Ohio Commercial Activity Tax Sourcing – Board of Tax Appeals upholds two CAT assessments on receipts with tenuous connections with Ohio
The Ohio Board of Tax Appeals recently decided two cases that affect Ohio’s Commercial Activity Tax (CAT): SMK Industries v. Testa and Defender Security v. Testa. Both decisions reviewed the CAT’s rules for situsing sales. SMK Industries reiterated Ohio’s “ultimate destination” rule for sourcing sales of tangible personal property under R.C. 5751.033(E), while Defender Security is the first case to address sourcing gross receipts under the residual provision in 5751.033(I), which includes receipts from the sale of services and intangible assets.
In SMK Industries v. Testa, the taxpayer manufactured and sold clothing in Texas. Title to the goods passed to the purchaser in Texas and the purchaser was responsible for shipping goods. Nonetheless, the BTA determined that the clothing sales with an Ohio “ship to” address on the invoice were properly sourced to Ohio. The BTA rejected the taxpayer’s argument, again focusing on the ultimate destination of the property after all transportation is complete – including transportation by the purchaser or its agent. This ruling is consistent with previous decisions in Dupps Co. v. Lindley (decided under former Ohio corporate franchise tax) and Greenscapes Home & Garden v. Testa.
In Defender Security Co. v. Testa, the taxpayer sold and installed security and monitoring equipment to customers in Ohio, and then obtained contracts for security monitoring services. The customer contracts for security monitoring services were then sold to ADT. The taxpayer challenged the Tax Commissioner’s determination that its receipts from the sale of customer contracts (i.e., an intangible asset) should be sitused to Ohio when the customer was located in Ohio. Instead, the taxpayer asserted that the receipts from the sale of intangible assets must be to sitused based upon where its customer, ADT, was located. The BTA agreed with the Tax Commissioner, holding that ADT received the benefit of these intangible assets in Ohio because the acquired contracts only existed because of the security monitoring equipment located in Ohio. There would be no benefit, the BTA asserts, “without property in Ohio to be monitored and equipment located within such property in Ohio by which the monitoring is performed.” Therefore, the BTA relied upon the ultimate consumer’s location in Ohio, rather than ADT’s locations outside Ohio.
This ruling enlarges Ohio’s ability to tax gross receipts for sales of intangible assets tied to a consumer or property in Ohio, regardless of whether the direct purchaser is located in Ohio. This is inconsistent with previous rulings situsing tangible personal property sales where the Tax Commissioner has found that receipt by the direct purchaser is the relevant inquiry and ignored the subsequent resale of property to an ultimate consumer outside Ohio. Based on this ruling, if the purchaser benefits “because of property in Ohio,” receipts from sales of the underlying intangible asset or service will be deemed to be in Ohio.
The SMK Industries decision was not appealed. The Defender Security Co. decision has been appealed, which is pending in the Tenth District Court of Appeals.
If you have any questions about Ohio’s Commercial Activity Tax sourcing, do not hesitate to contact a member of our team.