Plumbing the mysteries of sales tax on (some) cell phones

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.

Comments

[Axel Kehlenbeck]

THe directive states that sales tax is to be collected on the "Wholesale" price of the cell phone to the vendor. This is not what is happening. Stores are advertising the full retail price and charging sales tax on that. You actually state "Unbundled Advertised Price" also in your communication above. So when I go to buy a new cell phone, I should have them look up the wholesale price and only pay sales tax on that, correct?

By the way, this policy is crazy becasue there are so many examples of similar transactions that are NOT subject to these rules.

[Mike]

I own a cellphone store in Mass. We are expecting a sales tax audit soon. We unknowingly were charging tax on the discounted value of the phones instead of the "fair market value" (whatever that is). The DOR is going back 3 years and charging for the uncollected tax as well as interest and penalties. Assesments of $50,000 and up are not unusual. What should be made clear is that the carriers (Verizon At&T etc) are not discounting the phones for nothing. They recoup the money in the form of higher phone bills. If your cellphone was not subsidised your monthly bills would be alot less. But guess what? In Massachusetts yout monthly bill is subject to sales tax. So you are in reality being double taxed. Add also to this insanity that for some unknown reason the carriers are not required to collect sales tax on the full retail value they collect on the subsidised price of the phones. Bigbox retailers (Bestbut Costco RadioShack etc) also don't collect on the fullretail/fair market value price of the phones. Once again in Massachusetts the salt of the earth small businessman is being run out of town.

[Kathryn]

It is strange how they were making people pay sale tax on some cell phones and other ones they weren't. It's not right. So service contract cell phones are more expensive. And the ones without sales tax don't have a contract. It makes sense why they charge more.

[Bill Ahern]

A cleaner solution would be for the state to impose its sales tax on both the phone and the service, however much it added up to. Too many services escape sales taxation, forcing the statutory rate up on goods, and tempting the state to issue rulings like the one at issue here.

[John A. Payne]

I disagree. In the description above, I am buying a phone for $300 and committing to use a service for some period of time. That the cell phone company elects to sell its phone to me at a discount to win my on going business is no different than if a clothing store, grocery, or other retail operation offers coupons or discounts or sale items to lure me back to its store on a regular basis. Putting an additional value of $399 on the phone is a typical DOR effort to overtax consumer with hidden, misguided or convoluted theories that do not stand the scrutiny of common sense. In this case DOR is trying to tax a service contract by claiming it is really part of the phone cost. Massachusetts has highly complicated Open Meeting Laws that require public servants (except the legislators who make the laws) to expose all their deliberations to public scrutiny. Why is DOR not held to the same standard rather than being able to hand down unilateral judgments based on its distorted theories?