The phone is on sale, and you are paying it back with a service contract.
If you buy something on sale do you pay taxes on the full retail price or the sale price
It's not really on sale. The carriers found a loop-hole to charge you for the phone, but make it look like you were paying for something else that is non-taxable (the service contract).
The carriers are charging you more for the service contract than the true cost (plus) profit. It's basically 'cost of contract'+'profit on service contract'+'extra profit that just happens to cover their cost of the phone'. This allows them to sell you the phone at a "loss", but to then recover their loss by using the 'extra profit' they build into the service contract payments.
The people who get really robbed are the ones who just buy the service contract without getting a phone, since they are paying for a phone they don't receive.
All that state is doing is closing that loop-hole.