The Ohio Supreme Court held that under the Commercial Activity Tax (“CAT”), Defender Security Company’s (“Taxpayer”) gross receipts from selling alarm monitoring service contracts to ADT Security Services, Inc. (“ADT”) should be sourced to the location where ADT itself receives the benefit from purchasing these contracts, rather than the location of the ultimate consumer of the monitoring services. Taxpayer, an authorized dealer of ADT, sold and installed security systems in Ohio and entered into ongoing alarm monitoring service contracts with these Ohio consumers. Taxpayer would then sell the monitoring service contracts to ADT, and ADT would provide the monitoring services remotely from outside of Ohio. The issue before the Ohio Supreme Court was the proper sourcing for CAT purposes of the amounts Taxpayer received for ADT’s purchase of the Ohio service contracts.
Ohio’s catch-all sourcing rule applicable to the case requires that receipts be sourced in proportion to the purchaser’s benefit in Ohio and provides that the “physical location where the purchaser ultimately uses or receives the benefit of what was purchased” is the most important factor in the determination. The lower courts had agreed with the tax commissioner that the sourcing for the sale of the alarm monitoring contracts from the Taxpayer to ADT should, in effect, look through the contracts to the location where the ultimate alarm customer received the benefit of the alarm monitoring services. After confirming that the proper appellate standard of review was de novo and without deference due to the tax commissioner’s determination, the Ohio Supreme Court disagreed with the tax commissioner and the lower courts.
The Ohio Supreme Court reasoned that under the statute, the proper sourcing of ADT’s payments to the Taxpayer for the contracts should focus on the benefit ADT received from purchasing the contracts from the Taxpayer, rather than the benefit Ohio consumers received from ADT. The court explained that the physical location at which ADT uses and receives benefit from its purchase of the intangible contract rights was the location where it receives payments and performs the services, all of which occurred at the ADT offices and monitoring locations outside Ohio. Therefore, the receipts from ADT’s purchases of customer contracts were not Ohio receipts, and the Ohio Supreme Court ruled that Taxpayer was due a refund for CAT paid on the receipts.