California: Proposed Bill to Reduce Cell Phone Sales Tax
- Feb 29, 2012 | Will Frei
From a California consumer's point of view, it can seem like black magic: the cell phone you purchase at a discounted price can seem to get charged with a sales tax rate of 100%. Take Jon Vennarucci, as reported by ABC7 news, he bought an iPhone for $49 dollars and paid around $50 in sales tax.
Vennarucci can't figure it out, and according to Senator Joe Dutton, California cell phone tax law shouldn't be this mysterious, so he proposed Senate Bill 1086 (SB1086) to clear things up.
To understand Dutton's bill, we will begin by demystifying the magic of California cell phone taxability. California tax law distinguishes between "unbundled transactions" and "bundled transactions." A bundled transaction refers to a sale where the retailer requires the consumer to purchase a phone and service agreement as a package. An unbundled transaction refers to a sale of a single item, such as a cell phone.
Currently, sales tax is always charged on the "unbundled price" of cellular devices. Ergo, if the phone is only on sale because it is part of the bundle, the retailer should still charge sales tax on the non-sale, unbundled price. [Activation fees, however, are not taxable].
A bulletin from the California Board of Equalization explaining cell phone taxability offers the following 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).
A spokesperson for the Board of Equalization told ABC7 that this tax rule is "based on the premise that service contracts are taxable." However, Dutton believes this is overly-complicated and unfair, adding, "There's a lot of goofy things with the way California does things."
Dutton's bill aims to change the "goofiness" by applying sales tax to the "bundled price" of cell phones, whether or not they would be more expensive unbundled. In that case, Excellent Cell Phones would charge sales tax on the discounted price of $29.99, making the sales tax $2.47, instead of $14.85 (assuming a sales tax rate of 8.5%).
According to ABC7, Dutton's bill would save consumers "...an estimated $82 million per year," which could be good Juju for people like Jon Vennarucci.