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

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. If you have questions about how this ruling affects your Ohio CAT obligations, or any other questions on Ohio tax matters, please contact us.

Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reached at [email protected] or 330.258.6460.

Richard B. Fry III is a partner and Buckingham’s Taxation Practice Group Chair. He focuses on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. Rich can be reached at [email protected] or 330.258.6423

Nathan M. Fulmer is an associate in Buckingham’s Taxation Practice Group. He represents clients on a broad range of tax planning and controversy matters. His joint degree in taxation allows him to provide unique solutions when assisting clients on business matters. Nate can be reached at [email protected] or 330.258.6464.

 About Buckingham, Doolittle & Burroughs:

Buckingham, Doolittle & Burroughs, LLC is a corporate law firm that counsels middle-market executives and business leaders all over Ohio and beyond. With offices in Canton, Akron, and Cleveland, Buckingham offers clients Business Law Reimagined through sophisticated and practical legal services. Serving the region for more than 100 years, Buckingham’s mission is to deliver meaningful experiences through the practice of law, exceed expectations in terms of service, counsel and business sense, and to offer continuous value to the industries, communities and clients they serve. For more information, news and updates, visit bdblaw.com.