There’s No Such Thing As A Free Lunch

Or free computer software.  Just ask the 30,000 recipients of Microsoft’s latest promotion…

Microsoft launched a site, PowerTogether.com, to offer free copies of Windows Vista or Microsoft Office 2007 in exchange for watching three webinars on the new products (don’t bother signing up, even though the promotion was set to expire on February 28, there are no more promotional items available).  An act of marketing genius?  Perhaps.  Microsoft thought of everything.  Well, except for the cost of the software.

The combined retail value of Vista and Office is more than $600, which means that Microsoft must issue a federal form 1099 to the recipient for the value of the products.  In order to comply with the IRS reporting requirements, the recipient must complete a federal form W-9 and return to Microsoft before the company can send out the second product.

So, if you only receive one product, you’re off the hook, right?  Not so fast.  Just because Microsoft doesn’t report the recipients who receive only one product doesn’t mean that the product is not taxable.  The receipt of merchandise, cash or services may be taxable – even if it’s free (just ask Oprah).  Prizes, awards and other giveaways may be classified as taxable income, according to the IRS, unless all of the following conditions are met:

  1. The recipient was selected without any action on his or her part to enter the contest or proceeding,
  2. The recipient is not required to render substantial future services as a condition to receive the prize or award, and
  3. The prize or award is transferred by the payer to a governmental unit or tax-exempt charitable organization as designated by the recipient.

Since the “winners” of the Microsoft giveaway chose to navigate to the site and chose to participate by watching the webinars (and need not to do so again in the future), they are clearly responsible for reporting the income attributable to the products unless the products are properly transferred to a tax-exempt entity.  Such income is generally includable on a federal form 1040, line 21.

Still confused?  If you have a question about the ramifications of the Microsoft giveaway or other giveaways, consult with your tax professional.