New Directive on sales tax for cellphone bundled transactions

DOR has just issued Directive 11-2 on the subject of the sales/use taxation of cellular telephones in bundled transactions. The new Directive revises previously issued rules on these transactions.

Since Directive 93-9 issued in 1993, DOR has said that in a bundled transaction (involving both the purchase of a cell phone and a service contract) in which the real cost of the phone is subsidized by the service contract, the price of the phone for the 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.

Then, in Directive 94-2 issued in 1994, DOR applied a different analysis in the case of phones provided by a telecommunications carrier to a customer at no additional charge or for nominal consideration in connection with the sale of telecommunication services. DD 94-2 provided that when property such as the cell phone is transferred by a vendor to a customer for no additional consideration, or for nominal consideration, or for an amount substantially below cost, the property constitutes a promotional item for sales and use tax purposes, and the vendor is considered its consumer and must pay tax on the promotional item, less any sales tax paid by the customer.

However, starting July 1, 2011, D 11-2 announces rules amended in part because in the ensuing years since D 93-9 business models have changed. It may not be readily apparent to the retail customer who actually owns the cell phone store where they are making a purchase and which of the existing salestax rules would apply.

The new Directive makes it clear that the tax must be calculated on the higher of the amount actually paid by the retail customer or the wholesale cost of the phone or other wireless communication device.

But it also provides -- and this is new -- that the vendor responsible for collecting and remitting the sales tax now has a choice. In situations where the wholesale cost of the phone or other device is used for calculating the tax (because it is higher than the amount paid by the customer), the seller may collect and remit tax from the customer on the wholesale cost. Alternatively, the vendor may elect to assume a portion of the tax by collecting only on the lesser amount actually paid by the customer, in which case the vendor must also remit tax on the difference between that lesser amount and the wholesale cost.

So effective July 1, regardless of the identity of the vendor or its relationship to a telecommunications carrier, DOR will require tax to be paid on an amount higher than that paid by the retailer customer only in situations where a cellular phone or other wireless device is sold at an amount less than the wholesale cost to the vendor. In that situation, the vendor of a cellular phone or other wireless device is responsible for remission of tax on the wholesale cost. The seller may collect part or all of that tax from the retail customer.

You may also want to review a previous DOR blog post on this subject. D 11-2 also contains examples to illustrate the practical application of the new Directive.

 

 

 

 

Comments

[Axel Kehlenbeck]

Mr Bliss

I am also outraged by the policy on cell phone tax. Everyone has gone to charging tax on the retail price of the phones, not wholesale so the government and the consumer are being ripped off. The biggest joke is that the DOR has no knowledge of the wholesale price on the phones, which in effect should be the sales tax paid by the provider. This is FALSE. When the vendor buys the phone wholesale, that transaction is recorded by their tax ID number so that the state can record the amount of sales tax the vendor owes the state. This applies for every business out there. The whole policy is ludicrous, unenforceable, and just another way for the state to increase taxes. Looks like its time for another referendum on the state ballot to repeal this directive. In the meantime the state and the telecommunications vendors reap additional profits.

[Robert Bliss]

Brent, we can't comment on the particulars of audits, but let's just say we cast a wide net in this area.

[Brent Adler]

I assume that the state is auditing Verizon to make sure that they are paying the amount that they collect to the state?

[Robert Bliss]

Maureen,the only way currently to find out is to ask the retailer, or to ask for a supervisor who can supply the information. We are seeing reports that Apple is selling the iPhone to retailers with no discount, meaning that retailers are basing the tax on the full cost of the phone, rather than a lower wholesale price, because they are paying full price themselves.

[Maureen]

I too was justed charged $40.56 tax for a $199.99 iphone upgrade with AT&T. The frustrating part was that no one at AT&T could explain to me why. Had I not found this site, I would still be in the dark. The question is, how do you find out what AT&T pays for an iphone?

[Steve B.]

You keep citing regulations and directives and as you know, those rules do not always comport with the underlying statute or state constitution. Moreover, the rule just might simply be wrong, lacking in common sense, and could create unintended consequences. You also say that the price of the phone is subsidized by the bundled contract. Well aren’t we paying a monthly tax already on that contract? It appears to be double dipping by the DOR. To say that a tax on the service contract and the sale of a phone are apples and oranges is wrong if indeed, as you argue, the price of the phone is “subsidized” by the service contract. In other words, the consideration given for entering a binding 2-year contract has value. I am paying for the price of the phone by agreeing to this long-term contract, and I am being taxed on that contract based on the value of the contract – which is in essence part of the value of the phone!

Another point is the value of the phone to begin with. The consumer has no way of knowing what this cost is. How are we to find the wholesale cost other than to rely on the vendor? Who’s to say what the true value of the device is. I for one would not enter the transaction had I been asked to pay $550 for a phone. The true market value on these devices is not even the so-called “wholesale” price. And Mr. Bliss, please do not insult the public by making the argument that this is a “tax decrease” because we no longer pay tax on the “retail” price of a phone. News flash – Nobody paid retail price to begin with! It is a fictitious and arbitrary price set by a cell phone manufacturer or vendor to entice people to believe they are getting a discount.

As for the “small independent” retailers who are allegedly complaining about this, I say too bad. That is the market place you are playing in, and a “misery loves company” approach to resolving this problem is never a good solution. That problem exists in many sectors such as hardware stores competing with Home Depot, Wal-Mart, etc. It’s called free competition, or it is supposed to be!

This entire taxing scheme lacks in common sense and the public should be outraged. I suspect they will start waking up to this as their service contracts become due, as mine recently did, and was charged a $50 tax on $50 transaction to replace my phone! Someone in this state better read the story of the Goose That Laid the Golden Egg to those charged with administering our government and enacting our laws! They must have missed that day in kindergarten.

[Robert Bliss]

M.C., please send me the name of the retailer so we can get in touch with them. As our Directive states, they are to charge sales tax based on the wholesale cost of the phone, not the higher retail price, if indeed there is a difference between the two

[Robert Bliss]

Pedro, let me offer a few comments on your passionate post. First, it indeed has been reported that some of the most popular phones are being sold to retailers at no discount off the purchase price. Second, your assertion that “government should know the price charged" would, if adopted, lead to government intrusion into private enterprise at the point of sale, which is not everyone's cup of tea. Third, the phone and telecommunications services are apples and oranges when it comes to sales tax. Paying sales tax on those services has nothing to do with paying sales tax on the phone. Do you realize that if Verizon chose to give you the phone at no cost, they would have to pay the sales tax on the cost of the phone? When we suggested to smaller retailers that they be required to pay sales tax on the difference between the amount the customer paid and the cost to the vendor, we were told it would take such a large bite out of profits that they would go out of business.

[M.C.]

Like the previous post, we just got charged tax based on $650 for a phone for which we actually paid $199. This is completely ridiculous. The Department of Revenue directive is not consumer friendly at all no matter what legislators are saying. It was not well publicized regardless of what Mr. Bliss says, and it is simply another way for the state to collect more tax on something and to do it the cowardly way, without a vote that requires a public stand by elected officials.

In addition, the cost to the retailer for this phone was NOT $650. The manager told us that but said that the state required them to base the tax on the higher amount. Although we do not like paying sales tax on items, we understand the need for money to run our government. When it degenerates to this level however, it is completely infuriating.

[Pedro]

We just got charged $650 worth of taxes on a phone we paid $160.

There's no way Verizon or other carriers pay this much, and to say "The Wall Stree Journal published" as a source of knowledge is garbage. The government should KNOW the price being charged. Make the resellers open their books, if the true reason for this is to support small businesses.

The new "wholesale" wording as of July 1 was worthless for us as Verizon refuses to pay the tax difference and pushed that on to us. Again, if the government was really doing its job for consumers, it should FORCE the resellers to pay the difference, not make it an option ("the seller may collect part or all of the tax from the retail consumer.") Then we'll know what the phones are actually worth.

Further, since I'm being taxed based on the fact that my cell phone price is "subsidized" by my service contract, does that mean I no longer have to pay taxes on that contract? Every month I have to pay "Taxes, Government Surcharges and fees." I guess those go away now right?

Protest with your votes people, stop electing these same tax and spend representatives over and over again!

[Y.C]

It's fun of being charge taxes in MA, it makes NH so valuable to MA residents. Which state do you serve, MA or NH?Its even more fun reading suppose-to-be dor's replies below. "not an increase but a decrease" -- are you kidding me? Or MA has swaped the definitions of both words in "beacon hill" dictionary?

[Robert R. Bliss]

Marty, the Wall Street Journal this week published a story reporting that Apple is indeed charging the retailers of its new I-phone $650. This shows Apple's incredible market power right now.

[Marty]

I asked a Rep at Verizon Wireless to prove to me that Verizon paid $640 for an iphone from Apple. He said he's not allowed to do that!! So you won't allow me to pay tax on the lower amount even though you have the option to do so, instead you want me to believe VZW paid $640 for an iphone from Apple then turns around and resells it for $49.00??? Going to NH for my future cell purchase BUT I'm sure a new law will be passed that forces you to buy the phone in the state the number is listed in....MA SUX!!!!!!!

[anthony rindone]

i think this law is carzy. anothre way for mass to screw its people. what the sate should do is tell the cell phone retailers that the cannnot discount the phones anymore and only charge full price, because we are pay tax of the retail price any so it reaally does not matter. this way if the state does that then it can her the cell industry and the state can do into furteher debt than we claim we are in. so now cell customers can by phones on craigslist so we dont pay tax and not give the cell comanies business either. this is a good way to help our state and economy ...dont you think.

[Alan Carr]

This is a tax that has been in places since the early 90's and the DOR has been harrassing the small independant dealers for years while the big box retailers out of state did not need to follow the tax until recently. Hopefully the DOR will be go after all the back tax that the major retailers had not been charging if not then they should rebate all the independent dealers who they have hurt in the past 18 years.

[candace barletta]

Verizon is taking advantage of the consumer they absolutely do not pay the retail price they sell the phone for in the store therefore they should according to this law charge the tax on the wholesale price they paid by not doing that they are pocketing the difference and taking total advantage of the customer.

[Robert Bliss]

Matt, fact is that some car sales have sales tax assessed not on the "sale" price but on the basis of book value. Let's say you want to give your car to a friend or relative and the sale price is listed at $1 dollar or some other token amount. Under state law, the sales tax paid on this private transaction is based on the vehicle's book value. This is the case in private transactions only; car dealers are exempt since the law already requires them to charge sales tax based on the real value of the vehicle. Of course, this allows plenty of room for sales, rebates, etc.

Not to beat a dead horse, but the issue with bundled cell phone transactions revolves around the fact that a cell phone sold without a data package may retail for $500, while the same phone sold with a data package retails for $200. This is not a sale price; the cost of the phone is subsidized by the data plan. DOR has long had regulations on so-called promotional items which make clear that these items are to be taxed based on their real value. This is spelled out in the Massachusetts Code of Regulations (CMR)830 64H.1.4.

[Matt]

Double-dipping... I can't wait till this sort of rule is applied to car sales. Who will we (the public) be looking to for wholesale pricing, KBB, the dealership?!?! Keep bleeding the cow that feeds you and soon the cow will be gone to greener pastures.

[Robert Bliss]

Tara, the new TIR on cell phones effectively reduced the tax base on vendor transactions from the "highest published price" to the higher of what the customer pays or the wholesale cost. In most cases, this changes the tax base from a published retail price to a lower wholesale price. Carrier transactions are unchanged; they (phone company-owned stores) were previously using the wholesale price, but independently-owned cell phone retail stores were using the retail price. It is that discrepancy that cause the retailers to ask us to level the playing field. Bottom line, this was a tax decrease, not an increase.

The Directive was the result of an industry request from independent vendors of cellular phones in Massachusetts (often small businesses, sometimes franchisees) who believed that the prior policy regarding calculation of sales tax on phones and services sold in bundled transactions placed them at a competitive disadvantage to telecommunications carriers selling the same bundle of products and services. Thus, DD 11-2 "levels the playing field" between the retailers and carriers insofar as calculation of tax. Public comments on the working draft supported the change as adopted. If you look at the Introduction in the DD, it gives some further details about the prior policy.

[Tara]

One more thing not to buy in MA!

[Robert Bliss]

Maureen, this new Technical Information Release does nothing to increase the cost of cell phones, and, with its allowance for retailers to base the sales tax on the wholesale rather than retail price, may lower the cost somewhat. The TIR for the first time also gives the retailer the ability to charge sales tax on the bundled price, as long as the retailer pays the balance of the sales tax owed. As for notice, this change was published for nearly three months before it took effect July 1.

[Maureen Turcotte]

It would have been nice if the STATE could have at least let the general public about this change that they slipped in in the middle of the night. When are they going to stop screwing the general public every chance they get!!!!!

[lory]

Is is really any wonder why people go to New Hampshire to buy anything.. THIS STATE is a screw job.. THANKS to all the Fat Cats...