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On Feb. 18, 2021, the Maine Supreme Judicial Court held that the taxable “sale price” of smartphones sold at significantly discounted prices to customers who entered into wireless service contracts at the taxpayer’s retail stores included payments made by the wireless service carriers in connection with the sales.1
The amounts paid by the carriers to the taxpayer constituted part of the taxable sales price of the phones because the taxpayer expected at the time of sale that it would be fully reimbursed by the carriers for the price discounts.
The taxpayer, Apple, is a major manufacturer and retailer of electronic equipment, including wireless telephones marketed as iPhones. The case concerned payments made to Apple under contracts with three wireless telecommunications carriers during a three-year period. The contracts required the carriers to make payments to Apple when a retail customer purchased a phone and simultaneously entered into a wireless service contract with one of the carriers. For example, a retail customer could buy for $199 an iPhone regularly priced at $649 if the customer agreed to enter into a wireless service contract. Apple collected and remitted sales tax on the reduced price (in the example, $199) charged to the customer for the iPhone rather than on the regular price. For a retail customer who purchased the same phone without entering into a wireless service contract, Apple collected and remitted sales tax based on the regular price (in the example, $649).
In 2013, Apple was audited by the state of Maine for sales and use tax.2
The State Tax Assessor3
determined that Apple owed additional tax on the full value of the discounted iPhones when customers simultaneously entered into a long-term wireless contract. The Assessor concluded that the full, undiscounted price of the iPhone was subject to sales tax because Apple anticipated receiving reimbursement by the carrier for the full difference between the regular price of the iPhone and the reduced price actually charged to the customer. The Assessor issued a notice of assessment for the difference between what Apple actually collected and remitted in sales tax during the audit period and what the Assessor determined should have been collected and remitted. Apple requested a reconsideration and the assessment was upheld. The Maine Board of Tax Appeals subsequently affirmed the assessment. After Apple petitioned for judicial review by a superior court, Apple and the Assessor both filed motions for summary judgment. Following a hearing, the superior court issued an order granting Apple’s motion for summary judgment. The Assessor timely appealed to the Maine Supreme Judicial Court.4
Tax imposed on full price
In reversing the superior court, the Maine Supreme Judicial Court initially examined the statutory definition of “sale price” in Maine law, which is “the total amount of a retail sale valued in money, whether received in money or otherwise.”5
The definition of “sale price” excludes “discounts allowed and taken on sales.”6
However, according to the two cases upon which the Court relied heavily, “if at the time of sale the retailer expects to be reimbursed for what may appear to be a price discount, the amount of the expected reimbursement becomes part of the taxable sale price.”7
Apple had the burden of showing that the payments that it received from the wireless carriers should not be treated as “value” in determining the sales price of the iPhones. The Court’s prior decisions in Flippo v. L.L. Bean, Inc.
and Flik International Corp. v. State Tax Assessor
provided it with useful guidance in determining whether Apple met this burden. Under Flik
, payments made to a retailer in connection with a particular sale count toward the sale price even if they come from two different sources and are paid at two different times.
The Court explained that the ultimate question was whether, at the time of sale, Apple expected to receive reimbursement for the price reduction on iPhones that it provided to customers who also agreed to enter into wireless service contracts. The Court noted that this analytical framework is consistent with how other jurisdictions characterize similar transactions. According to the Court, the purpose of the carriers’ payments to Apple could be ascertained from the parties’ course of performance and the terminology in the contracts. The Court explained that the terminology in most of the contracts supported the Assessor’s position that Apple expected to receive reimbursement from the wireless carriers. Although some of the contracts did not use “reimburse” or similar terminology, they all provided for payments from the carriers that were triggered by Apple’s sales of the phones at reduced prices. There was a direct correlation between the subsidies that Apple granted to its customers through discounted prices and the carriers’ payments to Apple. The strongest evidence that Apple ultimately expected to realize the regular price for the iPhones that were sold at the reduced price is the fact that Apple did not grant the price reduction to customers who did not enter into the wireless contracts.
Ultimately, the Court was not persuaded by Apple’s argument that the payments represented “bounties” that the carriers paid to Apple for finding new customers rather than reimbursements for iPhone price reductions. Apple unsuccessfully argued that the carriers’ payments were not reimbursements because they were subject to delay and conditioned on customers activating the contracts with the carriers. The Court explained that the retailer’s expectation of reimbursement at the time of sale is the controlling factor. In rejecting Apple’s argument, the Court concluded that because the payments from the wireless carriers to Apple were directly linked to the discounts customers received on the iPhone, they could not be severed and therefore Apple anticipated “reimbursement” for the full price of the iPhone over time rather than bounty payments for new customers.8
The Court determined that the carriers’ payments to Apple constituted reimbursement for the iPhone price reductions granted to customers who entered into wireless service contracts with the carriers. The price reductions for customers who purchased iPhones and entered into the wireless service contracts were not true, nontaxable discounts under Maine law. Therefore, the assessment of sales tax based on the regular retail prices of the iPhones was valid.
This significant decision from a state’s high court concerning a major retailer and a popular type of transaction turned on several key facts. The Maine Supreme Judicial Court found relevant the fact that Apple did not grant the same reduction in price to customers who purchased an iPhone without a wireless contract. The Court reasoned Apple would not have provided a discount in this instance, but for the promise of contractual payments from the wireless providers that would “reimburse” Apple for the difference between the discounted price and the full price over time.9
Second, the Court rejected Apple’s argument that the transaction should be treated as it would if the customer were purchasing a phone from a wireless provider rather than Apple. Here, the Court reasoned that the direct sale involving Apple as the retailer involved two separate transactions: (i) the purchase of tangible personal property from Apple in the form of an iPhone; and (ii) the purchase of a service from the wireless carrier. In contrast, when a smartphone is purchased from a wireless carrier, it is bundled into the purchase of the service and the phone is provided at no extra charge, representing a true discount because the wireless carrier does not expect to be reimbursed at the time of the transaction.
Retailers and purchasers should now be aware that in Maine any payments that can be construed as reimbursement of the original sales price for a discounted item will result in the imposition of sales and use tax on the full amount of the original sales price, not the discounted price. Based on the result in this case, Maine Revenue Services may view the decision as an opportunity to extend this analysis to other taxpayers that utilize similar arrangements that incentivize bundled types of transactions, resulting in increased state sales and use tax audit activity on these types of issues.
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