On discounted cellphones, why is sales tax full price?

Garden Grove resident Ken Licht is in the market for a new cellphone. But he can’t get a good explanation of why he’ll have to pay sales tax on the full price of a handset — even though most phones are heavily discounted by wireless companies or given away free.

It’s a question I get asked a lot. And with nearly 300 million cellphones now in use in the United States — meaning that 93% of the population is sporting a mobile device, according to the wireless industry — it’s probably not a bad idea to explain what’s going on.

First of all, Licht made the same observation that probably all cellphone customers have made at one time or another.

“If you go to a store and buy a jacket that’s marked down from $500 to $200,” he told me, “you pay taxes on the $200.”

Ditto when you buy a car, or an appliance, or virtually any other item.

“Why are cellphones different?” Licht, 62, wanted to know.

The trick is the service plan.

The California State Board of Equalization — the state tax folk — distinguishes between “bundled” and “unbundled” sales prices. Bundled means a phone comes with a service plan, usually lasting a year or two. Unbundled means the phone has been sold au naturel, without an accompanying plan.

According to the tax board’s Regulation 1585, “Tax applies to the gross receipts from the retail sale of a wireless telecommunication device sold in a bundled transaction, measured by the unbundled sales price of that device.”

In other words, even if you buy a discounted cellphone as part of a bundled package, you still have to pay the unbundled tax rate.

“The retailer of the wireless telecommunication device is required to report and pay tax measured by the unbundled sale price of the device and may collect tax or tax reimbursement from its customer measured by the unbundled sales price,” the regulation says.

And now you ask: How is that fair?

The retailer likely has obtained the cellphone at a wholesale price and is making it available to customers at a discount, but it’s required to ensure that the state is cut in for sales tax based on the full retail price — an amount that no one in the sales equation has had to pay.

“With cellphones, you get a discounted phone only because you’re buying a service with the phone,” said Anita Gore, a spokeswoman for the Board of Equalization.

“A phone has a value,” she said. “Even if you purchase a plan, the phone still has a value.”

Thus, you’re not paying tax on the price of the phone, whatever that may be. You’re paying tax on the value of the phone.

That’s a fine argument until you look at Section 6006 of the California Revenue and Taxation Code. It defines a sale as “any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.”

Nothing there about value. Section 6006 suggests that a sale is based solely on the price — the “consideration” — paid for a good.

Then there’s Section 6051 of the tax code, which says a sales tax will be imposed on “the gross receipts of any retailer from the sale of all tangible personal property sold at retail.”

Nothing there about value either. Section 6051 says the tax is based on the gross receipts — that is, how much money changes hands — at the time of sale.

And so you ask again: How is that fair?

“Many laws were written years ago, prior to new technologies coming on the market,” Gore said. “At the time the tax code was written, cellphones weren’t even sold.”

Regulation 1585, she said, addresses this by stipulating that sales tax be paid on the full price of the phone, not the discounted price.

The regulation doesn’t trump the law, Gore said. It implements the law. There’s no contradiction.

I don’t know about that.

Section 6006 seems pretty definitive about what constitutes a sale. And Section 6051 seems pretty conclusive when it says the sale tax applies to “all tangible personal property sold at retail,” as opposed to “all tangible personal property except for cellphones, which we’ll treat differently because we’ll make more money that way.”

I’m thinking this is the sort of thing a lawmaker might want to clarify.

“If legislation was crafted by a lawmaker and signed by the governor, we would live within the new law,” Gore allowed.

Any takers in Sacramento?

Drop me a line

If you have a consumer question, you can always reach me by e-mail here at the paper. But now you can also have your question answered on the air during my new segment every weekday morning on KTLA-TV Channel 5. Just e-mail your question to asklaz@ktla.com.

David Lazarus’ column runs Tuesdays and Fridays. Send your tips or feedback to david.lazarus@latimes.com.