Ohio Supreme Court rules fees excluded from commercial activity tax

Oct 06, 2020
Income & franchise tax

The Ohio Supreme Court has unanimously ruled that a security company does not owe commercial activity taxes on fees for alarm service contracts sold to ADT Security Services, Inc. (ADT). In the Sept. 29, 2020 opinion, the court held that the receipts were sourced to ADT’s out of state offices, rejecting the Ohio Department of Taxation’s assertion that the receipts should be sourced to the Ohio locations of ADT’s customers.

The taxpayer is an Indiana company that acts as an authorized dealer for ADT. It markets residential services and installs security equipment that ADT then uses to perform its monitoring services. The department argued that payments made by ADT to the taxpayer should be sourced to Ohio because the customers were located in the state. The Ohio Board of Tax Appeals and the state appellate court agreed with the department.

Under Ohio’s market-based sourcing statute, receipts for intangibles are sourced to where a purchaser receives the benefit of a transaction. The court found that ADT, which purchased the customer contracts from the taxpayer, realized the benefits at its out-of-state offices. That is, the benefit was received by ADT out of state and not at the address of Ohio residents who paid for security services. Notably, the court concluded that the department and the lower courts failed to properly distinguish between the benefit Ohio consumers received from ADT and the benefit ADT received by purchasing consumer contracts from the taxpayer.

The court also noted that the taxpayer was not an agent of ADT and received no funding or payments from ADT apart from contract revenue. Finally, the court rejected the department’s argument that ADT purchased the right to charge Ohio consumers for security services, framing the inquiry as where ADT received the contract right benefits – not where ADT used the contract rights. The court concluded that ADT received the benefits of the contract rights at its offices outside of Ohio.


This was a case of first impression in Ohio. But as more states adopt market based sourcing, the question of where payments for intangible contract rights are sourced will likely arise again. Indeed, the Washington Court of Appeals faced a similar issue earlier this year in LendingTree, LLC v. Department of Revenue. In that case, the court found that LendingTree's income generated from its referral services to lenders should be apportioned based on the lenders' business locations, rather than the location of the potential borrowers.

Multistate businesses selling intangible contract rights should be aware of both the Ohio and Washington cases. Both cases relied heavily on the underlying contracts to establish where the benefits were received. In this case, the court concluded from the contractual language that taxpayer was not an agent and was not paid for any services performed in Ohio. Sourcing of services for both income and gross receipts taxes can be complex. Taxpayers should consult their state and local tax advisers for more information.

RSM contributors