Cell phone dealers (e.g., authorized dealers, franchisees, or resellers) are currently the focus of the Florida Department of Revenue. The reason – these businesses are “low hanging fruit” for the Florida Department of Revenue to audit and make large assessments against. Business owners do not have to accept an assessment only because the Florida Department of Revenue says that is the amount owed. This article will discuss several of the issues faced by cell phone businesses. It is critical business owners recognize these issues before it is too late.
The biggest issue facing cell phone businesses involves the purchase and sale of cell phones. Most stores will purchase their cell phones and resell the same. However, the dealer will not always know how much the cell phone will be sold for ahead of time due to specials run by the cell phone carrier. In these instances, the carrier will tell the authorized dealer what to sell the cell phone for, especially if the customer upgrades their line/service or switches from a competitor. It may occur that in certain instances the sale of the cell phone to the customer is for $0. In other words, the customer is not paying anything at the time of purchase for the cell phone due to a sale that is going on.
The Florida Department of Revenue takes a hardline stance on this. Specifically, the Florida Department of Revenue says that in these instances of no charge to the customer, the tax is owed on the purchase of the cell phone by the cell phone business (i.e., you or your clients). This comes as a shock to everyone, as tax is normally due on the sale not on a purchase for resale purposes. How does the Florida Department of Revenue justify this position that otherwise does not fit within the law? The cell phone business is giving away the phones. Essentially, the Florida Department of Revenue’s position extrapolated to its logical conclusion is anyone can walk in off the street and get a free cell phone without something more. Everyone in the business of any business knows a retailer will not stay around long if it is giving all of its products away. In fact, the cell phone businesses are in fact technically selling these cell phones for whatever the amount is. The amount could be $0, $0.01, or $49.95. The amount is irrelevant. The fact that a sale takes place for any amount is what is relevant, as the sale is almost always paired with something else – such as a line renewal.
The cell phone businesses are also reimbursed by the carrier (e.g., T-Mobile) for the reduction to the cell phone sales price, if the business meets certain criteria. Thus, the business is made whole by this approach. Arguably, the actual net purchase price by the cell phone company of the sold cell phones can be $0 in some instance, which means that tax should not be owed since the price was $0. Though it is obvious, it is worth stating that T-Mobile, as well as other carriers, is not the manufacturer of the cell phones. Rather, Samsung, Apple, and Google, to name a few, are the manufacturers of the cell phones that sell them to companies like T-Mobile. However, this fact of who manufacturers the cell phone is irrelevant to the Florida Department of Revenue, as the Florida Department of Revenue’s position is T-Mobile, as well as the other carriers, are the “manufacturer.” Because of this position, the Florida Department of Revenue does not allow a reduction to the cell phone business’s purchase price of the cell phones. This position of the Florida Department of Revenue only goes to further demonstrate the untenable and illegal nature of the Florida Department of Revenue’s position.
Another major pitfall for cell phone businesses would be instances of receiving payments on behalf of the carrier. In these circumstances, the cell phone business takes in a payment owed by the customer to the carrier. An example of this might be payment for cell phone service. Some cell phone businesses record this as a sale. However, the business is nothing more than a middleman of passing on the payment received from the customer to the carrier. There is no sale that occurs between the cell phone business and the customer. Yet, the Florida Department of Revenue considers the transaction to be a sale and will attempt to assess the maximum amount against the business for these types of transactions.
Fixing cell phones is another hot topic the Florida Department of Revenue loves to assess. In these types of instances, a customer will come by the store and discuss problems with the cell phone. Software updates or upgrades are normally performed to determine whether the issue can be resolved via a quick fix. If not, then the cell phone may need to be sent to the carrier or manufacturer, as the cell phone business is usually contractually prohibited from physically repairing the cell phone. The Florida Department of Revenue does not care about what really happens when making an assessment. If the transaction has any indication it is a “repair” to the cell phone – even if it is a software repair – then the Florida Department of Revenue will assess tax on these types of transactions.
There are certain avenues by which the Florida Department of Revenue picks businesses to audit. One method is by obtaining the 1099-K from credit card companies, which the Florida Department of Revenue has cunningly gotten the credit card companies to be statutorily required to provide this information. The Florida Department of Revenue will assess and compare the information to your sales tax returns. If your credit card sales are higher than the sales reported on the sales tax returns, you will have the distinct (dis)pleasure to undergo a sales and use tax audit. Once more, this gateway information is used as a springboard to audit other areas of the business and make large (often six figure) assessments in those categories.
Another way the Florida Department of Revenue could select your business to be audited is by obtaining a copy of the business’s federal income tax returns. Like with the 1099-K, the Florida Department of Revenue will compare the income reported on the federal income tax returns to the sales tax returns. If there is a difference between the federal income tax returns and the sales tax returns, the Florida Department of Revenue automatically assumes the difference is taxable. A business could have a very reasonable explanation for this difference. However, such an explanation will not stop the Florida Department of Revenue from assuming the business is guilty until proven innocent.
The Florida Department of Revenue could look to assess your business for any of these issues. Worse off, the Florida Department of Revenue could invent other issues during your audit. It is critical to understand and review your documents and business practices through the same lens the Florida Department of Revenue uses in order to mitigate your risk.
While each business within the cell phone industry can be and is different, the major problem remains of the Florida Department of Revenue demanding sales or use tax be paid on transactions that should not be taxed. Business owners must be weary of these unfriendly tactics against businesses and be prepared to fight back. Paying the Florida Department of Revenue what they say they owe during an audit could only serve to perpetuate the problem.
About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues. You can read his BIO HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Contact us for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.02, F.S. - Definitions.
Section 212.05, F.S. - Sales, storage, use tax.
ADDITIONAL ARTICLES TO READ
FLORIDA DOR's 2022 LEGISLATIVE PACKAGE BAD FOR FLORIDA BUSINESSES, published December 29, 2021, by Staff.
IS LABOR SUBJECT TO SALES TAX IN FLORIDA?, published October 4, 2021, by Jeanette Moffa, Esq.
FLORIDA SALES AND USE TAX AUDITS, published September 21, 2020, by Steve Middel.
FL DOR - PROSECUTING CRIMINALLY BASED ON IRS 1099 DATA, published February 6, 2020, by Amanda Levine, Esq.
FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, C.P.A., Esq.
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.