Common (Industry) Practice vs The Letter of the Law

Factual Questions
1

The NYS AG is suing a major electronics retailer, B&H Photo, over uncollected/unpaid sales taxes. The issue concerns point-of-sale manufacturer rebates, which – per the lawsuit – are subject to sales tax under NY law.

For example, suppose a retailer is selling a Dell computer for $1,000. They need to collect sales tax on the entire $1,000. Now suppose Dell offers a $200 point-of-sale rebate on the computer. The retailer lowers the selling price to $800, passing along the rebate to the customer. Apparently, NYS law is that sales tax is due on the entire $1,000, and the law treats the $200 rebate as being part of the purchase price. Meaning that the retailer is considered to be selling the computer for $1,000, but with that $1,000 being paid from two sources, $800 from the customer and $200 from the manufacturer. (Seems to go against common sense to me, but I don’t know that common sense has any standing if the law is clear.)

Lawsuit here, including allegations that B&H’s tax people were aware of the issue but decided to keep collecting tax on the amount paid by the customer, due to competitive pressure.

B&H hasn’t gotten around to defending themselves in court, but their public defense has been that what they do is common practice in the industry. For example:

Assuming B&H is correct that what they do is common practice, does this have any legal standing at all?

I can imagine that if the text of the law is very ambiguous that common practice might be used to support an interpretation which is consistent with that. But suppose the text of the law seems pretty clear and justifying the practice would require stretching the meaning or possibly disregarding the law entirely, is common practice any sort of basis at all?

Secondly, does B&H have any sort of case based on the fact that they’re (apparently) being singled out from among many retailers using the same approach? If not, it would seem to lend itself to abuse in the form of selective prosecutions based on personal or ideological animosity, because there are many areas where the letter of the law is commonly “honored in the breach”, but it doesn’t necessarily follow that there’s an actual legal remedy for that.

2

If a cop gives you a ticket for speeding and you go to court and argue that lots of other people speed too, I don’t think that’s going to get you off the hook. Seems to me this is a pretty much identical argument.

3

It might seem to be an identical argument, but there is a big difference. The individual cop gave you the ticket because you were the one he caught and giving you the ticket does not really affect the ability for you to compete commercially with the other drivers (that is, the fact that the other drivers can drive recklessly without incurring a penalty does not give them a commercial advantage).

This is a bit different, in that it might seem that the State of New York is saying that B&H, and only B&H, must obey the law. If this is the case, it would appear that B&H has a point. This may or may not be true (hence, the reason for it to be settled in court), but it would seem that this what the argument is and why it is different from the speeding ticket.

It wouldn’t surprise me, however, that the amount that B&H owes in back taxes will easily cover the costs of the lawsuit, and once they get a judgement, the cost of going after the smaller offenders would simply be the cost of sending a letter. That is, it is much cheaper for the state to drag a single offender into court and fight a single case and use that precedent to encourage compliance from the others.

4

The “everybody does it” defense doesn’t get much traction. The state will just say, “Give us their names and we’ll go after them.”

The actual law is not ambiguous at all.

NYS treats the rebate as a second person paying for the item at the same time. It’s as though you put down $100 and your friend puts down $100. You pay sales tax on the $200.

Not charging the proper tax puts those who do follow the law at a competitive disadvantage.

5

Is there a precedent or legal principle where a law that is not enforced (nobody has even attempted to enforce it) for an extended period of time can’t be suddenly enforced (with full penalties) without warning.

I find it hard to believe that no jurisdiction has ever used selective enforcement of an obscure law to punish people who’ve annoyed the police, politicians, etc., and gotten beaten in court over it.

6

I don’t know if it applies here, but what you’re looking for is desuetude.

7

It would appear that if B&H is being singled out (which is not at all clear), it’s because B&H is the company a whistleblower made a complaint about .

But I find the wording in this statement suspicious - it consistently refers to “discounts” or “sales price” rather than rebates when saying that unidentified other retailers collect taxes in the same manner as B&H.* If you’re saying that other retailers treat rebates the same way, then why not just say it?

I also find it odd that they say 'entire consumer electronics retail industry" does the same thing - maybe they do, maybe they don’t but I think it’s interesting that they aren’t saying that it’s commonplace throughout the entire retail industry.

But they definitely don’t have a case by saying everybody in the industry does it- otherwise all those “cash no tax” places I’ve been to couldn’t be prosecuted. Because almost everybody in their industry does it , for a certain tightly defined definition of “industry”

  • Sales/store coupons/store rebates are treated differently than manufacturers rebates/coupons. If a store puts on item on sale for $499 instead of $599 , or offers a $100 coupon or rebate, the store is receiving $499 for the item. If it’s a manufacturer’s coupon or rebate, the store is getting $599 for the item and the tax must be paid on the full price either by the consumer or the retailer. The store coupon/rebate is a discount and the manufacturer’s coupon/rebate is a form of payment, just like a gift card would be.
8

When I worked at Toys R Us many years ago they prided themselves on the claim that they never had “sales”. They did send out coupons and items went on clearance but they avoided any actual “sales”.

Then then introduced “Temporary Price Refuctions” or TPRs. We as employees were firmly told to never call them sales, especially when interacting with customers. (Sorry, “guests”, and we were “associates” not employees.)

9

If NY is anything like Canada, the tax people don’t actually care if you collect the sales tax from the customer, as long as you remit the required amount of the tax to the tax office. It may be that B&H’s competitors are charging the customer tax on $800, but sending the state the full amount of tax on $1000, as an unannounced internal price reduction. (Unannounced because trying to explain it would just confuse most customers, as would trying to collect it directly.)

10

My employer network is blocking that site. But I would guess they refer to it as “discounts” and “sales price” because their legal argument is going to be that these are discounts and sales prices.

That doesn’t strike me as odd at all. I would assume that - like most companies - they closely follow industry practices in their own industry, but are much less educated on what common practices are in other areas. (In addition, it’s also possible that rebates in the consumer electronics retail industry are structured differently than in other industries.)

11

In the US, things are highly dependent on the specific state the transaction is taking place, as the sales tax is a state tax. It is technically illegal in most states to tell customers they don’t have to pay tax, even if the store is paying it.

You may see ads on TV (furniture places seem to be over-represented here) that say “BUY TODAY AND PAY NO SALES TAX [of course, you will pay sales tax, but we will discount the sale the amount of the tax]”. It’s odd phrasing, but there are situations in most states where the buyer is not required to pay a sales tax, most notably items purchased for resale within the same state or items purchased by certain state agencies. In those cases, the stores would have to discount the sale for the amount that normally would be charged as tax, but not charge the sales tax. Those sales are shown separately on the monthly Sales Tax Return the retailer files with the state’s department of revenue.

It was explained to me that this is also why retailers often cannot include the sales tax in the advertised price for an item (except for a few specific situations). While the revenue folks aren’t going to care much as long as the retailer remits the amount of sales tax due, there are laws against not charging the customer the sales tax and itemizing it as such on the receipt.

12

It’s certainly not going to be their legal argument* - it’s perhaps an argument to the public. But there’s huge difference between B& H putting an item on sale, B& H setting a price that unknown to the customer take into account an rebate from the manufacturer ( In which case B&H is responsible for the sales tax on the rebate amount ) or B& H setting a price and letting the customer know there is a manufacturer’s rebate. ( in which case the customer pays the tax). The short version is that B& H must remit the tax on the total amount they receive for the item. If they put it on sale for $599 and only receive $599, they are to remit sales tax on $599. If they receive $599 from the customer and $100 from the manufacturer, they are to remit tax on $699, exactly as if they had received $100 from me and $500 from you.

I don’t see how rebates can be structured much differently and still be rebates - they require proof that item was sold ( usually within a specified period ), proof that the retailer bought the item ( again usually within a specified period ) and the manufacturer sends someone the amount of the rebate. Remember how rebates used to work, not that long ago - you bought an item and sent a copy of the receipt with a claim form to the manufacturer and the manufacturer sent you the money directly- there was no question that those purchases required sales tax on the full amount paid for product and the current rebates are simply a different process - instead of paying $699 and getting $100 back later, the customer pays $599 and the manufacturer pays the retailer $100. Either way, the retailer is being paid the same total.

But in any event, their argument seems to be that they can’t compete if this is “common industry practice” - but lots of places that are not “consumers electronics retailers” sell consumer electronics and B&H is not saying that general retailers like Target, or Walmart, or Costco are not remitting tax on the rebate amount.

  • The allegations in the lawsuit are not only that they didn’t remit the tax, but that there is internal documentation that at some point, they knew it was required and they still didn’t follow the rules. Arguing that the rebates were in fact “discounts” and “sale prices” won’t get them very far unless they can somehow rebut that documentation - and if they can rebut that documentation, there’s no need to argue about “discount” vs “rebate”.
13

I don’t know how it might be done. But the weird and counterintuitive aspect of the NYS law is in considering a payment from the very guy who is selling it to you as part of the retail sale price as opposed to a discounted sales price. Most people would consider a situation where A sells B something for $600 but gives $200 of that money back to B to be a sale for $400, and not a sale for $600 with a separate payment of $200. If NYS law says that it is anyway, then that’s what it is. But the point is that laws can be technical, and I can imagine there might be situations where a clever lawyer might come up with an argument that “if you do it such-and-such way, then it won’t technically fall under that law”.

The lawsuit makes the points that support the lawsuit, and leave counterpoints, if any, to the defense lawyers. The lawsuit documents that B&H was aware of the issue, but then goes on to claim that they simply decided to ignore it, for which there is not that documentation. It’s possible that B&H will claim that they didn’t simply ignore it, but rather subsequently got an alternative legal position, and/or restructured the way the rebates were done. (The lawsuit does claim that B&H attempted to get the manufacturers to rework the rebate contracts, but with very limited success, but at any rate it does show that they were working along those lines.)

14

Here’s the thing - what you’re missing is that it is not the store giving the customer back the money but the manufacturer . So A sells B something for a total of $600 - $400 to come from B and $200 to come from C. There’s absolutely a way to do this without the retailer having to remit sales tax on the $200 - the $200 can be taken off the price the manufacturer charges. In that case, it’s not a rebate at all, it’s a discount. But the manufacturers weren’t willing to do that- most likely in part because there is no way to ensure that the $200 in savings makes it to the consumer rather than being kept as additional profit by the retailer.

15

That’s apparently how the law treats it, but that’s not technically true, since the manufacturer gives the money to the store, not to the customer.

The final sentence seems to be incorrect.

According to the lawsuit, the manufacturer (or at least one - Adobe) said that B&H was not required to pass on the rebates to the customer. (B&H wanted this in their contract, because they believed having this term explicit would help them in this regard.) See paragraphs 82-86 of the lawsuit.

16

I don’t understand the state’s position. If B&H (great store, BTW!) advertises and sells something for $499 then I assume that is the price I am paying and should pay tax on. If the price is based on a manufacturer rebate, then I guess we get into hair-splitting: is the manufacturer sending B&H the $100 rebate in a cheque - in which case, yes, maybe NY has a case; or are they simply applying it as a credit to whatever B&H owes them? “You bought this item wholesale for $400 but if it is sold before Dec 1st we will call it $300 instead.” If that is the interpretation, which if the manufacturer credits the seller, it would seem to be - then how is that any different than getting a permanent discount on the wholesale merchandise?

As a side note, I read somewhere that a lot of car dealers offer “invoice pricing” because they get significant rebates from the manufacturer if the dealer makes certain quotas - the “invoice price” is afterwards significantly discounted by the manufacturer. Just because there is not a specific rebate amount, if the wholesale price is discounted by the dealer down from list price in anticipation of a kickback from the manufacturer, how is that different from B&H except in the fine barbershop tradition of hair-splitting? If the manufacturer did not offer that incentive, the consumer would have paid it. And tax. Poh-tay-toe, poh-tah-toe.

17

Selective Prosecution would be unconstitutional. I imagine it would be very hard to prove, or else there would be less argument about racial profiling…

18

Why am I paying tax on $200, instead of me paying on $100 and the second person paying for the item at the same time paying on $100?

NYS is suggesting that I’m responsible for paying sales tax on monies spent by someone else.

19

Are they? I thought they were saying the store must pay the tax on $200 to the state. Does the state care if it’s the customer who pays, or the manufacturer, or the store?

20

Well, generally speaking the store agrees to collect the tax and pass it on to the State, while the responsibility to pay the tax is born on the person buying the item.

In the past, if you bought something (via mail/phone/computer) from a store that didn’t have a local presence, you wouldn’t pay tax to the store, because the store never made an agreement with your state to collect and remit taxes. However, you were still technically required to pay the sales tax, even if nobody ever did.

In this case, who is responsible for paying the tax… the person who bought the item, or the all the persons who paid for the item?