Ohio CAT – Ohio Supreme Court holds sale of intangible contract rights sitused outside Ohio

Buckingham, Doolittle & Burroughs, LLC

Ohio Commercial Activity Tax – Ohio Supreme Court applies market-based sourcing and grants taxpayer refund by situsing intangible revenue to purchaser’s physical locations.

Situsing gross receipts often becomes a contentious issue in Ohio Commercial Activity Tax (CAT) audits partially due to the lack of guidance applying Ohio’s market-based sourcing statute. The Ohio Supreme Court has now spoken providing pro-taxpayer guidance in Defender Security Company v. McClain, 2020-Ohio-4594. The Court adopted the taxpayer’s position that its gross receipts from the sales of alarm services contacts were sitused to ADT’s physical locations outside Ohio where it received customer payments and performed services for Ohio customers. The ruling provides a definitive and clear test for applying Ohio’s market-based situsing rules to gross receipts from services and intangible assets.

Defender Security Co. was an independent dealer of ADT monitoring services. It installed security systems for residents in Ohio, signed customers up for ADT monitoring services, and then sold those contract rights to ADT for a fee, referred to in the opinion as ADT funding. Under the statute, the ADT funding for CAT purposes is sitused to where ADT received and used the benefit of alarm service contracts acquired from Defender Security Co. R.C. 5751.033(I). But as the Court noted, it is often difficult to pinpoint the physical location where this benefit is received.

Buckingham Attorney Rich Fry successfully argued that ADT used and received the benefits of the contract rights purchased from Defender at ADT’s headquarters in Colorado and its monitoring centers, none of which were located in Ohio. This approach, focusing on ADT’s physical locations, is consistent with Ohio’s statute which instructs that “[t]he physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be paramount” in determining the situs of the gross receipts. The tax commissioner failed to properly distinguish between the benefit Ohio consumers received from ADT – the protection of people and property in Ohio – and the benefit ADT received by purchasing contracts from Defender – the right to receive monthly fees in exchange for providing monitoring services. The Court dismissed the tax commissioner’s application of look-through or “but for” tests which focused on the Ohio consumer’s location, rather than the purchaser’s / ADT’s location.

The Court’s decision in Defender Security Co. v. McClain will be helpful for Ohio taxpayers, including providing refund opportunities for those with similar situsing issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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