The Verge reports that the New York Attorney General believes retailer B&H has dodged over $7,000,000 in taxes in a lawsuit filed recently. It’s all to do with the “Instant Rebate” offers, which are common amongst online retailers these days. The suit claims that B&H has “cheated” the NY sales tax and that they “chose profits over principles”. The investigation and lawsuit come as a response to a whistleblower they say approached them in January 2016.
So, as I understand it, the problem seems to lie in the way B&H does Instant Rebates. This is essentially where the manufacturer is subsidising some of the cost. For the sake of simple maths, let’s say the rate of sales tax in New York is 10%. It’s actually anywhere between 4% and 8.875%, but again, for the sake of simple maths, let’s say it’s a flat 10% across the board.
So, with our hypothetical 10% tax rate, if you buy something for $1,000, you as the customer (where applicable) pay 10% sales tax on that item on top of the purchase price of the item. You pay $1,100 in total. B&H collects that sales tax on behalf of the tax office and then passes it along to them. Let’s say B&H is running a discounted sale item. That item is now priced at $800. 10% of $800 is $80. So, you pay $880. $800 goes to B&H and $80 goes to the tax people.
All easy and simple so far, right? But what about those instant rebates? Well, let’s first take a look at regular old fashioned mail-in rebates. These are pretty simple. You pay full price at the retailer, including the full amount of tax. Then, when you receive your item, you contact the manufacturer to get some money back off the purchase price (but not the tax!). That’s the key thing here.
Instant rebates, the Attorney General argues are essentially the same as a mail-in rebate, as they’re still manufacturer-subsidised. B&H has to sell the item and then get that money back from the manufacturer, the same as the customer would in a more traditional mail-in rebate system. So, if an item is $1,000 with 10% tax and there’s a $200 instant rebate, you would basically pay full price for the item, $1,000, plus 10% sales tax of $100, and then you would have that $200 discounted from your tax-inclusive total. Bringing your final total paid to $900.
So, in the instant rebate example with $200 discount, you’d be paying $900 ($1000 plus 10% tax = $1,100, minus $200) rather than $880 with the regular old fashioned type of discounted “instant saving” price ($1,000 minus $200 = $800, plus 10% tax). But what B&H has been doing is quoting sales tax for the final discounted price of $800. This results in a $20 difference in sales tax compared to the method the Attorney General says they should be applying.
Over the past 13 years, these discrepancies in sales tax collected on instant rebate purchases, the Attorney General says, amounts to “at least an estimated $7.3 million” from at least $67 million in rebates. They claim that such a scale of discrepancies could not have been made by mistake and that B&H did this intentionally to try to get an edge over the competition at the expense of the tax department. If you can buy a $1,000 + tax product for $900 or $880 total, which would you purchase?
A B&H spokesperson said in a statement that…
B&H has done nothing wrong and it is outrageous that the AG has decided to attack a New York company that employs thousands of New Yorkers while leaving the national online and retail behemoths unchallenged. The Attorney General wants to charge New Yorkers a tax on money they never spent. It’s wrong and we won’t be bullied.
It will be interesting to see how this one plays out. What B&H has done might be considered a bit naughty, and sure it probably has helped their sales. But it’s also helped their customers, too, who want to pay as little as possible for the gear that they buy. If the law does determine that B&H failed to collect sales tax, then perhaps it’s time to change that law?