Washington: Use Tax Owed on Free Promotional Phones
- Sales Tax News
- May 2, 2013 | Gail Cole
Has anyone ever offered you a free cell phone? If so, you know the phone doesn't come without "strings;" you get a free phone only if you agree to some sort of wireless phone plan. The cell phone service provider gets a new customer, and the customer gets a new phone. It's a win-win situation. Right?
Maybe not. In a recent ruling, the Department of Revenue thousands of dollars in unpaid use tax for phones it sold "fully discounted." $85,946, in fact.
The use tax bill represented phones transferred to customs "at discounts equal to the regular price" during the audit period, which spans more than three years. As the ruling notes: "Sprint collected no retail sales tax on these 'fully-discounted' phones…."
Sprint argued that it "loses almost $100 on every phone it sells" and that it "recoup[s] … [that loss] through sales of wireless service plans." In essence, said Sprint Senior State Tax Counsel Anthony Whalen, wireless plans are "just more of a forced financing arrangement." The phones aren't promotional items, said Whalen, but are "integral to the business."
The Department of Revenue disagreed. It notes, "If you charge zero dollars and zero cents" for an item, that item "falls within [the] promotional purpose statute" and is subject to use tax.
In its ruling, the Court of Appeals reminds that "[u]se tax is a companion tax imposed when a seller does not collect a retail sales tax." (See applicable law). "[A]cutal use of the property is not required and liability accrues when a consumer assumes dominion or control over tangible property it does not intend to resell."
Four factors support the claim that Sprint owes use tax on fully discounted phones:
- Monthly wireless service fees cost the same no matter how much a customer paid, or did not pay, for a phone.
- Customers were given "cash register receipts at the point of sale indicating that the fully-discounted phones were purchased for $0.00."
- These receipts do not reference future payments for the phones, but rather indicate that the sales transaction is complete.
- Sprint does not tell "the customer to come in and buy this [phone] over time."
Ultimately, the DOR argues, one of two situations is taking place. Either "Sprint is liable for use tax because it did not resell the phones for valuable consideration (and was thus not a retailer of the phones), or "Sprint made intervening use of the phones before reselling them." In either case, Sprint is liable for use tax.
The Court of Appeals agrees.
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