To get sales tax right, read the fine print – Wacky Tax Wednesday

I know a guy who loves to take advantage of Patagonia’s Ironclad Guarantee. He never hesitates to have the store replace items that show a little wear and tear. In fact, he doesn’t hesitate to have the store replace items that were worn out by someone else, and he takes particular delight in buying used items at yard sales and exchanging them for brand new replacements. Getting a new Patagonia shirt for a few dollars is indeed a good deal, but it sure doesn’t seem ethical to me.

Were Patagonia to catch on to him, they’d probably just refuse the upgrade. I can’t imagine they’d blacklist him from future purchases. But not all retailers are so forgiving.

Save $5 (and lose access to your Google accounts)

I recently heard about some folks who tried to earn a little extra cash by purchasing a new Google Pixel phone on behalf of a reseller located in New Hampshire. They were paid $5 per phone and could buy up to 5 phones, which they had shipped to the reseller’s New Hampshire address. It probably seemed like an easy way to supplement the coffee fund or pay for stocking stuffers — until they wound up getting locked out of their Google accounts.

It is clearly stated in Google’s Terms of Sale for Devices (which, admittedly, no one ever reads):

 “You may only purchase Devices for your personal use. You may not commercially resell any Device.”

Google Terms of Service reads:

“We may suspend or stop providing our Services to you if you do not comply with our terms or policies or if we are investigating suspected misconduct.”

While it’s acceptable to purchase a Google Device for a gift, the company evidently realized there was something fishy about the hundreds of phones being shipped to one New Hampshire address. It therefore suspended access to the accounts of all involved, without warning: email accounts were frozen, Google Docs suddenly made unavailable, and so on. For some, life must have ground to a halt. Fortunately, according to Dan’s Deals (the website that originally broke the story), Google reactivated the suspended accounts before too much time had passed.

Patience — this story is linked to sales tax. Since New Hampshire has no sales tax, there was no tax on phones shipped to the New Hampshire address. The reseller could therefore maximize profits when reselling the phones. For some reason, this calls to mind an oft-repeated phrase I’ve heard in foreign markets: “Special price, just for you!”

This isn't the first time people have gone into business buying items in tax-free states only to sell them for a profit elsewhere, and it probably won't be the last. During iPhone launch days in 2014, Apple stores in (tax-free) Portland, Oregon were plagued by long lines of homeless and elderly people who were paid by resellers to purchase phones for them. And the New Hampshire Pixel reseller has admitted to doing this very thing in the past, with no consequences.

Last year, Apple cracked down on resellers by making iPhones sold in tax-free states available by reservation only. This dramatically cut down on the lines. Google took a more punitive approach with the Pixel incident, one that seems likely to dissuade entrepreneurs from buying Google products for resale in the future.

The moral

The appeal of avoiding sales tax whenever possible is easy to see. It explains why there are often shopping malls close the state lines in states without sales tax, and why some people love shopping online from stores that aren't required to collect sales tax in their state.

But auditors are on the lookout for this sort of activity, as indeed are businesses like Google, apparently. Since the economic downturn of 2008, states in need of additional tax revenue have devoted extra resources and attention to missing sales and use tax revenue. Recently, for example, the Oklahoma Tax Commission was authorized to hire more than 50 new auditors to crack down on tax noncompliance; they're currently investigating sales and use tax exemptions and the under-reporting of sales tax.

When businesses get sales tax wrong, they can be saddled with hefty back taxes, plus interest and penalties. Recovery can take years.

Tax automation software facilitates compliance for business of all sizes in all states. Learn more.