On March 6, 2018, the Ohio Board of Tax Appeals (BTA) issued two decisions affecting the Ohio Commercial Activity Tax (CAT). The decisions reviewed the CAT's situsing rules as applied to the sale of certain service contracts as well as the CAT's group reporting requirements.

Situsing decision

The BTA's decision in Defender Security Company¹ involved a taxpayer (hereafter, "Defender Direct") that was an authorized dealer for ADT Security Services, a multinational company providing home and small business security monitoring services (hereafter, "ADT"). In that capacity, Defender Direct sold and installed security equipment and obtained contracts for monitoring services. Defender Direct subsequently sold the monitoring contracts to ADT. Defender Direct had included the gross receipts from the contract sales to the extent they involved Ohio end-customers. Defender Direct filed refund claims arguing that the contract sales should have been sitused to Colorado, ADT's principal place of business where the contracts and customer information had been delivered. The Ohio Department of Taxation (Department) denied the refund claims and Defender Direct appealed.

For Ohio CAT purposes, Ohio Rev. Code Section 5751.033(I) situses gross receipts from services and other gross receipts not otherwise sitused based on the purchaser's benefit received in Ohio. The BTA upheld the Department's denial of the refund claim, rejecting Defender Direct's argument that the receipts were sitused outside Ohio. In applying Ohio Rev. Code Section 5751.033(I), the BTA noted that the contracts at issue would not exist without the security equipment located in Ohio by which the monitoring is performed. Accordingly, the BTA reasoned that the benefit to ADT was received "because of property in Ohio which ADT will monitor pursuant to the alarm services contracts" sold to it, the receipts from the sales of those contracts should be sitused to Ohio. The BTA also concluded there was no agency relationship between Defender Direct and ADT that would have sitused the receipts to the customer's principal place of business based on the application of an administrative rule situsing "agency services."²

Group reporting decision

Ohio Rev. Code Section 5739.012 requires persons more than 50% commonly owned that have nexus with Ohio to file a combined return as a single CAT taxpayer. A combined CAT taxpayer may not eliminate intermember gross receipts. Ohio Rev. Code Section 5751.011 permits a consolidated election to be made at either a 50% or 80% ownership threshold, but must include all members commonly owned without regard to Ohio nexus. The main advantage of the consolidated election is the elimination of intermember receipts. When registering for CAT as either a combined or consolidated taxpayer, all members of the CAT reporting group should be listed. As dispositions or acquisitions occur, members are dropped or removed, as the case may be, by filing Form CAT AR.

Crab Addison, Inc.³ involved the appeal of an assessment for an affiliated entity where the Department concluded that an affiliate's Ohio-sitused gross receipts were not includable in the CAT consolidated return. The Department's assessment was predicated on the fact that the affiliated entity whose receipts were assessed was not included in the original CAT consolidated election nor added at any point in time thereafter. In addition, the Department averred that the taxpayer did not support its claim that the receipts from this affiliate were included in the CAT consolidated filing. The taxpayer did not request a hearing before the BTA and, accordingly, its submission of additional information with its appeal was not considered. The BTA upheld the assessment, concluding that the taxpayer did not meet its burden of proving the Department's assessment incorrect.

Implications

The Defender Security case is among the first BTA decisions involving the situsing of gross receipts under Ohio Rev. Code Section 5751.033(I). The BTA's analysis signals a willingness to look through the physical location of the purchaser to the location of the purchaser's customers in applying the situsing rule. This decision could have implications to other fact patterns where a service provided to a purchaser is tied to end-users of either the purchaser's property or services in Ohio.

The Crab Addison case, while ultimately turning on a failure of proof, nonetheless highlights the importance of properly completing CAT registration and election forms, keeping those registrations/elections updated with the Department through the use of Form CAT AR, and maintaining return file documentation showing how included entities' gross receipts roll up into the group's CAT returns. Attention to the foregoing items can help avoid time-consuming and costly efforts to support reporting positions during a CAT audit.

As of this time it is unknown whether either case will be appealed. EY will continue to monitor developments in these areas.

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ENDNOTES

¹ Defender Security Company v. Testa, BTA Case No. 2016–1030 (Ohio Bd. Tax App. March 6, 2018).

² See Ohio Admin. Code 5703-29-17(C)(4).

³ Crab Addison, Inc. v. Testa, BTA Case No. 2017–496 (Ohio Bd. Tax App. March 6, 2018).