More Commercial Activity Tax Cases: Registration, Evidence, and Situsing Issues
Two recent Ohio Board of Tax Appeals (“BTA”) cases shed light on potential problems taxpayers face understanding Ohio’s Commercial Activity Tax (“CAT”). Crab Addison v. Testa, BTA No. 2017-496 (03/06/2018) highlights issues relating to consolidated filings and properly registering for the CAT, and the need to follow the rules for the presentation of evidence in proceedings before the BTA. Defender Security Company v. Testa, BTA No. 2016-1030 (03/06/2018) focuses on the issue of situsing gross receipts that do not fall within one of the specified gross receipts situsing methods.
Crab Addison v. Testa
In Crab Addison, the taxpayer received an assessment and argued that it filed as part of a consolidated group that included Crab Addison, Mac Acquisitions and BHTT Entertainment. As part of its petition for reassessment protesting the assessment, the taxpayer failed to provide documentation supporting its position that Crab Addison filed as part of a consolidated group, despite the Tax Commissioner’s requests for such documents. The Tax Commissioner issued a Final Determination affirming the assessment and the taxpayer appealed to the BTA. The taxpayer provided spreadsheets with its notice of appeal to the BTA, purportedly indicating that the total gross receipts reported and total tax paid equate to the sum of three entities’ gross receipts. However, because such documentation was not presented and authenticated at a hearing before the BTA, the documents could not be considered. As a result, the BTA affirmed the Final Determination.
Taxpayers should make sure to accurately register their group of companies, including all entities, to ensure that they properly elected to file as a consolidated elected taxpayer. The decision also points out the necessity to provide documentation during the proceedings before the Tax Commissioner to support the taxpayer’s position. The decision is a reminder that proceedings before the BTA are formal proceedings that require taxpayers to follow strict rules, including the requirement that evidence be presented at the hearing before the BTA rather than simply attaching documents to the notice of appeal. Failure to do so can result in a taxpayer losing its appeal based on a failure of proof, as happened in this case.
Defender Security Company v. Testa
Defender Security Company (“Defender”) is an authorized dealer for ADT Security Services that sells and installs security equipment, obtains contracts for security monitoring services, and then sells those contracts to ADT for a fee. Defender filed an application for refund for the CAT it paid on gross receipts related to its sale of security monitoring contracts to ADT. Defender asserted that these gross receipts should be sourced outside Ohio because ADT receives the benefit of the contracts outside Ohio. Defender argued that ADT, as the purchaser of the alarm services contracts, received the benefit of the contracts at its principal place of business to which Defender sends the purchased alarm services contracts.
The BTA determined that the receipts should be sitused based on ADT’s benefit of what it purchased. See R.C. 5751.033(l). In reaching this conclusion, the BTA dismissed the argument that the benefit of ADT’s purchase is the contract itself. Rather, the BTA instead looks-through the actual contract to the underlying revenue stream (i.e., the security monitoring services) to determine the benefit of the purchase. In the Decision and Order, the BTA stated,
“Defender’s receipts from the sale of alarm services contracts to ADT, i.e. its ‘customer account revenue’ is properly sitused to Ohio. It belies logic to argue that the purchaser (ADT) receives no benefit in Ohio from the contracts it purchases from Defender. The contracts would not exist without property in Ohio to be monitored and equipment located within such property in Ohio by which the monitoring is performed.”
As a result, the BTA affirmed the denial of Defender’s refund claim.
Taxpayers should consider the facts and circumstances of their specific receipt generating activities. The BTA has started to issue a number of decisions on CAT gross receipts situsing issues for tangible personal property and for service transactions. It may be prudent for taxpayers to reevaluate their situsing methodologies from time-to-time to ensure that they are properly situsing their gross receipts for the CAT.