Cell Phone Sales Tax

Ever bought a new cell phone and been charged a ridiculous amount of sales tax?  It’s a tax loophole known as “bundling.”  Since your free or heavily discounted phone probably required you to enter into another service contract, the government thinks they’re entitled to collect sales tax as if you paid the full retail price.

Here’s their argument: You are paying full retail price, it’s just spread out over the course of your contract.

Here are the flaws with this set-up:

  • Knowing that no one pays “full price” for their phones, phone companies make their MSRP’s incredibly inflated, to make their discounted price look like a better deal.  Even the most basic phone will carry an “unsubsidized” price of $150 or more, which would never hold on the market.
  • If phone manufactures could command higher prices without relying on contract “subsidies,” they would.  Since they have to bring prices down to reasonable levels to move product, the actual transaction price — by definition — should be what the sales tax is based off.
  • Think about buying a new car with factory incentives.  If the manufacturer offers $5000 cash back on a $30,000 car, you only pay sales tax on the actual price of $25,000.  The $30,000 was just a number, irrelevant to the transaction value and irrelevant to the sales tax.  Except in cell phones.
  • With bundling, you get taxed twice.  The iPhone is a good example.  It is advertised everywhere for $199, but in tiny gray print at the bottom of the Apple website it says the unbundled price is $599.  According the government, when you buy the $199 iPhone with 2 year service plan, you’re really paying $599 and just spreading it out.  By their logic, the other $400 is included in the $30/month required data plan, which over a 2-year term is $16.67/month.  Only they’ll charge you the tax on the full $599 price up front, and then they’ll charge you tax on the $16.67  every month, even though you already paid it.  Double dipping?
  • Even if you insist on paying full price for the phone, the data plan still costs the same.  Shouldn’t you get a discount on your service, since your purchase no longer needs to be “subsidized?”
  • Over the course of 2 years of iPhone service, the customer with the $199 subsidized phone and a contract will pay $400 less than the customer with the $599 unsubsidized phone and no contract.  Which means no one pays the full price.  Which means $199 is the “real” price.  Which means customers are getting scammed out of whatever the sales tax is on $400 every time they buy an iPhone.

Seems kinda shady.  I’m trying to think of other examples where you have to pay sales tax on some trumped up value but I’m drawing a blank.

7 thoughts on “Cell Phone Sales Tax

  1. Pingback: Taxes and eCommerce | Download Zone
  2. I have a draft in my WordPress setup right now talking about how 2-year contract prices in the long run are a giant ripoff. I am buying my next phone on the full, unsubsidized price and skipping the whole contract deal all together.

    • But is the service plan price cheaper without a contract? If you pay full price for the phone, and still have to pay full price for the service, what’s the point? (Other than the freedom to walk away…)

  3. T-mobile actually has cheaper service plans for unsubsidized phones. Over two years, it’s actually cheaper to buy the phone full price and pay something like $30-40 less per month.

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