Tax Refund Opportunity for Ohio’s Highway Contractors

Smart Summary

  • If you leased maintenance of traffic (“MOT”) equipment to ODOT on an ODOT construction project, you may be eligible to receive a tax refund for the years 2020, 2019, 2018, and 2017.
  • The refund may not apply to operated equipment or contractor-designed MOT.
  • The refund may also apply to the sales tax on MOT equipment used on ODOT projects if purchased in the last four years.

2020 was an odd year for many reasons and created plenty of risks for the construction industry. But risks include both threats and opportunities. One potential opportunity manifested earlier in 2020 when the Supreme Court of Ohio dismissed an appeal from the Tax Commissioner in Karvo Paving Co. v. Testa, infra. That announcement came out during the height of the pandemic with precious little detail and muted fanfare. See Karvo Paving Co. v. Testa, 2020-Ohio-1586, 158 Ohio St. 3d 1484, 143 N.E.3d 515.

The lower court, the 9th District Court of Appeals that hears cases from Lorain, Medina, Summit, and Wayne Counties, ruled in favor of the Summit County Board of Tax Appeals and Karvo, which held that Karvo Paving Company – among other things – overpaid taxes on many items used in the maintenance of traffic on ODOT projects. See Karvo Paving Co. v. Testa, Ohio Ct.App., 9th Dist., C.A. No. 28930 (Sept. 30, 2019). The 9th District also remanded the issue as to whether the casual sales exemption under R.C. 5739.02(B)(8) applies to equipment that Karvo rented from an affiliated entity, which is currently pending before the Ohio Board of Tax Appeals.

Implications for Primes and Subs

This case turned on the 9th District holding that ODOT “owned” the property during its use on the project and that the contractor leased it to ODOT. According to the court, since ODOT designed the MOT, directed its use and placement through the plans and sign-off by the Engineer, and given that the contractor had no real authority in this matter, the MOT equipment was subject to the resale exemption under R.C. 5739.01(B). This equipment includes barrels, cones, signage and even Jersey barrier.

Given that ODOT is a tax-exempt agency, like all forms of government in Ohio, it is not subject to sales or use taxes under the Ohio Revised Code. This has significant implications for highway contractors because, in effect, the courts in Ohio have determined that equipment used, even temporarily, on a public works project is sold to the public agency during the life of the project if that agency is proscriptive in the use of that equipment as is ODOT under its MOT schemes.

It is not clear how far reaching this current decision will be and given that the Ohio Supreme Court dismissed the case at the request of Tax Commissioner, there may remain a future controversy and conflict with past precedent. What is clear, however, is that, for the specific tax paid on equipment used on ODOT construction projects for ODOT-designed MOT, contractors (primes as well as subs) should seek up to four years of refunds for sales or use tax on this equipment before times runs out. See R.C. 5739.07(D).

The Karvo decision is a significant change in the way the Tax Commissioner now is looking at the equipment sales and use tax on public works projects. And, based on this decision, there may be even more chances for refunds depending upon how your corporation is legally structured. As you close out your books on this year of high threat, consider this opportunity for a significant tax refund. If you need any assistance, the professionals at Kegler Brown can walk you through the challenges of dealing with the Boards of Tax Appeals in your area.