Posted by:Robert Bliss, Director of Communication, Department of Revenue
DOR has received several inquiries lately from buyers of new I-Phones asking why the sales tax charged on the price of the phone reflected a substantially higher purchase price than the actual price paid.
For example, a buyer paid $300 for the phone but was charged sales tax as if the phone's real price was $699. How can this be is not an unreasonable question.
Welcome to the world of bundled and unbundled cell phone transactions. Time for a little deconstruction.
The underlying issue here is that some cell phone companies bundle the cost of the new phone with a service contract. This is called a bundled transaction in which real cost of the phone is in effect subsidized by the purchase of the service contract. At the dawn of the era of cell phones, DOR in 1993 issued Directive 93-9 which basically states that in a bundled transaction, the real price of the phone for purpose of calculating sales tax is the price that would have been paid for the same phone in an unbundled sale without a service contract.
More recently, DOR's resident expert on this subject phrased it this way: "In simplest terms, a vendor selling a phone in a transaction where a purchaser is also required to sign a service contract with a telecommunications provider is receiving consideration both from the purchaser and a substantial commission from the telecommunications provider. Because the actual amount of the commission is considered proprietary information between the vendor and the telecom provider, DOR approximates the 'true' consideration for the sale of the phone by requiring tax to be collected on the 'unbundled' advertised price."
By way of further clarification, last year DOR issued in March Letter Ruling 09-2 in response to a request from a cell phone manufacturer. Since letter rulings are issued to individual taxpayers, the name of the company and any information that might identify it is stripped out of the letter ruling, but the discussion is there for all to see. Also, the letter ruling refers to a sales tax of 5 percent, which later last year was increased to 6.25 percent.
So, as in any sales transaction, shop around and compare prices to get the best deal, and to get the lowest possible sales tax.