More Americans traveled this year for Thanksgiving than in any other year since 2005, according to AAA. For the duration of the holiday season, this seems to portend longer-than-usual lines, heavier-than-usual traffic, and more-overbooked-than-usual flights. In navigating this tumult, there is likely at least one thing that will connect holiday travelers: our need to keep our phones charged. Capitalizing on this problem, a handful of startups have deployed kiosks from which fully charged phone batteries may be leased or purchased. Rolling out in travel hubs and hotels coast-to-coast, these kiosks present a minefield of sales and use tax issues.
I recently encountered one of these kiosks at New York City’s Penn Station. The kiosk welcome screen presented the options to rent, buy, or return a battery. Selecting the rent option, for an initial fee of $4.99 and an additional $0.44 in sales tax, I was able to withdraw a battery to charge my smartphone. Prior to completing the transaction, I was informed that the kiosk operator, MobileQubes, would charge an additional $0.99 per day until return of the battery.
Perhaps the most consequential sales and use tax issue raised by this business model is whether the true object of the transaction is the sale of electricity or the lease of a battery. In New York, both electricity sales and leases of tangible personal property are taxable, so MobileQubes appears to be properly collecting tax from its customers in the Empire State either way. Still, the characterization of the sale could have consequences for the company’s purchases. For instance, if New York determines that the true object of the transaction is electricity and that the batteries are merely used as a delivery vessel, it might not allow the company to purchase the batteries tax-free under the state’s sale-for-resale exemption.
Under similar facts, the New York Tax Appeals Tribunal has found a company’s purchase of cylinders used to deliver oxygen to be taxable. Perhaps distinguishing that case, the tribunal was in part persuaded by the fact that the transactions at issue were not denominated or structured as leases. MobileQubes does denominate and structure its transactions as leases. This may favor sale-for-resale treatment for the batteries. At the same time, this may disfavor that treatment with respect to the company’s purchases of electricity.
In some states, the taxability of the sale to customers could be at issue. For instance, in Colorado, lessors of tangible personal property for terms of three years or less generally pay tax on their acquisition cost of property leased, and no tax is levied on the lease payments. However, payments to a kiosk operator would be taxable in the state if characterized as payments for the sale of electricity.
Some states might not even apply the true object test, instead viewing the sale as a bundled transaction involving the sale of separable items of tangible personal property. This would be more likely in states such as Texas that view electricity as tangible personal property, and would favor exempt sale-for-resale treatment for a kiosk operator's purchases of both electricity and batteries.
At least one competitor, Chargerent, employs a rental model similar to that of MobileQubes. Another company, FuelRod, does not lease batteries through its kiosks, but sells them outright and permits purchasers to swap these batteries for fully charged ones for free.
Is the true object sought by customers of phone battery kiosks electricity, batteries, or perhaps something more chimerical? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn.
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