is responsible for updating the direct payment agreement to reflect the new information and forwarding it to the Department thirty (30) days in advance of said change. Q8. What happens if you audit my business and you determine I did not pay the correct amount of tax? If too much tax was paid through the direct payment account, the Department shall refund  the overpayment plus any applicable interest. If too little tax was paid, the balance of any tax due plus applicable penalty and interest  must be paid in full. If tax was paid erroneously to the vendor/seller, a comprehensive refund claim must be  filed with the Department within the statute of limitations. The refund claim is subject to review and verification by the Department. Applicable interest will be included with a final approved claim. Q9. What are additional requirements under R.C. 122.175? During the term of an agreement under R.C. 122.175, each taxpayer subject to the  agreement shall submit to the Tax Commissioner a return that shows the amount of computer data center equipment purchased for use at the eligible computer data center, the amount of tangible personal property and taxable services other than computer data center equipment purchased for use at the eligible computer data center, the amount of tax under R.C. 5739 or 5741 that would be due in the absence of the agreement under this under R.C. 122.175, the exemption percentage for computer data center equipment specified in the agreement, and the amount of tax due under R.C. 5739 or 5741 as a result of the agreement under R.C. 122.175. Each such taxpayer shall pay the tax shown on the return to be due in the manner and at the times as may be further prescribed by the Tax Commissioner. Each such taxpayer shall include a copy of the director of development services' certificate of verification issued under division (E)(6) of R.C. 122.175. Failure to submit a copy of the certificate with the return will not invalidate the claim for exemption if the taxpayer submits a copy of the certificate to the Tax Commissioner within sixty days after the Tax Commissioner requests it. Relinquishing or Revoking Direct Payment Permit Authority Q1. What is the difference between “relinquishing” and “revoking” a direct payment permit? A direct payment permit holder can relinquish (give back) a direct payment permit by  informing the Department ’s Audit Division (by certified mail) of the effective date of cancellation. Any cancellation shall be effective as of the last day of the reporting period in which the cancellation is requested. The Tax Commissioner may revoke (cancel) the direct payment permit if, upon audit, it is  determined that, for the audit period, less than ninety (90%) percent of the tax owed was paid unless the Tax Commissioner determines there is a legitimate legal dispute over the imposition of the tax. The Tax Commissioner may also revoke direct payment authority for 6

other reasons including, but not limited to: not providing electronic records, not providing responsible party information, not filing returns accurately and on a timely basis, not remitting the tax due, not updating the procedures as required, and not completing audits using statistical sampling for expenses when determined reasonable. Generally, the business will then have to wait at least three (3) years before applying for another direct payment permit. Q2. What must I do if my Direct Payment Authority is relinquished? Send a notification by certified mail to the Ohio Department of Taxation, Audit Division,  P.O. Box 183014, Columbus, Ohio, 43218-3014. Cancellation is effective as of the last day of the reporting period in which the written notice is given. Written notification shall be sent by the business to all vendors and sellers from whom  purchases of tangible personal property or services are made, prior to or at the time of the first purchase after such cancellation. Such notice must be sent by first class mail and the permit holder must maintain evidence of such notification for subsequent examination by the Tax Commissioner. Failure to notify vendors or sellers from whom purchases of tangible personal property or services shall be considered as a refusal to pay the tax by the person required to issue such notice. Q3. What must I do if my Direct Payment Authority is revoked? In the event the direct payment authority is revoked and the permit holder continues to do  business, provisions of R.C. 5739.03, 5741.04, and 5741.12 shall immediately apply to all purchases made subsequent to such revocation. Written notification shall be sent by the business to all vendors and sellers from whom  purchases of tangible personal property or services are made prior to or at the time of the first purchase after such cancellation. Such notice must be sent by first class mail and the permit holder must maintain evidence of such notification for subsequent examination by the Tax Commissioner. Failure to notify vendors or sellers from whom purchases of tangible personal property or services shall be considered as a refusal to pay the tax by the person required to issue such notice. If you have additional questions, contact the Audit Division at 1-614-466-8099. OHIO RELAY SERVICES FOR THE HEARING OR SPEECH IMPAIRED Telephone: 1-800-750-0750 7

TAXPAYER NAME AUDIT PROJECT PLAN AUDIT PERIOD DEPARTMENT'S TAXPAYER'S ANTICIPATED ACTUAL TASK STATUS RESPONSIBILITY RESPONSIBILITY COMPLETION COMPLETION Preliminary Preliminary meeting with tax √ representative √ √ Meet with taxpayer Choose audit period and stat √ √ sample period √ Tour facility √ Follow-up meeting Pre-Audit Department reviews chart of accounts and determines √ accounts to be stratified Taxpayer reviews target √ accounts as presented Department and taxpayer meet to agree on accounts to be √ √ stratified Draft participatory audit √ agreement Administration agrees with √ participatory agreement

DEPARTMENT'S TAXPAYER'S ANTICIPATED ACTUAL TASK STATUS RESPONSIBILITY RESPONSIBILITY COMPLETION COMPLETION Taxpayer agrees with and signs √ participatory agreement √ Draft timeline Administration agrees with √ timeline √ Taxpayer agrees on timeline Audit Capital Rep. makes capital records √ available for review Capital records verified to the √ depreciation schedule Department and taxpayer agrees on allocation of capital records to √ √ review Department determines taxability √ of capital records as assigned Taxpayer determines taxability of √ capital records as assigned Department reviews taxpayers findings of capital √ recommendations

DEPARTMENT'S TAXPAYER'S ANTICIPATED ACTUAL TASK STATUS RESPONSIBILITY RESPONSIBILITY COMPLETION COMPLETION Taxpayer reviews departments findings of capital √ recommendations First meeting to review findings √ √ and address issues on capital Taxpayer to research additional evidence to support their √ standings Department to review court cases and confer with √ administration Second meeting to review findings and address issues on √ √ capital Taxpayer to research additional evidence to support their √ standings Department to review court cases and confer with √ administration Final meeting to review findings and address issues on capital √ √ Expense samples Rep. to supply an AP download √ for the sample period

DEPARTMENT'S TAXPAYER'S ANTICIPATED ACTUAL TASK STATUS RESPONSIBILITY RESPONSIBILITY COMPLETION COMPLETION Rep. to supply GL for sampled expense account total √ verification AP download verified to GL √ √ totals Tax Department to perform data screening, remove credits and establish the target population √ Create Statistical Methodology √ Letter Sign Statistical Methodology Letter of Agreement √ √ Computer Audit Group to create stratum ranges, calculate sample size per stratum range, and generate any required pull lists (i.e.: stat sample, block sample, comprehensively reviewed items) √ Produce stat sample pull list √ invoices for review Both parties agree upon distribution of stat sample pull √ √ list invoices

DEPARTMENT'S TAXPAYER'S ANTICIPATED ACTUAL TASK STATUS RESPONSIBILITY RESPONSIBILITY COMPLETION COMPLETION Department reviews and determines taxability of assigned stat sample pull list invoices √ Taxpayer reviews and determines taxability of assigned stat sample pull list invoices √ Department reviews taxpayer's determination of stat sampled √ expense tax liability Taxpayer reviews department's determinations of stat sampled √ expense tax liability First meeting to review findings and address issues on stat √ √ sampled expense tax liability Taxpayer to research additional evidence to support their √ standings Department to review court cases and confer with √ administration Second meeting to review findings and address issues on stat sampled expense tax liability √ √

DEPARTMENT'S TAXPAYER'S ANTICIPATED ACTUAL TASK STATUS RESPONSIBILITY RESPONSIBILITY COMPLETION COMPLETION Taxpayer to research additional evidence to support their √ standings Department to review court cases and confer with √ administration Final meeting to review findings and address issues on stat sampled expense tax liability √ √ Comprehensive expenses Both parties agree upon distribution of block sample and/or comprehensively √ √ reviewed invoices Department reviews and determines taxability of assigned block sample and/or comprehensively reviewed √ invoices Taxpayer reviews and determines taxability of assigned block sample and/or comprehensively reviewed √ invoices

DEPARTMENT'S TAXPAYER'S ANTICIPATED ACTUAL TASK STATUS RESPONSIBILITY RESPONSIBILITY COMPLETION COMPLETION Department reviews taxpayer's determination of block sample and/or comprehensively √ reviewed invoices Taxpayer reviews department's determinations of block sample and/or comprehensively √ reviewed invoices First meeting to review findings and address issues on block sample and/or comprehensively reviewed invoices √ √ Taxpayer to research additional evidence to support their √ standings Department to review court cases and confer with √ administration Second meeting to review findings and address issues on block sample and/or comprehensively reviewed √ √ invoices Taxpayer to research additional evidence to support their √ standings