Use Taxes

Use Taxes

February 01, 2004 | By Keith Martin in Washington, DC

Use taxes are a danger when companies offer free or discounted equipment to encourage customers to use their services. Two cellular telephone companies in Louisiana offered their customers cell phones for less than the wholesale price as an inducement to sign up for phone service. Most states collect both sales and use taxes. Sales taxes are collected on retail sales of equipment and sometimes also on services. “Use” taxes are collected on equipment that someone buys out of state or at wholesale and then uses himself in the state. In this case, the tax collector charged that the phone companies were using the phones as marketing tools and levied use taxes.

However, before the case could be heard in court, the state legislature changed the law — retroactively. The tax collector cried foul and said it was unconstitutional for the legislature to change the law retroactively. In December, the state supreme court declined to rule on the constitutional issue and sent the case back to a trial court for the arguments to be heard there. The case is Unwired Telecom Corp. v. Parish of Calcasieu.

The case is a warning to be wary of use taxes when giving away or offering discounted equipment as a marketing tool to sell services.

Keith Martin