Google Is Banning Pixel Owners Over a Tax Loophole

November 17, 2016, 5:05 PM UTC
Google Inc. Product Launch Event
Sabrina Ellis, director of product management for Google Inc., discusses the Google Pixel and Pixel XL smartphones during a Google product launch event in San Francisco, California, U.S., on Tuesday, Oct. 4, 2016. Google is embarking on a wholesale revamp of its mobile phone strategy, debuting a pair of slick and powerful handsets that for the first time will go head-to-head with Apple Inc.'s iconic iPhone. Photographer: Michael Short/Bloomberg via Getty Images
Michael Short—Bloomberg via Getty Images

Google Pixel buyers who tried to take advantage of a tax loophole and save a few bucks on the smartphone were penalized by the search giant, according to reports.

The Internet giant has suspended hundreds of accounts owned by users who purchased its Pixel smartphone. Those affected purchased a Google smartphone through the company’s Project Fi wireless carrier service and had them shipped to New Hampshire, where there is no state sales tax. A reseller there allegedly sold the smartphone to others and shared the tax-savings profit with the original buyer, according to a post on Dan’s Deals, a site that offers tips for users to save money.

According to Dan’s Deals, it spoke with the reseller, who claims to have been buying devices from Google in this manner for the last several years. The dealer says it’s willing to return the phones in question to Google—if Google agrees to turn user accounts back on. Dan’s Deals says more than 200 people were affected by Google’s ban and now have no access to Gmail, among other Google services.

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The Google Pixel and Pixel XL smartphones were released last month. The devices are the first to be designed and engineered by Google, and compete at the higher-end of the smartphone market with devices like Samsung’s Galaxy S7 and Apple’s iPhone 7. The Pixel, which has a 5-inch screen, starts at $649. The Pixel XL, which comes with a 5.5-inch display, starts at $769.

Google’s (GOOGL) Project Fi is a wireless service from Google that can connect to cellular and Wi-Fi networks. Rather than lock customers into a single wireless carrier, however, Project Fi can automatically connect the respective device to the best available signal from three different carriers. It can also link the handset to Wi-Fi if that’s offering the best connection.

It’s unclear what tipped off Google to the tax loophole, but Dan’s Deals noted that the dealer has made thousands of transactions in this way in the past and never had a problem. This is the first time, however, that the dealer made purchases via Project Fi.

That said, the carrier option isn’t the problem in this case. Google displays a warning during the Pixel purchase process that says its devices must only be bought for personal use or as a gift. Google does not allow customers to buy its smartphones for resale purposes. In this case, those who have had their accounts banned bought the device from Google for resale and made a profit a subsequent sale.

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Google’s warning does not say what it might do in the event customers violate the policy, but according to those who spoke to Dan’s Deals, the company blocked their access to a slew of Google accounts, including Gmail, Google Docs, and even the company’s online storage service Google Drive. When others try to email affected users, the Gmail account bounces back as “undeliverable,” according to Dan’s Deals.

It’s unclear how long the Google accounts will remain banned and whether Google has communicated anything to those who allegedly violated its terms of sale. It’s also unknown how the reseller might be affected.

“We identified a scheme in which consumers were asked to purchase Pixel devices on behalf of a reseller, who then marked-up the cost of those devices in order to resell them to other customers,” a Google spokesperson told Fortune in a statement. “We prohibit the commercial resale of devices purchased through Project Fi or the Google Store so everyone has an equal opportunity to purchase devices at a fair price. Many of the accounts suspended were created for the sole purpose of this scheme. After investigating the situation, we are restoring access to genuine accounts for customers who are locked out of many Google services they rely on.”

Update at 7:14 p.m. on 11/17/16 to include Google’s statement.

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