When doing a local PPC campaign, one would expect that all the hits that you get are from the targeted cities when you review Google analytics.   In most cases, you will find a small percentage of AdWords traffic from states well outside your target region. Aren’t these “bad” clicks that should be refunded?
Possible  not, Google states that a search from outside the target area that contains a targeted city as the geographic modifier will probably trigger an ad.   For example, someone in Chicago that puts the term “Minneapolis Dental Office” will trigger ads that are region specific to the Minneapolis area.   Does this person really intend to visit a dental office in Minneapolis Minnesota? 
Three scenarios to consider:
1.       The person is searching from Chicago and has no intension of scheduling an appointment. This person could be someone who sells dental supplies and is trying to sell some.   The person could be getting marketing or competitive information.   So in these cases you probably are wasting click money.

 
2.       The person is a Minneapolis resident who is out of town for business or family. While out of town, the person decides to schedule an appointment for when he gets back. So he puts the term “Minneapolis Dentist” in the search bar. In this case the Dentist would certainly want the ad to show because this person is a customer.

 
3.       The third scenario involves a person who is in the Minneapolis area searching, but analytics show him as being in Chicago.   Why is this? The search engine recognizes the IP address of the searcher. The IP address identifies the location. BUT, for most searchers, the IP address is actually the  Internet service providers, not the individual computer.   Usually the IP address assigned by the Internet service provider is fairly local, for example, I live in Lakeville MN, but my IP address recognized as being in Burnsville (about 4 miles from Lakeville). So the geo targeting based on IP address is far from perfect. Some internet service providers will show your IP address as being several hundred miles away, because that is where the router station is. I actually had a client who lives in a near suburb of Minneapolis whose IP address is located in Illinois. This situation is actually not that rare. So in the case of the searcher who has this IP situation, they are going to continually view local ads for the Illinois area, rather than Minneapolis. One of the following will happen to this person:
a.       He will give up searching on the internet and use the phone book
b.      He will figure out that he needs to put a geographic modifier term (ie Minneapolis) in all his local searches.
c.       He will notice that Google allows him to set his location on the search page- so he permanently sets it to Minneapolis Minnesota or his area code
d.      He has a Google account and logs in when he searches. Google will eventually figure   out he means Minneapolis on all his local searches.
This person is clearly a customer that a local business does not want to ignore, but in Google analytics the traffic from this person will show as from Illinois.
The best way to deal with out of state traffic is to look at the engagement metrics and conversion metrics via Google analytics. If it shows low conversions or very high bounce rate you should try to block that IP address. Find out how to exclude IP addresses .