Ask Maggie: On ETF taxes and unsubsidized phone fees

Also in this week's wireless and broadband advice column, why phones are tied to their networks.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
9 min read

Breaking up is hard to do, but when you're slapped with an early termination fee, the sting hurts even more. Then tack on a sales tax, and who wouldn't be crying in their beer?

Ask Maggie

In this week's Ask Maggie column, I tackle a tough question about being charged a sales tax on top of an early termination fee for canceling a wireless service early. I also tell a reader about a U.S. carrier that cuts customers a break on their monthly bills when they bring their own phone. And finally, I explain the likelihood of whether or not consumers will ever be able to use the phone of their choice on any carrier network.

Ask Maggie is a weekly advice column about technology. I am always looking for more questions, so if you've been waiting to ask something, now's the time to ask it. Please send an e-mail to me at maggie dot reardon at cbs dot com. And please put "Ask Maggie" in the subject header.

Paying the taxman for an early termination fee?

Hello Maggie,
My daughter had a two-year contract for a broadband card from Verizon Wireless. Due to a change of jobs, she had to cancel the broadband card early. And she paid an early termination fee. We both were very surprised to see a sales tax on the fees, as well as some surcharges.

Could you please let us know if it is legal to charge these particular sales tax/surcharges on ETF?

This occurred in July 2010 in New York City.


Dear Uma,
I have to admit getting charged sales tax on an early termination fee seems unfair. But I'm going to be honest with you, tax law is a tricky thing. I'm not an expert in this. And to really find the answer to your specific situation, you would need to investigate your local tax code and possibly consult with a tax attorney.

Still, I contacted Michael Aschenbrener, a class action attorney at the law firm Edelson McGuire in Chicago. His firm was involved in many of the lawsuits against wireless carriers for imposing early termination fees. He is not a tax attorney, but he has been following the early termination issue closely.

Here is what he had to say: First, whether or not your ETF is subject to a sales tax depends on a couple of things. First, if the contract you signed with your carrier specifies the ETF was a penalty, then you likely should not be charged a sales tax. Penalties are typically not taxable. But if your contract stipulates that the ETF is part of your service, then it could be taxable. Services are typically taxable.

The next thing you have to find out is what your local tax code stipulates. Sales tax is usually imposed by the state, so you should check out the tax code to see what it says about these services being taxable.

Once you determine whether or not, according to your local state laws, this should be taxed, Aschenbrener suggests challenging the customer service person from your carrier and asking him or her to explain how this charge is a taxable occurrence.

The rep may not know, but Aschenbrener said it's a fair question to ask. Assuming the sales representative doesn't know the answer, he suggests asking for a manager or someone even more senior who can explain the legitimacy of the charge.

Aschenbrener said that it's important to question this and to make sure that someone can explain why this tax has been applied to your bill because in some cases the carrier may be applying a fee across the entire customer base when it does not actually apply to every customer based on where they live.

At this point, the rep may just waive the fee and you can go on your way. If the rep doesn't waive the fee and can't provide you with a satisfactory answer as to why you're being charged the tax and you are certain that it should not apply to you, then Aschenbrenner suggests contacting a class action attorney. He said the tax on a $200 fee is not enough to pursue for one person, but even if a fraction of the more than 300 million cell phone users in the U.S. have experienced the same thing, it could be a significant case.

Good luck!

Avoiding subsidies to get a break on your monthly bill

Dear Maggie,
I have a couple of questions about subsidized phones. Carriers provide no-cost or reduced cost phones as an incentive to sign a two-year contract. As an example, I believe the iPhone is $600 to $700 and the customer can purchase it for $200 to $300 by signing a two-year contract.

So the carrier subsidizes customers for about $500. They amortize the subsidy over the length of the contract. So part of your monthly charge is for the handset.

(a) Why is it that at the end of your contract, the monthly charge is not reduced since you have fully paid for the handset, plus depreciation? Seems to me that this is additional profit.

(b) Since the contract includes a subsidy, why can't the carrier offer a reduced rate if I supply my own handset--as I did by purchasing a Nexus One directly from Google?

Dear Jim,
You make some very good arguments, and you bring up some interesting questions.

You are correct that wireless operators figure the cost of your subsidized phone into your monthly service fee. Over the life of your two-year service contract, you are paying off the phone. This reasoning is why carriers justify charging you an early termination fee if you cancel your service early. But when your contract ends and the phone is paid off, the service fee remains the same every month.

So you are correct to state that once you have paid off the phone, carriers are pocketing the excess service fees as profits. While it might seem unfair to a consumer, wireless operators are businesses. And businesses like profits.

A wireless operator would argue that for the first year or two years of your contract, it is making less profit or even operating at a loss, because it has footed the upfront cost of your phone and the marketing costs of acquiring you as a customer. Once you enter the third year of your contract, the carrier can finally start making money, or so they say.

Now, for the second part of your question. Since carriers factor the cost of the phone subsidy into the price of the monthly service, why can't customers who bring their own phones or purchase phones without a subsidy pay a reduced service cost?

Again it comes down to profitability. If a carrier doesn't have to subsidize your phone, they can make more money from you. And what business wouldn't want that?

Of course, this is a completely unsatisfying answer for a consumer. So most wireless operators would justify the monthly charges by saying that regardless of whether you are buying a subsidized phone or not, they must still spend money on marketing to win your business. This also factors into most companies' early termination fees and monthly service fees. So even if you bring your own phone, this is still a cost to the business. But your point is valid, and it seems like you should be able to get at least a small break for not taking the subsidized phone.

There is at least one wireless operator in the U.S. that offers a discount on your monthly service if you don't buy a subsidized phone. T-Mobile USA offers a plan it calls Even More Plus, which does not require an annual contract. This service is $10 cheaper a month than the Even More service that offers a two-year contract and a subsidized phone.

Unlocking wireless forever

Dear Maggie,
I want the best Android available, but because I'm on Sprint I'm limited to what versions come on their network. Why can't I have the phone of my choice on the network of my choice? Why are we restricted in this manner and will this situation ever change?

Dear Elinor,
The good news for you is that one of the best Android phones on the market, the HTC Evo, is on Sprint. So you shouldn't have to settle because you are a Sprint customer if Android is what you fancy.

But I think your real question is more about the principle. Why can't you choose any phone you want, and use it on any network? In many other markets around the world, this is how it works. You buy a phone at full retail price. And then you sign up for a service with a carrier. You aren't locked to any particular carrier. And you are not tied to a contract. If you're dissatisfied with your provider, you switch to a different carrier.

As you know in the U.S. wireless market, that's not the case. One of the reasons you can't simply buy any cell phone and use it on any network is a technical one. Verizon Wireless and Sprint Nextel have built their networks on a technology called CDMA, and AT&T and T-Mobile use GSM.

This is why a Verizon or Sprint phone can't work on an AT&T or T-Mobile network or vice versa. Technically, a CDMA phone designed for Verizon or Sprint should be able to work on each other's network, since Sprint and Verizon each operate in the 1900 MHz and 2100 MHz spectrum bands, but Verizon and Sprint load their own software on the devices and lock them so that the phones cannot be used on each other's networks.

AT&T and T-Mobile USA use GSM, which is a technology used throughout all of Europe and many other parts of the world. GSM phones have SIM cards, which fit into the phone. If a phone is unlocked, the SIM card can be swapped out to get service from another carrier.

AT&T and T-Mobile USA lock phones that they sell to wireless subscribers, but if you call customer service, you should be able to get a code to unlock your phone. Then you should be able to use your AT&T phone on T-Mobile and vice versa. The only exception is the iPhone. AT&T does not provide the unlock code for this phone, but it's easy enough to "jailbreak" the phone. And now that the U.S. Patent Office has ruled that altering an iPhone or any other phone is not illegal, you won't be breaking any laws if you do it. But you will be violating the terms of use, which could void your warranty.

Now for the second part of your question: In the future, will people be able to buy a phone and choose any network they like? From a technology standpoint, it should be getting easier to do this. Verizon Wireless is building a 4G wireless network using a technology called LTE, or Long Term Evolution. AT&T and T-Mobile USA also have plans to use this technology and so do most of the big wireless operators overseas. Sprint Nextel is using Clearwire's 4G network using a technology called WiMax. But even Sprint and Clearwire say they are open to using LTE in the future.

What this means is that once every carrier is using the same wireless technology, it will be much easier for devices to be used on multiple networks. And because these operators are hoping to allow devices other than cell phones, such as Netbooks, digital cameras, gaming devices, and MP3 players, to use these 4G networks, it's likely they will have to be more open in terms of the devices they allow on their networks.

But change is slow. Most of these networks are still in the planning stages. Verizon is the only operator with an LTE network that is supposed to launch this year. So it will take some time for operators to migrate to the new technology. What's more, as the wireless industry gets more competitive, carriers see exclusive deals with handset makers as a key strategy for winning new customers.