Service Contract Receipts Sourced to Location of Ultimate Customer for Ohio Commercial Activity Tax Purposes

By Tim Clancy

The tax apportionment methodology used for the sourcing of receipts from services has been in transition across the various states. While states used to source service-related receipts based on where the services were performed (cost of performance method), many states have now transitioned to a “market-based” or where the “benefit is received” approach. Under this method, sales are sourced to the state where the customer receives the benefit or where the market is defined to be located. Ohio is one of the many states currently using a market-based sourcing approach for revenues from the sale of services.  The Ohio Board of Tax Appeals (BTA) recently issued a ruling that required the receipts from Ohio-based alarm services contracts to be sourced to Ohio because the underlying purchaser’s benefit occurred in Ohio[1]
 
The taxpayer, Defender Security Company (“Defender Security”), was an authorized dealer of ADT Security Services. The taxpayer sold and installed security equipment and obtained contracts for monitoring services. Defender Security sold the monitoring contracts to ADT for a fee. On its originally-filed Commercial Activity Tax returns, Defender Security included in its Ohio taxable receipts the contract sales receipts to the extent they involved Ohio-based customers. The taxpayer subsequently filed refund claims stating the contracts should be sourced to Colorado, which was ADT’s principal location and the location to which Defender Security delivered the monitoring service contracts. The Ohio Department of Taxation denied the requests for refund. The BTA agreed with the Department that the benefit to the out-of-state security service company of the alarm services contracts obtained by the dealer was wholly received in Ohio, where the ultimate security monitoring services were provided to protect individuals and property located in Ohio.  Consequently, the BTA upheld the Department’s denial of the refunds. It is not known at this time whether the case will be appealed.
 
Observations
 
As states have moved to a market-based approach for the sourcing of sales of services and intangibles, they have not been consistent in defining how to determine where the “market” is located or how the “benefit received” is determined. In this case, the BTA was willing to look through the physical location of the purchaser to the location of the purchaser’s customers in applying the situsing rule. Taxpayers should consider an in-depth analysis of each state’s market-based sourcing rules and consider the most appropriate location for sourcing the sales, based on each state’s rules.
 
Please contact us with any state and local tax questions.
 
Tim Clancy
State and Local Tax Practice Leader
tclancy@windhambrannon.com
678.510.2804
 
Andrew Jones
State and Local Tax
Ajones@windhambrannon.com
678.510.2882
 
[1] Defender Security Company v. Testa BTA Case No. 2016-1030 (Ohio Bd. Tax App. March 6, 2018)