By Colin A. Young
STATE HOUSE NEWS SERVICE
STATE HOUSE — Unlike other goods, the tax savings on cell phone sales in Massachusetts this weekend will be greater than the 6.25 percent tax holiday markdown on most other products.
Due to what the Department of Revenue once called in a blog post a “rather arcane, even for tax law, body of regulation,” some cell phone buyers have paid more than they expected in state sales taxes since 1993.
Take, for example, a shopper who purchases a new cell phone from a service provider and enters into a service contract with that same provider. The device may carry a wholesale price of $600, but by entering into a service contract, the consumer is charged only $250 for the phone.
The sales tax, however, is calculated based on the wholesale price of the phone, rather than the price the consumer actually pays for the device. So even if the consumer pays $250 for the phone, the amount of sales tax owed for that transaction is $37.50 — or 6.25 percent of the $600 wholesale price — rather than $15.63.
But on Aug. 15 and Aug. 16, the state’s sales tax will be waived on most purchases less than $2,500. So the shopper in the example above could save $37.50 instead of just $15.63 on the purchase.
Though the phone itself would be exempt from the state’s sales tax, the actual cell service would still be subject to state sales and use taxes, according to the Department of Revenue.
“Cell phones are tax exempt on the holiday, but only to the extent of the price of the phone. Services under a contract would not be eligible,” said Bill Rennie, vice president of Retailers Association of Massachusetts. “It’s tangible personal property that qualifies for the holiday, so the phone itself is eligible. Questions come up when buying it with a contract.”
At least five bills have been filed this session to apply the sales tax only to the price paid by the consumer at the point of sale. The Joint Committee on Revenue voted to recommend a bill (H 2517) filed by Rep. Denise Garlick (D-Needham) to allow for the sales tax to be imposed on the price of bundled cell phone transactions instead of the market value of the phone. The bill is now before the House Ways and Means Committee.
“It’s a common sense thing for the consumer. When you buy a retail product, you believe you’re going to pay sales tax on the price you pay for the product,” Rep. Tackey Chan, who co-sponsored Garlick’s bill, said. “If I buy something at a 50 percent discount, I pay the sales tax on the discounted price, not on the full price before the sale.”
In 1993, as the cell phone industry was getting off the ground, DOR issued a directive ruling that in the case of bundled transactions — those in which the consumer pays a reduced price for the phone when entering into a service contract — the sales tax must be paid on the price of the phone had it not been bundled with, and subsidized by, a service contract.
After making a few tweaks to the regulation in 1994, it was left largely the same until 2011, when DOR issued a new directive clarifying that sales tax must be paid on “the higher of the amount paid by the retail customer or the wholesale cost of the phone.”
The 2011 directive also gave retailers the option of collecting from consumers the sales tax rate on the lower of the prices, and paying the difference themselves when remitting sales tax to the state.
Rep. Jeffrey Roy said he views this as “a fairness issue” and signed onto Garlick’s bill after he bought a phone himself and noticed he was charged a tax more than 6.25 percent of the price he paid.
“I was quite surprised to see that,” the Franklin Democrat said. “I did my homework and saw where the issue had arisen and made a few more inquiries and saw legislation was filed last year on the same topic and knew it would come around again in January.”
The House, during budget deliberations this spring, rejected an amendment offered by Rep. Jay Barrows to make the change in the proposed fiscal 2016 budget. The Revenue Committee advanced similar legislation in the 2013-2014 session, but the legislation did not move past the House Ways and Means Committee.