Early in 2015, MetroPCS introduced a new marketing campaign to attract additional customers to its products and services. The marketing campaign allows customers to receive an instant “rebate” for a portion of the purchase price for a new phone. After the phone is purchased, the authorized dealer is subsequently reimbursed by MetroPCS for the instant rebate that was provided to the customers at the time of sale. This marketing practice is common with other cell phone dealers as well, such as AT&T and Verizon, and it generally comes with the requirement that the customer sign a long term contract with the service provider. Unfortunately, this marketing practice, while common, has the potential to create additional tax exposure for authorized MetroPCS dealers.
The California Board of Equalization (BOE) provides fairly specific guidance regarding the application of sales tax on cellular devices. BOE regulations define two different types of cellular transactions, namely, bundled and unbundled transactions. In layman’s terms, a bundled transaction is made when a cell phone is purchased and the charge is combined with a long-term service agreement with a service provider. Conversely, an unbundled transaction is made when a cell phone is purchased, but the customer does not enter into a long-term service agreement with a service provider. A long-term service contract is generally defined by the BOE as one that is in excess of one month. The amount subject to tax for a bundled transaction is generally the retail selling price of the cell phone, without taking into account a reduction in price for rebates or discounts, as if the customer had purchased the cell phone without signing a service contract. The amount subject to tax for an unbundled transaction is measured by the gross receipts on the sale of the phone.
MetroPCS authorized dealers are considered by the BOE to transact unbundled sales of cellular devices because they are sold without long-term service contracts. As a result, the amount that is subject to sales tax is measured by the gross receipts of the phone. Because the new marketing efforts of MetroPCS currently include rebates on the purchase of new phones, the amount of the transaction that is now subject to tax is not merely the amount paid by the customer for the phone, it also includes the value of the instant rebates. In other words, the “gross receipts” subject to tax in these transactions is the sum of the amount paid by the customer for the phone plus the rebate amount the dealer receives from MetroPCS.
The effect of this additional wrinkle to the selling price of the phone creates a substantial risk of tax exposure for authorized dealers of MetroPCS products. Many authorized dealers are unaware of the requirement to report tax on the value of the rebate, and as a result, are not collecting sales tax reimbursement from their customers on the price of the phone and the rebate amounts. If the authorized dealer is not reporting tax on the rebate amounts, the corresponding liability arising from these transactions could be in the tens of thousands of dollars by the time the dealer is selected for a three-year audit. In order to avoid this potential liability, MetroPCS authorized dealers should take a proactive approach and account for these rebates at the time the sale occurs by collecting tax reimbursement on the aggregate selling price of the phone (selling price plus the rebate). While this practice is not overly complex to implement and most point of sale systems have an option to account for these rebates, some Metro PCS authorized dealers fail to make the correction prior to being selected for audit. The result of this inaction can be a harrowing lesson in the complexities of sales tax law that can result in a significant effect on the business’ bottom line.
Mitchell Stradford is a former auditor with the Board of Equalization. His experience at McClellan Davis, LLC includes the representation of multiple MetroPCS authorized dealers in sales tax audit and appeals matters. If you have any additional questions in regards to the above issue, please feel free to contact him directly at firstname.lastname@example.org or (855) 995-6789.