Taxation without negotiation for Calif. smartphone buyers

Cell phone buyers in California pay unfair tax on devices bought under contract.

Rafe Needleman Former Editor at Large
Rafe Needleman reviews mobile apps and products for fun, and picks startups apart when he gets bored. He has evaluated thousands of new companies, most of which have since gone out of business.
Rafe Needleman
3 min read

This is an old issue, but it's been crawling deeper under my skin as more people buy smartphones: here in California, and only in California, we pay sales tax on the "full price" of the mobile devices. That full price is not negotiable. It's whatever the wireless carrier says it is.

That's a lot of sales tax.

For example, if you buy a Blackberry 9700 under two-year contract from AT&T for $199, you pay the same tax as you would if you bought the device without a contract at $449. At my county's sales tax rate of 9.5 percent (among the highest in California), that's $42.75 of tax, on a $200 purchase. That's a sales tax of more than 21 percent. Even on a "free" phone, like the LG Neon, a $250 "value," you pay sales tax, in this case $21.85.

Californians have been living under this tax ruling, Regulation 1585 (PDF link), since 1999. But as I said, it's especially galling now to smartphone buyers, where the retail price of the phone can high enough to make the sales tax on it really hurt. Sales tax on a $299 iPhone, for example, is $66.41, since the value of the device is said to be $699. Sales taxes in California have gone up since 1999, too.

This is the only product category where sales tax is based on an arbitrary retail value set by the seller. With everything else you buy, you pay tax on the purchase price after discounts and negotiation, not before. If I go into a store and see a rug with a $1,000 tag on it, and I buy it from the merchant for $200, I'll pay tax on the $200, not the arbitrary $1,000 price that no one actually pays. And that is, in fact, the way the rest of the California tax code is written, where it specifies that sales taxes shall be levied on "gross receipts."

Mike Altschul, general counsel for the CTIA, a mobile phone industry board, points out that that the confusion and animosity the tax creates hurt consumer/vendor relations. I can attest to that. The first time I was hit with this tax on a subsidized Razr phone, I was sure the salesperson was trying to scam me.

But Anita Gore, of the California's Board or Equalization, which administers sales tax here, explained to me that the law is designed to make sure that the state receives its fair share of sales taxes even when wireless companies "bundle" goods (phones) and services (wireless plans) together, with the majority of the consumer's expense being earmarked towards services, which are not taxable in the same way.

Regardless, I remain incensed that consumers have to pay sales taxes on phones at an unfair value. There's hardly any market pressure on these prices, since almost nobody pays them. Thus, carriers and vendors can price phones arbitrarily, and consumers end up spending more in taxes than they should, without any opportunity to negotiate the expense down to a real market price.

I realize that, especially in today's economic climate, I'm not going to get California to change any law that's bringing money into its depleted coffers. So here's something else that could help: Mobile carriers should clearly state in their ads the value that you will be paying sales tax on. Or, failing that, when a user is going through an online retail site to get a phone, it'd be nice to see the sales tax fee displayed sometime before the final checkout screen.

California's unusual sales tax on mobile devices surprises buyers in a very bad way, and it makes people angry at the wireless carriers and resellers--businesses already dealing with more customer relations issues than they're able to effectively handle. I'm writing this column to help Californians remember, when we buy our phones and pay 20 percent or more in sales tax, where our anger over that should be directed.