On September 29, 2020, the Ohio Supreme Court issued a decision in the case of Defender Security Company v. McClain,1 regarding the much-discussed issue as to where the benefit of the sale of an intangible asset is received. In this case, Defender Security Company (“Defender”) is a dealer for the alarm monitoring company ADT Security Services (“ADT”). Defender generates leads for ADT and installs equipment in properties in Ohio. At the time of the installation, Defender provides the property owner a contract with ADT to monitor the Ohio property. ADT is located in Aurora, Colorado, and Defender’s headquarters office is in Indianapolis, Indiana. The payments at issue in this case are the payments made to Defender by ADT for generating the contracts with the Ohio property owners.
The commissioner points out that ADT pays for the development of relationships in Ohio. Without Defender’s activities in Ohio, the payments would not have occurred. Therefore, the payments received by Defender should be sourced to Ohio.
The parties agreed that the controlling statute is Ohio R.S. § 5751.033(I), which states in part “[t]he physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be paramount….” The Court cites Goldberg v. Sweet2 that “benefit” means “government services that make business possible and profitable, such as ‘police and fire protection, the use of public roads and mass transit, and the other advantages of civilized society.’” In applying that definition to the case at issue, the Court found that Defender did not sell police and fire protection services to ADT but rather sold an intangible for which the benefit of police and fire protection services was a byproduct of the intangible.
The Court found that the court of appeals failed to distinguish what ADT bought from Defender from what ADT provided to the consumers. ADT acquired an intangible that related to services to be provided in Ohio. “Because ADT uses and receives the benefit of the contracts...outside of Ohio,...the sale of those contracts are [sic] not sitused to Ohio. In other words, we look to the benefit received by the direct customer, not the ultimate beneficiary.”
As states develop their analysis of market-based sourcing, one of the questions that often comes up is how to determine where the benefit of the service/intangible is received. This case concludes that Ohio will look to the benefit of the purchaser of the intangible, not the ultimate service to be provided. Many other states are still unclear as to the determination of benefit under these circumstances. Ryan’s Income Tax practice monitors these developments and can help a taxpayer with an analysis as to where a benefit is received.
1 Defender Security Company v. McClain, Slip.
2 Goldberg v. Sweet 109 S. Ct. 582 (1989).
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