May It Please The Court

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May It Please The Court
by Leonard Rivkin
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The Government is Now Taxing The Term 'Free'

How much did your cell phone cost when you bought it? Was it free? Apart from the fact that you signed a 15-year contract to get a free phone, you likely paid taxes on it.

Yep, California Regulation 1585 requires that you pay taxes on the full price of the phone, even if you didn't pay full price. The consequences of the regulation are that you and I pay perhaps as much as 25% of the value of the phone.

Those taxes mean a fairly sizable contribution to the $38 billion (with a "B") the state brings in on retail sales. But they shouldn't. Or should they?

The regulation, which was written by the Board of Equalization, not the Legislature, conflicts with the laws passed by the Legislature. Section 6006 of the Revenue & Taxation Code defines a sale as "any transfer of title or possession, exchange or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration."

Plus, add to that statute section 6051, which says a sales tax will be imposed on "the gross receipts of any retailer from the sale of all tangible personal property sold at retail."

So, "free" means "no consideration," and that means no taxes.

So why are you taxed?

The Board of Equalization counters with section 6012 that defines "gross receipts" as "the total amount ... of the retail sales of retailers, valued in money, whether received in money or otherwise."

The "otherwise" is the troublesome part. It means that because you signed that 15-year contract, you really did pay money, so the state gets to tax you on that "money," even though you didn't pay it.

Confused yet? You didn't think "Free" meant "free," did you?

Posted by J. Craig Williams on Friday, May 06, 2005 at 18:01 Comments (0)


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