Maine: Customers Owed Sales Tax on Full Value of Discounted Phones

The Maine Supreme Judicial Court recently addressed what constituted the taxable “sales price” as applied to cell phones purchased by customers who contracted for wireless service when they purchased a phone.  The taxpayer, a manufacturer of phones and other devices, offered discounted pricing on iPhones to those customers who opted to procure a wireless plan from various third-party wireless carriers. The contracts with the wireless carriers required that they reimburse the taxpayer for the discount. The taxpayer collected and remitted sales tax based on the discounted sales price of the phones. On audit, Maine Revenue Services asserted that the tax should have been based on the regular price of the iPhones. The matter eventually made its way to the Maine Supreme Judicial Court.

Under Maine law, sales tax is imposed on the “sales price” of tangible personal property sold and the definition of sales price “sweeps broadly so that any value received for a retail sale is included.”  Discounts allowed and taken on sales are specifically excluded from the definition of “sales price.”  However, if at the time of the sale a retailer expects to be reimbursed for what may appear to be a discount, the amount of the expected reimbursement becomes part of the taxable sales price. Previous cases in Maine had established that if a retailer expects reimbursement and does not foresee a reduction in profits, there is no discount regardless of the form or timing of the eventual reimbursement.  Although the taxpayer argued that the payments were “bounties” from the wireless carriers to reward it for finding new customers, the court noted that one of the contracts between the taxpayer and the wireless carriers referred to the payments as “reimbursements.” Further, the amount of the reimbursed discount was directly linked to the length of the wireless plan purchased and, importantly, the taxpayer did not offer discounted pricing to customers who did not also purchase wireless plans. The court concluded that, at the time a phone was sold, the taxpayer expected to recoup its profits and therefore the payments were reimbursements, not nontaxable discounts. Accordingly, the taxpayer owed sales tax on the regular purchase price of the phones.  For more information on Apple Inc. please contact Ryanne Tannenbaum at 617-988-1729.