California Board of Equalization California Sales Tax
California Board of Equalization has focused on sales tax audit of independent mobile phone vendors. Cell phone vendors must charge for sales tax on the full sales price of a cell phone when purchased at a discounted price, even when the phone offered for free. The application of the full sales tax is the same for pagers and other wireless telecommunication devices sold through a “bundled transaction.”
When will sales tax be charged on the full sales price?
If you sell a cell phone at a discount and also require the end consumer to purchase a service contract, sales tax on the full sales price of the phone, not the discounted price, must be collected from the buyer. Even if the phone is sold for free, tax on what the phone’s sales price would have been without the service contract must be collected.
California Sales Tax Audit Determination
When the sale of a phone is made together with a required service contract, it is called a “bundled” transaction. If a phone is sold by itself, the sale is called an “unbundled” transaction.
Most cell phones are sold at a discounted sales price, or given away at no cost. However, in order to receive the discount or free cell phone, the customer is required to purchase a service contract of greater than one month (typically one or two years) with a particular service provider. California Board of Equalization Sales Tax Regulation 1585, Cellular Telephones, Pagers, and Other Wireless Telecommunication Devices, describes these types of sales as bundled transactions.
A retailer may sell a cell phone without the requirement that a customer purchase a service contract. These sales are unbundled transactions and the actual sales price charged by the retailer to the customer is referred to in Regulation 1585 as the “unbundled sales price.”
How tax applies When the sale is a bundled transaction, the retailer must report and pay tax based on the unbundled sales price of the cell phone whether or not the price of the phone is itemized on the invoice. The retailer is allowed to collect tax from the customer based on the unbundled sales price, and then pay that amount to the state. The unbundled sales price is either • The sales price the retailer typically charges for the cell phone without requiring the purchase of a service contract, or • The fair retail selling price (if the above cannot be established by the seller’s records).
Example Excellent Cell Phones advertises a cell phone for $29.99 but requires you to activate the phone with a specific service provider for a two-year contract period. The retailer typically sells this phone for $179.99 without a service contract. The retailer is responsible for reporting and paying sales tax based on the unbundled sales price of $179.99 (tax of $14.85 assuming an 8.25 % tax rate). Even if Excellent Cell Phones offers the same cell phone for free, the tax would be the same, $14.85, as it is based on the $179.99 unbundled sales price. When the sale is an unbundled transaction, the retailer must report and pay tax based on the actual sales price charged to the customer.
Are fees for activating the cell phone taxable?
Fees for one-time activation and charges for wireless service are generally not taxable.