Sales or Use Tax on Temporary Traffic Maintenance Equipment
In Karvo Paving Co. v. Testa, 145 N.E.3d 1221 (Ohio App. 2019), the Court of Appeals of Ohio held that Karvo Paving Co. (“Karvo”) did not owe sales or use tax on traffic maintenance equipment it installed while performing Ohio Department of Transportation (“ODOT”) contracts; did not owe sales tax on employment services provided by an affiliated company; and was not necessarily precluded from claiming a sales tax exemption on equipment it rented from a related company.
The primary issue in the case was whether Karvo was liable for use tax on traffic maintenance equipment it supplied under contracts with ODOT. Karvo installed the traffic maintenance equipment at construction sites, as required by ODOT, to protect drivers from driving into work sites. The Commissioner argued Karvo was liable for use tax because it purchased the equipment for use in the performance of its construction contracts. Karvo argued, however, that it essentially rented the equipment to ODOT to allow ODOT to maintain traffic while Karvo was performing its paving work.
The Court of Appeals agreed with the Board of Tax Appeals’ finding that ODOT dictated the amount and type of traffic maintenance equipment required for each project, and that ODOT controlled its placement and use. The Court of Appeals also agreed with the Board’s finding that the equipment was provided to satisfy ODOT’s requirements and was not necessary for Karvo’s paving work or its workers’ safety. Finally, the Court of Appeals agreed with the Board that Karvo delivered possession and control of the traffic maintenance equipment to ODOT for the duration of each project. Accordingly, the Court of Appeals concluded that Karvo’s purchase of the traffic maintenance equipment for the purpose of renting it to ODOT during construction projects was not a retail sale and, therefore, not subject to use tax.
A second issue in the case was whether employment services that K&H Excavating, LLC (“K&H”), a Karvo affiliate, provided to Karvo were subject to sales tax.
Although employment services generally are included in the definition of a sale in Ohio and are subject to Ohio sales tax, that rule does not apply when employment services are purchased from an affiliate. In the case of corporations, one corporation owns or controls another – and is therefore affiliated with it – if it owns more than 50% of the other corporation’s voting stock. In Karvo, the Commissioner argued that the owner of Karvo Paving, George Karvounides, owned only 45% of K&H (the remaining 55% was owned by Mr. Karvounides’ wife), and therefore Karvo and K&H were not affiliated. The Court of Appeals concluded, however, that Karvo and K&H were affiliates because the 50% test applies solely to two or more corporations. Moreover, there was evidence that Mr. Karvounides, in fact, controlled both Karvo and K&H, notwithstanding his wife’s ownership of the majority interest in K&H. As a result, the Court of Appeals concluded no sales tax was due with respect to K&H’s sale of employment services to Karvo.
The final issue in the case was whether Ohio’s casual sale exemption applied to equipment Karvo rented from K&H. The Board of Tax Appeals had concluded the casual sale exemption did not apply because K&H was engaged in the business of leasing equipment. The Court of Appeals acknowledged that the only business K&H had engaged in during the audit period was leasing equipment. The Court noted, however, that K&H originally purchased the equipment for an excavation business it had previously carried on, albeit before the audit period. The Court of Appeals, therefore, could not rule out that K&H’s lease of the equipment was a casual sale – i.e., a sale of equipment that it had previously purchased for its own use and that was previously subject to tax. The Court of Appeals remanded the issue to the Board of Tax Appeals to re-examine whether the equipment leases qualified as casual sales.
Karvo Paving Co. v. Testa was a victory not only for Karvo, but also for other construction businesses that sell or lease items to customers or clients in the course of performing their construction contracts. The case makes it clear that contractors are not liable for Ohio sales or use tax when they purchase items for resale or lease to their clients. It should be noted, however, that Karvo Paving turned on particular facts, including the fact that ODOT required the traffic maintenance equipment and that Karvo surrendered possession and control of the equipment to ODOT for the duration of each project. Contractors should be mindful of these and other facts and circumstances when considering whether a particular transaction or situation will qualify as a taxable use of property or, alternatively, as a lease or sale for resale. |