Must pay sales tax on full price of phone in MA.

[Shrink]

No fair. Buy the phone for $199, must pay sales tax on $650.

Just thought those of you who don't have this situation might enjoy feeling good about where you live.


Phone tax surprises many at register

Sale price doesn’t factor in Mass.

By Michael B. Farrell | GLOBE STAFF JANUARY 12, 2012

When Shari Worthington upgraded to an iPhone 4S, she expected to pay more for the latest technology from Apple. But the hefty sales tax tacked on to her purchase came as a surprise.


“Why am I paying $40 tax on a $149 phone?’’ Worthington, a Worcester advertising executive, said she asked the Verizon Wireless sales clerk in Shrewsbury.

The answer: Because state tax regulations treat cellphones differently than other consumer products.

In Massachusetts, a phone that is deeply discounted when it’s tied to a cellular service contract is supposed to be taxed at the product’s actual value, which is typically a lot higher. And as the list price of some phones has soared to as high as $850, more people are noticing, and complaining about, the added cost.

State lawmakers have introduced bills to eliminate the policy, and the Retailers Association of Massachusetts is calling for cellphone buyers to be taxed on what they are charged at the register.

Only Massachusetts and Rhode Island base cellphone sales tax on the higher price of the phone.


“In reality, people get these phones tied into a contract, and that’s the price of the phone,’’ said Bill Rennie, vice president of the retail association. “The easiest thing to do is to treat these transactions like any other item.’’

In Worthington’s case, she was charged the state’s 6.25 percent sales tax on her iPhone’s actual value, $650. “That just drove me absolutely nuts,’’ she said. “If I go in to buy a washing machine that’s on sale, I don’t have to pay sales tax on the full price.’’

The state issued its first policy on taxing cellphone sales in 1993. The thinking then was that since phones were essentially being treated as giveaways by companies to promote lucrative long-term service contracts, they were undertaxed.

Robert Bliss, the Revenue Department’s director of communications, compared a discounted cellphone to a used car that is sold for $1. The buyer, he said, would still have to pay sales tax based on the vehicle’s real value, not the bargain basement price.

State policies vary widely when it comes to cellphone taxes. But only Massachusetts and Rhode Island base cellphone sales tax on the higher price of the phone, not on the lower bundled cost, and tax wireless service throughout the contract, according to an analysis from KSE Partners, a Montpelier consulting firm that specializes in government affairs.

Last spring, the Massachusetts Department of Revenue clarified the cellphone tax rule after it found many wireless phone sellers - from major carriers to small independent stores - were not collecting full-price sales taxes, as required. The state does not calculate how much money it collects through the tax, Bliss said, but he estimated it totals millions of dollars annually.

“It’s not a new tax. It’s not some fresh revenue gambit,’’ he said of the directive. “It’s just trying to refine existing policy.’’

That notice came too late for Tim Blakeman, who owns Wireless Zone stores in Plymouth and Kingston. After an audit two years ago, the state ordered him to pay $23,000 in back taxes on discounted phones he had sold. Blakeman said he had to borrow money from relatives and close a third store in Buzzards Bay to pay. Nobody had told him about the cellphone sales tax, he said.

“If I had known, that’s what I would have been doing from the beginning,’’ Blakeman said.

He now collects the higher tax, but his customers are not happy.

“We’ve actually been yelled and screamed at and they think we’re trying to rip them off,’’ Blakeman said.

As part of its recent clarification of the 1993 regulations, the state told wireless sellers they can cover some of the sales tax that would otherwise be paid by customers, Bliss said.

Sprint does so, charging tax based on the price consumers pay for phones, not on what it pays the manufacturer, said John Taylor, a Sprint spokesman. AT&T, T-Mobile, and Verizon Wireless charge their customers the entire sales tax.

Mike Murphy, a Verizon Wireless spokesman, said the Massachusetts tax code puts retailers at a distinct disadvantage when they are trying to compete with those in nearby states.

“Verizon Wireless believes a ‘sales tax’ should apply to the sale price, as required in 48 states,’’ he said in a statement.

Republican state representatives Daniel Webster, of Pembroke, and Jay Barrows, of Mansfield, have separately introduced bills to treat the cellphone sales as any other consumer transaction.

But Scott Mackey, a tax analyst at KSE Partners, said the state might be reluctant to give up the tax, especially as the prices of smartphones climb and budgets remain stressed.

“With the iPhone,’’ he said, “now we are talking about a serious amount of money.’’

Michael B. Farrell can be reached at michael.farrell@globe.com.

[rdowns]

Old news. Pops up every time a new iPhone is released. CA and RI (IIRC) also charge tax on the full retail price.

[snberk103]

Are they also charging the same sales tax on the contract? If so, wouldn't that be charging the tax twice? In essence with a contract you are still paying the full price for phone, it's just rolled up as part of the monthly service fees. If you are paying a sales tax on the monthly fees, then you are paying sales tax on the full price... it is just spread out over the contract.

[rdowns]

Originally Posted by snberk103

Are they also charging the same sales tax on the contract? If so, wouldn't that be charging the tax twice? In essence with a contract you are still paying the full price for phone, it's just rolled up as part of the monthly service fees. If you are paying a sales tax on the monthly fees, then you are paying sales tax on the full price... it is just spread out over the contract.

No, one is tax on the sale of the device and the other is tax on a service provided.

[snberk103]

Originally Posted by rdowns

No, one is tax on the sale of the device and the other is tax on a service provided.

Same rate? Or two different rates?

I don't know why I care, actually .... a spot of insomnia, I'm up way too early idly posting to threads I that don't affect me. sigh. Never mind...

[Plutonius]

Just buy it in NH .

[rdowns]

Originally Posted by snberk103

Same rate? Or two different rates?

I don't know why I care, actually .... a spot of insomnia, I'm up way too early idly posting to threads I that don't affect me. sigh. Never mind...

Depends on the state. Sales taxes are different all over the US.

[Shrink]

Originally Posted by rdowns

No, one is tax on the sale of the device and the other is tax on a service provided.

This^^^

First you get nailed for 6.25% sales tax on the full $650 price of the phone (for which I paid $199 with a contract), and then the monthly tax on the carrier service.

[Votekinky06]

They have to make up for lost tax revenue on online purchases.

[Consultant]

Originally Posted by rdowns

Old news. Pops up every time a new iPhone is released. CA and RI (IIRC) also charge tax on the full retail price.

Exactly. Just about everyone have to pay that in the US.

It's just that people might not have noticed when it was a cheap dumb phone.

[CalBoy]

Originally Posted by rdowns

Old news. Pops up every time a new iPhone is released. CA and RI (IIRC) also charge tax on the full retail price.

CA does charge full sales tax on the pre-rebate price of a phone, so the iPhone is taxed on $500/600, but a phone that started at $75 and was cut to $50 during a sale would be taxed at $50.

Massachusetts is doing it pretty backwards, because almost every phone starts in the hundreds of dollars and goes on sale repeatedly over its life. It's collecting taxes on things people didn't really pay for.

[thatoneguy82]

Yup. As everyone has said already, California charges for the full price of the phone and it doesn't matter if it will be discounted. I know it's overestimating but, I just add 10% of the price for whichever I phone I will get. I live in LA County, our taxes went up then went down. It's either 8.5% or 8.75% - I have no idea. Oh well, that's life.

[jeremyshaw]

^^ As those two have said. Cali charges full price tax, reguardless of carrier discounts. Not that it really matters... since there is nothing you can do about it (well... technically by Cali State law, lol).

[mchak4]

I have been told by employees at several different Radio Shack stores in Mass that if I buy an iPhone upgrade from them, they only charge me the sales tax on the $199 or whatever the upgrade price is. The apple store charges sales tax on the full retail price, as noted elsewhere.

How can Radio Shack do this if nobody else can?

[wordoflife]

Meh, you can't do anything about it but it's dumb to me.

You buy the phone for $199, so you should pay tax on $199.
Since the contract you sign is to pay off the phone over 24 months, tax should be (is already?) included in there.

[snberk103]

Originally Posted by mchak4

I have been told by employees at several different Radio Shack stores in Mass that if I buy an iPhone upgrade from them, they only charge me the sales tax on the $199 or whatever the upgrade price is. The apple store charges sales tax on the full retail price, as noted elsewhere.

How can Radio Shack do this if nobody else can?

They may still be remitting the full sales tax to the state, and absorbing the cost of tax not paid by the customer. It's a good way to attract customers. Most people attach more emotional importance to saving their sales tax than the actual dollars, imho. That is to say... if a company advertised a 6% off sale, or advertised a "save the tax" sale (if sales tax was 6%) more people would take up the "save the sales tax sale" because it 'feels' better. I would even venture that they would still go for the "save the sales tax sale" even if it offered a smaller savings. Not paying sales tax is a powerful motive.

[Anonymous Freak]

Which makes me happy to live in Oregon - the land of no sales tax.