MCCLAIN, Tax Commr., Appellee.
No. 2019-0531
Submitted April 28, 2020 Decided September 29, 2020
APPEAL from the Court of Appeals for Franklin County, No. 18AP-238, 2019-Ohio-725.
O'Connor, C.J.
*1  {¶ 1} Appellant, Defender  Security Co., claims entitlement to a $73,334.82 refund of the commercial activity tax (“CAT”) that it paid on gross receipts earned between January 2011 and December 2013. The CAT is imposed on gross receipts derived from income-producing activity in Ohio, and the receipts at issue in this case consisted of payments made by  ADT  Security Services, Inc. to Defender. Appellee, tax commissioner, and later the Board of Tax Appeals (“BTA”) and the Franklin County Court of Appeals all concluded that the receipts were Ohio-taxable receipts under the CAT  law. We reverse and remand to the tax commissioner to issue refunds.
{¶ 2}  ADT provides  security  services to residential and commercial property owners throughout the country.  ADT enters into  alarmservices  contracts with its customers and provides remote  monitoring  services by receiving information from  security equipment installed at customers' properties. When an  alarm is triggered,  ADT contacts the customer and the police or  fireauthorities.
{¶ 3} Defender is an Indianapolis-based company whose business consists of serving as an “authorized dealer” of  ADT under an Authorized Dealer Agreement (the “master agreement”). Pursuant to the master agreement, Defender acts “exclusively” in its relationship to  ADT, but it is  not an agent of  ADT. Defender (1) generates leads for new  ADT customers through advertising, (2) installs equipment at the Ohio property of new customers, for which it collects and retains a  fee, and (3) at time of installation, signs an  alarmservices  contract with Ohio customers under which  ADT provides  securitymonitoring  services to the Ohio customer.
{¶ 4} Within Ohio, Defender operates four branch locations: Cincinnati, Columbus, Toledo, and Akron. But executive and administrative staff work is performed in Indiana at Defender's Indianapolis headquarters.  ADT interacts with both Defender and with Ohio customers from locations outside Ohio.
{¶ 5} Defender collects new Ohio  alarmservices  contracts at its Indianapolis headquarters and forwards them to  ADT's dealer-support unit in Aurora, Colorado.  ADT decides whether to take assignment of each  contract. The gross receipts at issue consist of payments  ADT makes to Defender when  ADT has accepted assignment of a customer  contract. In 5 to 6 percent of instances,  ADT rejects assignment of the  contract and the customer pays Defender for  securitymonitoring  services provided by  ADT. In all instances,  ADT provides  securitymonitoring services to Ohio customers from  one of six  monitoring locations, all outside Ohio.
{¶ 6} These transactions lead to three types of revenue sources for Defender: (1) payments made by Ohio customers to Defender for the cost and installation of  alarmservices equipment, (2) payments made by Ohio customers to Defender under the  alarmservices  contracts that are not accepted by  ADT, and (3) payments made by  ADT to Defender under the master agreement as consideration for  ADT's purchase of Ohio  alarmservices  contracts from Defender. There is no dispute as to the first two: Defender pays the CAT on the  fees it obtains from Ohio customers for installing equipment and for  alarm  services when  ADT does not purchase the  contract. Only the third category, which we refer to as “ ADT funding,” is at issue.
*2  {¶ 7} Defender's refund claim seeks the return of $73,334.82 for the quarterly tax periods during calendar years 2011, 2012, and 2013. To document the amount of refund, Defender submitted two summary documents but did not submit the business records underlying those summaries. First, Defender submitted a spreadsheet showing, for each quarter, the amount of “ ADT funding,” the CAT rate of tax, and the resulting amount of refund claimed. Second, Defender submitted a spreadsheet showing, for each quarter, the total taxable gross receipts reported on Defender's CAT return, the CAT amount paid, the taxable gross receipts “per refund claim,” and the amount of the CAT claimed as refund.
{¶ 8} The tax commissioner denied the refund claim. He noted that Defender “seeks a refund for CAT it paid with respect to the  Alarm  Services  Contractfees it received from  ADT,” but he did not question the sufficiency of the documentation of the refund amounts. The final determination also stated that Defender “obtains customer relationships for  ADT” for which “ ADT pays [Defender] a  fee.” The commissioner concluded that Defender's purchaser,  ADT, “realizes the benefit of the Ohio-based  Alarm  Services  Contracts in Ohio,” reasoning that “[w]ithout Ohio, the  Alarm  Services  Contractfees at issue would be wholly impossible,” with the result that “ ADT'sbenefit with respect to these  Alarm  Services  Contractfees must occur entirely within Ohio.”
{¶ 9} The final determination also rejected Defender's alternative claim that it could situs the receipts at  ADT's principal place of business in Colorado under  Ohio Adm.Code 5703-29-17(C)(4)(c), which authorizes an agent who is a taxpayer to elect apportionment to the “principal place of business” of its principal. The commissioner found that Defender did not qualify as an “agent” under the CAT  law, and Defender did not contest that finding on appeal.
{¶ 10} On appeal, the BTA held a hearing at which Defender's corporate controller testified that she verified the claimed refund amounts by reviewing the internal business records on which the calculation of the refund amounts was based.
{¶ 11} The BTA agreed with the tax commissioner's conclusion that the proper situs of  ADTfunding should be Ohio inasmuch as “[i]t belies logic to argue that the purchaser ( ADT) receives no benefit in Ohio from the  contracts it purchases from Defender,” given that both Defender's obtaining and  ADT's  servicing of the  contracts involves property in Ohio. BTA No. 2016-1030, 2018 WL 1372720 (Mar. 6, 2018), at *3. In support, the BTA cited provisions of  Ohio Adm.Code 5703-29-17(C) that involve  services rendered with respect to property located in Ohio, such as appraisal  services (division (5)), architecture  services (division (6)), and engineering  services(division (20)). BTA No. 2016-1030, 2018 WL 1372720, at *3. The BTA also stated that, in light of its ruling on the merits, it did not need to “further address the Tax Commissioner's arguments about the sufficiency of the documentation underlying Defender's refund claim.”  Id. at *4. The BTA affirmed the commissioner's denial of the refund claim.  Id.
{¶ 12} Defender appealed to the Franklin County Court of Appeals, which affirmed the BTA's decision. 2019-Ohio-725, ¶ 30, 2019 WL 994159. The court also held that the tax's imposition did not violate the Commerce  Clause.  Id. at ¶ 42, 49-51.
{¶ 13} Defender appealed to this court. We allowed jurisdiction as to three propositions of  law:
1. The appellate standard of review for legal questions addressed by the Board of Tax Appeals is de novo, without deference to the Tax Commissioner's determination thereof.
2. Gross receipts from the sale of intangible assets are sourced to the purchaser's physical location(s) that receive and use the assets, not the location where the assets were originated. Therefore, Defender's receipts from the sale of  Alarm  Services  Contracts to  ADT are sitused to  ADT's physical locations outside Ohio where it received the  Alarm Services  Contracts and utilized such  Contracts by performing  monitoring  services for consumers.
*3 3. The significant risk of double taxation caused by the Tax Commissioner's conflicting applications of  R.C. 5751.033(I) violates the fair apportionment requirement of the dormant Commerce  Clause of the United States Constitution.
{¶ 14} Before turning to the propositions of  law, we consider the tax commissioner's argument that we should dismiss this appeal as improvidently allowed on the grounds that “Defender never offered business records to show what it paid on account of its sales of Ohio  contracts to  ADT.” Our review of the record persuades us that the documentation and testimony are sufficient to justify our consideration of the substantive issues.
{¶ 15} Defender presented summary documents showing its CAT payments relating to the receipts at issue and then, at the BTA hearing, presented the testimony of its corporate controller to verify the summary documents in light of underlying records. Given this, we see no reason why the absence of primary documentation should deter us from reaching the legal issues when it did not deter the commissioner himself, in his final determination, from doing so without any suggestion of a defect in the evidence. Thus, we conclude that dismissal on evidentiary grounds would be inappropriate under these circumstances.
A. The court of appeals correctly reviewed the legal issues de novo without deference to the tax commissioner
{¶ 16} Defender's first proposition of  law asserts that the appellate standard of review for legal questions addressed by the BTA is de novo, without deference to the tax commissioner's determination. Defender maintains that the court of appeals “erred by affording great deference to the Tax Commissioner's determination” regarding the proper situs under  R.C. 5751.033(I).  See Progressive Plastics, Inc. v. Testa, 133 Ohio St.3d 490, 2012-Ohio-4759, 979 N.E.2d 280, ¶ 15(“the proper construction and application” of tax statutes “presents a question of  law, and our review in that regard is not deferential but de novo”). While we do not dispute the applicability of the legal rule stated in  Progressive Plastics, we disagree with the premise of Defender's argument on this point.
{¶ 17} The court of appeals' decision shows that the court decided the legal issue itself without deference to the tax commissioner's determination. The court of appeals stated as follows:
Based on  our de novo review of the record, we find the commissioner's final determination to be reasonable and wellreasoned. We adopt his findings that Defender was not an agent of  ADT, that the provisions of  Ohio Adm.Code 5703-29-17(C)(4)(c) are inapplicable to this matter, and that  ADT's benefit with respect to the  Alarm  Services  Contractfees occurred entirely in Ohio. We find,  as a matter of law, that Defender's gross receipts from selling the Ohio-based  contracts to  ADT are sitused in Ohio and, therefore, subject to Ohio's CAT.
(Emphasis added.)  2019-Ohio-725 at ¶ 30, 2019 WL 994159. Because the court of appeals, in accordance with our case  law, did apply a de novo standard of review, we find Defender's argument under the first proposition of  law to be without merit.
B. Under R.C. 5751.033(I), the situs of “ADT funding” receipts is ADT's physical locations outside Ohio
*4  {¶ 18} Defender's second proposition of  law presents the substantive tax issue in this appeal. Ohio's CAT is “levied * * * on each person with taxable gross receipts for the privilege of doing business in this state.”  R.C. 5751.02(A). Because business is conducted across state and international boundaries, imposing the tax often raises the thorny issue of how to properly allocate receipts to Ohio for taxation. The CAT  law defines “[t]axable gross receipts” as “gross receipts sitused to this state under  section 5751.033 of the Revised Code.”  R.C. 5751.01(G).
{¶ 19} The parties agree that  R.C. 5751.033(I) applies to the gross receipts at issue. The statute provides a catch-all situs for “gross receipts not otherwise sitused under this section,” and it states that such receipts “shall be sitused to this state in the proportion that the purchaser's benefit in this state with respect to what was purchased bears to the purchaser's benefit everywhere with respect to what was purchased.” In determining that ratio, the statute further provides that “[t]he physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be paramount in determining the proportion of the benefit in this state to the benefit everywhere.”  Id.
{¶ 20} Reduced to its essence, Defender's second proposition of  law presents the following question: Do Defender's  ADT-funding receipts have their situs  within Ohio or  outside Ohio under  R.C. 5751.033(I)? The determination of situs under the statutory standard involves an “ ‘inference of an ultimate fact’ ” from the basic facts shown by the evidence.  Marc Glassman, Inc. v. Levin, 119 Ohio St.3d 254, 2008-Ohio-3819, 893 N.E.2d 476, ¶ 7, quoting  Ace Steel Baling, Inc. v. Porterfield, 19 Ohio St.2d 137, 142, 249 N.E.2d 892 (1969). And the reasonableness of the inference from basic facts to an ultimate fact is a question of  law on review.  SFZ Transp., Inc. v. Limbach, 66 Ohio St.3d 602, 604-605, 613 N.E.2d 1037 (1993).
1. R.C. 5751.033(I) establishes situs at ADT's physical locations outside Ohio
{¶ 21} Under  R.C. 5751.033(I), the “paramount” consideration when determining the proportion of the benefit attributed to Ohio is “[t]he physical location where the purchaser [ ADT in this case] ultimately uses or receives the benefit of what was purchased.” Defender argues that  ADTpurchased intangible  contract rights and that  ADT's physical locations outside Ohio are the places where  ADT actually used and received the benefit of those  contractual rights. We agree with Defender, and we conclude that the tax commissioner, the BTA, and the court of appeals all failed to properly distinguish between the benefit Ohio consumers received from  ADT and the benefit  ADT received by purchasing consumer  contracts from Defender.
{¶ 22} What  ADT's customers acquired was the benefit of  ADT's  security  services in relation to their Ohio properties, and their payments for those  services were Ohio taxable receipts under  R.C. 5751.033(I). By contrast, what  ADT purchased from Defender consisted of intangible  contract rights, and the benefit derived from the purchase lay in receiving payments from Ohio customers in consideration for  ADT providing the  contracted-for  monitoring  services from its locations outside Ohio.
{¶ 23} The contrast of physical locations is stark. On the  one hand, the physical locations at which  ADT's customers use and receive the benefit of  ADT's  monitoring  services are the Ohio properties  protected by  ADT. On the other hand, the physical locations at which  ADT uses and receives the benefit of its  contracts are  ADT's physical locations where it receives customer payments and performs  services for Ohio customers—all of which, on this record, are outside Ohio. Because  ADT uses and receives the benefit of the  contracts it purchased from Defender outside Ohio, Defender's receipts from the sale of those  contracts are not sitused to Ohio under  R.C. 5751.033(I).
2. Ohio Adm.Code 5703-29-17 does not apply, nor does it furnish valuable analogies, because ADT purchases contracts rather than services
*5  {¶ 24}  R.C. 5751.033(K) specifically authorizes the tax commissioner to “adopt rules to provide additional guidance to the application of this section, and provide alternative methods of situsing gross receipts that apply to all persons, or subset of persons, that are engaged in similar business or trade activities.” With respect to applying division (I) of  R.C. 5751.033, the commissioner has exercised this power by promulgating  Ohio Adm.Code 5703-29-17.
{¶ 25} By its terms, the administrative rule addresses  services, not intangible  contract rights. Division (A) states a general rule about situsing receipts from  services, division (B) defines terms and states some general principles concerning the situsing of  services, and division (C) gives specific examples of how to determine the situs of receipts from enumerated  services. In light of this, the tax commissioner himself categorically states in his brief that “the regulation is irrelevant because it relates to  services, not intangibles.” This observation accords with Defender's emphasis on the transactions as sales of intangible assets and, on the record before us, we agree.
{¶ 26} To be sure, Defender engages in the activity of signing up customers in Ohio who will mostly become customers of  ADT, and that activity could be viewed as providing a  service for  ADT. But that approach runs aground on the simple fact that, under the master agreement,  ADTdoes not pay Defender for signing up customers; it only pays Defender for those customer  contracts that it purchases from Defender. Apart from actually selling a  contract to  ADT, Defender receives no “ ADT funding” at all.
{¶ 27} Because the administrative rule is inapplicable, the BTA erred when it analogized the present situation to the treatment of receipts of property appraisers, architects, and engineers under  Ohio Adm.Code 5703-29-17(C)(5), (6), and (20). Under the administrative rule, the rendition of such  services in relation to property in Ohio makes the receipt of  fees by the skilled professional an Ohio-taxable receipt. But  ADT does not pay Defender for performing  services in relation to Ohio property. Indeed, when Defender installs  alarm systems at Ohio properties that allow  ADT to provide  securitymonitoring  services, it is the Ohio customer who pays Defender, and after receiving those payments, Defender pays the CAT on them itself.
3. The term “benefit” in R.C. 5751.033(I) should be interpreted according to its common, ordinary meaning, not an acquired meaning
{¶ 28} The tax commissioner argues that the term “benefit” has acquired a special meaning in United States Supreme Court cases involving due-process or commerce- clause challenges to the imposition of state excise or income taxes. According to the commissioner, “benefit” connotes “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.’ ” Appellee's brief at 18, quoting  Goldberg v. Sweet, 488 U.S. 252, 267, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989). The commissioner reasons that the General Assembly “imported” this acquired meaning into  R.C. 5751.033(I) by using the word “benefit” in the language of the statute.
{¶ 29} As support for his argument, the commissioner cites  Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 813, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989) (“When Congress codifies  a judicially defined concept, it is presumed, absent an express statement to the contrary, that Congress intended to adopt the interpretation placed on that concept by the courts” [emphasis added] ) and  Case v. Los Angeles Lumber Prods. Co., Ltd., 308 U.S. 106, 115-116, 60 S.Ct. 1, 84 L.Ed. 110 (1939) (interpreting the statutory phrase “fair and equitable” in a  bankruptcy statute to incorporate a “fixed principle” established in court decisions). We reject the commissioner's argument because, unlike in the cases he cites, “benefit” in  R.C. 5751.033(I) does not involve a “judicially defined” concept or a “fixed principle” established by case  law.
*6  {¶ 30} Here “benefit” bears its ordinary meaning: “something that  guards, aids, or promotes well being: advantage, good.”  Webster's Third New International Dictionary 204 (2002).  R.C. 5751.033(I) uses the word “benefit” in the phrase “benefit of what was purchased,” but Defender did not sell police and  fire  service to  ADT when it sold the  service  contracts. Instead of constituting the benefit derived from the bargain, the availability of government  services is merely an assumption on which the  contract is entered into.
4. R.C. 5751.033(I) establishes situs where ADT uses or receives the benefit of  the contractrights—not where ADT uses the contract rights themselves
{¶ 31} The tax commissioner also asserts that  ADT “uses or receives” the intangible  contractrights in Ohio to generate income for itself. But that is not the correct analysis under the plain language of  R.C. 5751.033(I). The statute focuses on where  ADT “used or received”  the benefit ofthe  contract rights it purchased from Defender, not on where  ADT “used or received” the  contract rights themselves.
{¶ 32} The tax commissioner points to  R.C. 5751.033(F), which “allows Ohio to tax the ‘right to use’ a trademark in Ohio.” Division (F) does link tax situs to the use of intellectual property in Ohio. But this case does not address license  fees for intellectual property, and all agree that the analysis here is controlled by  R.C. 5751.033(I), not division (F). Under division (I), situs is determined not by looking at where  ADT uses the  contract rights, but where  ADT “uses or receives  the benefit of” the  contract rights.
{¶ 33} Likewise, the cases cited by the commissioner are inapposite. Taking  Geoffrey, Inc. v. South Carolina Tax Comm., 313 S.C. 15, 437 S.E.2d 13 (1993), as the paradigm case, we note that the South Carolina Supreme Court held that the state could impose income tax on Geoffrey's royalty income to the extent that Geoffrey purposefully availed itself of the state's  protections by licensing its trademarks for use in that state. In  Geoffrey, the taxpayer was deemed to have used the trademarks themselves in South Carolina but arguably received the  benefit of its license agreements in its  home state, Delaware. Applied to that situation, division (I) of  R.C. 5751.033would establish situs at the latter, not the former.
C. We need not reach Defender's third proposition of law
{¶ 34} Because we rule in Defender's favor on its statutory claim, we need not reach the constitutional claim set forth under its third proposition of  law.
{¶ 35} For the foregoing reasons, we reverse the judgment of the court of appeals. We also remand to the tax commissioner with instructions that he issue refunds for 2011, 2012, and 2013 in the amounts set forth in the refund claim, plus the amount of any interest that may be provided for by statute.  See  Corrigan v. Testa, 149 Ohio St.3d 18, 2016-Ohio-2805, 73 N.E.3d 381, ¶ 71(cause remanded to the tax commissioner for issuance of refunds).
Judgment reversed and cause remanded.
Kennedy,  Singer,  Fischer,  DeWine,  Donnelly, and  Stewart, JJ., concur.
Arlene Singer, J., of the Sixth District Court of Appeals, sitting for  French, J.

All Citations

--- N.E.3d ----, 2020 WL 5776005, 2020 -Ohio- 4594