Ohio Sales and Use Tax: Sales of mixed service including custom software and automated services purchased by bank needs further examination of purchaser’s true object. | Buckingham, Doolittle & Burroughs, LLC



The Ohio Supreme Court recently addressed whether certain “account processing services” purchased by Cincinnati Federal Savings & Loan Co. were subject to Ohio sales / use tax. The services involved the use of software to automate maintenance of the bank’s accounting and financial records on an ongoing and real-time basis. The Court found that the services included nontaxable custom software and the Board of Tax Appeals failed to examine the true object of the service. Since services often involve many aspects, especially with current technology, it is imperative that service providers analyze what the purchaser is primarily seeking – i.e., the true object. “[A] transaction is taxable only when the consumer’s true object is to obtain the work performed by computer systems—ADP or EIS—rather than to obtain personal and professional services that are coupled with the work that is performed by computer systems.” Cincinnati Federal Savings & Loan Co. v. McClain, Slip Opinion No. 2022-Ohio-725 (Ohio S. Ct. March 15, 2022), ¶24.

Therefore, the Court remanded the case to the Board of Tax Appeals to determine whether Cincinnati Federal’s true object was customized software or taxable automatic data processing (“ADP”) or electronic information services (“EIS”). See Cincinnati Federal Savings & Loan Co. v. McClain, Slip Opinion No. 2022-Ohio-725 (Ohio S. Ct. March 15, 2022); R.C. 5739.01(B)(3)(e) and R.C. 5739.01(Y)(2). When there is a “mixed transaction” that involves the purchase of taxable (ADP and EIS) and nontaxable items (custom software), the “true object test” must be applied to determine the taxability of each charge. The Tax Commissioner asserted that the charges at issue were for taxable ADP and EIS that required the use of the software, but were not direct purchases of the software itself. However, the record showed that the service provider made modifications to prewritten software based on Cincinnati Federal’s specific needs while also including some aspects that qualify as ADP and EIS.

The Court rejected Cincinnati Federal’s contention that the automated services it purchased constituted accounting services. Personal and professional services, including accounting services, are nontaxable and excluded from the definitions of ADP and EIS. Accordingly, if it had been purchasing only accounting services, Cincinnati Federal’s purchases would have not been subject to Ohio sales / use tax. 

Depending on the ultimate decision in this case, businesses may be entitled to refunds for tax paid on purchases of customized software and automated business solutions, even if only slight modifications were made to prewritten software.