The North Carolina Business Court (Court) recently reversed and remanded a decision appealed from the North Carolina Office of Administrative Hearings (OAH), leaving cellphone retailer Wireless Center of NC, Inc. (Wireless), an independent contractor of former Sprint Solutions, Inc.’s (Sprint) Boost Mobile (Boost) liable for over $500,000 of sales tax assessed on sales of prepaid airtime.
“... retailers should consult a tax advisor regarding tax consequences.”
background
In 2016, Wireless entered a contract with Sprint, then parent-company of Boost, to join Sprint’s Branded Retail Program. The program required Wireless to sell only Boost products. Thereafter, Wireless sold mobile phone equipment, products, and services as an independent contractor exclusively for Boost.
One of the products Wireless sold during this time was “real time replenishments” (RTRs) which are prepaid airtime units that added value to a customer’s Boost account. Customers could use them to activate or extend one of Boost’s prepaid plans or purchase other products and services. In direct conflict with both North Carolina law and contract language stating liability to collect sales tax rested with Wireless, it did not collect sales tax on the sale of the RTRs.
In 2017, Wireless received a letter from Boost stating that retailers similar to Boost would no longer be required to charge, collect or remit sales tax on certain purchases, including the RTRs. Of note, the letter stated that it contained no tax advice and that retailers should consult a tax advisor regarding the tax consequences of the change by Boost."
Then, in 2019 the North Carolina Department of Revenue (Department) initiated a sales tax audit which ended with a sales tax assessment against Wireless in part for failing to collect sales tax on the sale of RTRs during the audit period.
Audit Defense & appeal
Included in its audit defense and appeal, Wireless maintained that it was not required to collect and remit sales tax as it was not a retailer. Further, even if it were considered a retailer for North Carolina sales tax purposes, Boost had advised Wireless it was no longer required to charge, collect and remit sales tax.
To its detriment, Wireless neglected to consult a tax professional and unwittingly relied on the language in the letter and did not collect and remit sales tax as a retailer on its gross receipts derived from sales of “prepaid telephone calling service.” As set forth in North Carolina statute, the prepaid service is taxable at the point of sale rather than the point of use.
analysis & decision
North Carolina Sales and Use Tax Act (SUTA) imposes tax on retailers, regardless of any contractual language to the contrary. After considering Wireless’ arguments, the Court concluded, among other holdings, Wireless was a retailer and that the RTRs were taxable. Thus, the OAH’s decision was reversed and remanded the case to affirm the entirety of the sales tax assessment.
mitigate your risk of exposure on audit
Preemptive tax consulting and strategy is the better approach to the inevitable audit. Deciding to wait to reach out for tax advice until you receive an audit notice or even afterwards when your are in the trenches of an audit is second best. It’s your decision.