May 5, 2011 at 7:31 PM ET
Buying a gadget is beginning to resemble buying a car. You walk into a retailer and as you pull out your wallet, you are pelted with all manner of service plans, extended warranties, and other tack-ons that can double the price.
The similarity should come as no surprise. Car dealers and electronics retailers both sell products on razor thin margins. Their survival depends on finding a few suckers every day who are willing to overpay for an extended warranty.
The latest brainchild of cash-hungry electronics retailers is the guaranteed trade-in, with clever names like Best Buy’s “Future Proof Your Technology.” For a relatively small up-front fee, retailers promise to buy back the gadget at a specified price, providing consumers some measure of comfort that they won’t waste their money on ever-upgrading gadgets. The programs tap into perhaps the greatest frustration of tech consumers -- everything they buy is outdated almost immediately, meaning there is never a good time to buy. I call this the Cost of Keeping Up, or COKU, because it drives you cuckoo. These programs are cleverly crafted to overcome this psychological obstacle to buying a gadget right now.
It must be going well. Best Buy, which launched its version of the program in January, recently announced it will expand its buy back offerings to a variety of new product categories in May.
On the surface, buy back guarantees could offer some value to consumers who perpetually like having the newest thing, much like car leases. You buy an $1,000 laptop, pay $70 extra for the buy-back plan, and in 11 1/2 months you bring it back and get $400 toward a new machine. Sounds like you are spending $70 today to get $400 a year from now. What could be wrong with that?
As in many financial arrangements, things are not quite what they seem. Think of this as one big mathematics equation, all gently tilted in the retailer’s favor. For example, you may end up paying sales tax three separate times on the same money if you use a buy-back program.
If you read a lawsuit that’s been filed against Best Buy by the first company to offer buy- back plans – California-based Tech Forward – you’ll get a whiff of just how systematic the effort is to separate you from your money.
Tech Forward offers private label versions of buy-back programs for retailers like WalMart and Radio Shack. It says Best Buy copied its program after initially inviting the company to run a pilot last year. In its lawsuit, Tech Forward asserts that its main intellectual property is years of research into what the firm calls the "exercise rate,” defined as “the percentage of plan holders who actually send in their devices and qualify for a store credit.”
In English, that means the number of consumers who pay for the program and get nothing in return. In order for buy-back programs to be profitable, they require a certain percentage of consumers to pay for nothing.
The lawsuit also claims that Tech Forward has years of experience(PDF) and a database full of “information on how to profitably influence exercise rate behavior for specific devices.”
I’m always opposed to consumers entering into complex financial arrangements with companies, which almost always have the upper hand. They make the rules, they often bend the rules, and you often have better things to do than send in a flurry of letters in triplicate to assert your rights. Of course, there are a few superconsumers who can play the game and win. In this case, an anal-retentive record keeper who plans on buying the latest iPad literally the moment it’s released every year for the next five years might do well in these programs. If you’re not one of those technofreaks, I highly recommend you look elsewhere.
Why? Here are a few different ways to think about buy-back programs:
As an insurance product. Buy-back programs essentially guarantee you a resale value, meaning they act as insurance against loss of value. As with all insurance programs, they are impossible to really evaluate until there's a substantial number of claims, and we can see how consumer-friendly the claims process is. I can tell you that Best Buy's program includes a mountain of fine print that could turn your good deal into a bad deal very quickly. The company's provider and underwriter, Chartis Warranty Guard, reserves the right to inspect returned gadgets, something it calls “acceptance testing.” They are then graded into one of three tiers – “good,” “poor” or “substantially impaired.” Bring back that laptop 11 1/2 months after purchase in poor condition, and you get only $200. Bring it back substantially impaired, and you get nothing. On the surface, that's reasonable, of course. But guess who makes the determination? Guess what the appeals process is? Guess who has no leverage in the negotiation?
Tech Forward has the exact same return inspection strategy. Again, the firm might be magnanimous. Or it might not be. If you disagree with their decision, you must take your case to binding arbitration before the Better Business Bureau – you will have no option to sue the firm, as that right is waived by signing the terms and conditions.
As a costly loyalty program. Remember, you don't get money for your item. If you sign up for a buy-back program at a store, you get a gift card to the store. That means you won't be able to shop around for a new laptop at other places, you'll be forced to buy from Best Buy, Radio Shack, Walmart, or wherever you originally spent the money. You'll be forced to pay that store’s prices, which might not be the lowest. With items stuck in Minimum Advertised Price land, and never fluctuate in price, such as Apple's iPad, this is less of a concern. Still, it's never a good idea to give up your free agency as a consumer. What if you have a dispute and want to take your business elsewhere? Why are you paying them to be loyal?
NOTE: It is possible to buy a buy-back program directly from Tech Forward, which will issue you a check when you make a claim – that’s an advantage.
As punishment for the detail disinclined: To get your bounty, you need to have the original receipt and all the other original stuff that came with the gadget -- power cords, manuals, etc. If anything is missing, your gift card is reduced by the replacement cost of the missing items. If the item gets damaged in shipping, you’re on the hook. If you never quite make it to the UPS store, you’re out of luck. For those of you that have every receipt from the past two years stored in a safe deposit box, God bless. The rest of us mere mortals must add into the calculation of the program’s worth the odds that something will go missing before your return date. Those odds lower the value of the program. So does timing. Miss the 12-month cut off by one day? You get $300 instead of $400. Miss the 24-month anniversary by one day? You might get nothing. Tech Forward gives users a 30-day grace period, but assesses a late fee of 20 percent of the claim amount. In other words, that $200 payout becomes a $160 payout – (and remember, you probably paid around $40 in the first place for the protection, Tech Forward’s going rate for a $1,000 laptop right now).
Just as 10 percent of so of gift cards go unredeemed, Best Buy and Tech Forward know some people will screw up and miss out on their payouts entirely. As the lawsuit shows, the firms believe they can even influence those outcomes. That tilts the math in their favor.
Triple the sales tax, and maybe income tax -- Other surprises in the fine print might deeply reduce the value of your return. The gadget return transaction is actually defined as a sale and a transfer of ownership in the contract. That means sales tax might apply. Best Buy’s contract, for example, contains this ominous provision: “All sales tax liabilities for your sale of the device (to us) are solely your responsibility.”
Sales tax rules vary by state. According to Tech Forward, California residents who sell fewer than two personal items per year can be exempt from the tax. Others have to pay.
Best Buy, in response to an inquiry from msnbc.com, said “most customers will not pay sales tax on the proceeds,” but didn’t elaborate or explain why it includes the sale tax provision in its contracts. The company did say some consumers might have to pay income tax on the buy-back benefits.
(Tech Forward did not immediately respond to a request for comment)
While the tax may vary, the only thing that can be said for certain is: You have the tax liability, and they don’t. This means it’s possible you'll be paying sales tax twice on the same transaction – once when you buy the gadget and again when you return it. And, when you use that gift card, you'll have to pay tax on any purchase you make with it, so it's hardly a stretch to say you could be triple-taxed on buy-back purchases.
6/1/2011 – You buy a $1,000 laptop and pay $80 in sales tax.
5/31/2012 – You return the laptop and get a $400 gift card. You pay $32 in sales tax for that sale.
5/31/2012 – You buy another $1,000 laptop, paying $80 in sales tax -- $32 of that for using the $400 gift card.
TOTAL -- $144 in sales tax
As a way to really confuse your mobile phone purchase – Best BuyexecutiveGeorge Sherman recently said that buy-back programs were most popular among cell phone buyers. It’s really hard to make the numbers make sense with most phone purchases, because they come with two-year service obligations.Fulfill that two-year contract, and you can’t get a dime back from the insurance. Return the phone early, and any buy-back payment you receive will be reduced by the early termination fee you’d have to pay. Again, this is calculus that most consumers shouldn’t even attempt.
As a great way to give your data to someone else – Best Buy’s contract states expressly that consumers are responsible for cleaning their data off the returned gadget. Most of us are terrible at that. Forensic experts will tell you the only real way to accomplish a complete wipe – given that deleted data can be restored -- is to take a hammer to your hard drive. But that would void other parts of the buy-back contract.
Tech Forward says it will do its best to delete your data from gadgets you turn in: “We intend to erase all information on the device using U.S. Department of Defense-grade software overwrite, magnetic degaussing, and/or physically drilling holes in a hard drive before reselling or recycling the device,” the firm says on its website. But of course, it shoves liability for any lost or stolen information back on the consumer.
To get lost in other fine print – Tech Forward says it will process payments as quickly as possible, but reserves the right to take 60 days to make a payment. If you are returning a laptop computer with the intention of upgrading to a new machine – that’s the idea, after all -- you could be without a computer for two months. That is potentially an inconvenient benefit.
As part as source of confusion at the point of sale– At the risk of repeating myself, I hate complicated, multi-layered deals. I love simple, neat transactions. Buy a laptop computer today at Best Buy, and the salesman will hound you into buying an extended warranty, a service plan, buy-back protection and perhaps a pack of gum. Buy the service plan, and you’ll get half-off the buy-back plan, etc., etc. Judging by prices offered on Tech Forward’s website, Best Buy’s buy-back prices are excessive anyway. Just don’t engage in the conversation. Know what you’re getting for what you’re spending. If you can’t help but consider this option, you owe it to yourself to visit TechForward’s website to get a quote for comparison purposes before you go shopping.
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