Ohio: Court of Appeals rules for highway contractor in sales/use tax case

On Sept. 30, 2019, the Ninth District Court of Appeals in Summit County decided Karvo Paving Co. v. Testa in favor of a highway construction contractor that disputed an Ohio use tax assessment on traffic maintenance equipment. The Ninth District ruled that the contractor, Karvo Paving Co., rents its traffic maintenance equipment to the Ohio Department of Transportation (ODOT) to allow ODOT to maintain traffic during Karvo’s highway construction work. Karvo does not use the equipment itself, the court ruled, but rather purchases the equipment for “resale” to ODOT. As a consequence, Karvo’s purchases of traffic maintenance equipment fall within the sale for resale exception to the Ohio sales/use tax laws.

Sale for Resale

The Ninth District held that the applicability of the sale for resale exception for Karvo’s purchases of traffic maintenance equipment turned upon whether or not Karvo transferred possession of the equipment to ODOT. See, Ohio Rev. Code 5739.01(B) (defining “sale”).

The tax commissioner argued that Karvo was the consumer of the equipment liable for use tax on it because it held title and possession to the equipment and used it in performing under construction contracts with ODOT. See, Ohio Rev. Code 5741.02. The tax commissioner pointed out that Karvo transports the equipment to the project site and installs, maintains, repairs as necessary, and operates the equipment pursuant to its contractual obligations with ODOT.

Karvo, on the other hand, argued that ODOT possessed and controlled the equipment because it specified the type, quantity, and placement of the equipment. ODOT engineers also certified the proper placement of the equipment on the job site.

The Ninth District ultimately affirmed the Board of Tax Appeals finding that ODOT indeed took possession to the traffic maintenance equipment. The court therefore found that Karvo leased the equipment to ODOT and that the transaction qualified as an exempt resale of the equipment within the meaning of Ohio sales and use tax laws. As a government agency, ODOT is also exempt from sales/use taxation on the equipment pursuant to Ohio Rev. Code 5739.02(B)(1).

Employment Services

The Ninth District additionally ruled in Karvo’s favor with respect to issues regarding transactions with a related entity, K&H Excavating, LLC (K&H). Karvo’s sole owner, George Karvounides, also owned K&H with his wife.  Mr. Karvounides holds a 45 percent stake in K&H and Mrs. Karvounides owns the majority stake of 55 percent.

K&H leased bulldozers and excavators and provided maintenance services to Karvo. The Tax Commissioner assessed sales tax on employment services that K&H provided to Karvo, but the Board of Tax Appeals cancelled that tax assessed and held that an exception to the tax for affiliated entities applied. See, Ohio Rev. Code 5739.01(JJ)(4). Even though the entities did not share common majority ownership, the Ninth District affirmed the BTA finding that K&H and Karvo are affiliated entities within the meaning of the exception to the sales taxation on employment services. The Ninth District held that Mr. Karvounides controlled both entities even though his wife was majority owner of K&H.

Casual Sale Exemption

Next, the Ninth District addressed whether the bulldozers and excavators that K&H leased to Karvo were exempt from sales taxation as casual sales. See, Ohio Rev. Code 5739.02(B)(8); 5739.01(L). Briefly stated, “casual sale means a sale of an item of tangible personal property that was obtained by the person making the sale, through purchase or otherwise, for the person’s own use and was previously subject to any state’s taxing jurisdiction on its sale or use.”

The tax commissioner argued that the casual sale exemption could not apply to K&H’s leasing of equipment to Karvo because K&H’s entire business is leasing equipment and the transactions therefore were not “casual” or isolated. The Commissioner also argued that the casual sale exemption could not apply to leases (as opposed to outright sales) and that K&H failed to show that sales or use tax was previously paid on the equipment at issue.

However, while K&H only leased equipment during the audit period, Mr. Karvounides had testified that K&H had used the equipment to provide excavation services during earlier periods. The Ninth District found that the BTA failed to address issues related to the casual sale exemption and remanded the case to the BTA for further proceedings on the issue.

Implications

The Ohio Department of Taxation has an appeal window to take a discretionary appeal to the Ohio Supreme Court. It remains to be seen, however, whether the department will appeal the case and, if so, whether the Supreme Court will accept it for review.

If the Karvo Paving case is indeed finally decided, it could have interesting implications, though it may be somewhat limited to the Ninth District’s geographic region in Summit County and the specific facts presented. The leasing of traffic maintenance equipment to ODOT does not result in tax to ODOT due to its tax exempt status as a state agency. However, entities in the private sector may need to be careful not to take possession of equipment that subcontractors use in furtherance of their contractual obligations so as to avoid shifting the incidence of the tax from the subcontractor as consumer to another entity. The case could also create refund claim opportunities for subcontractors doing business with ODOT in Summit County under similar facts to those presented in the Karvo case.