Publication 120, Cell Phones and Other Wireless Telecommunication Devices
Final Clearance

July 2014

  • Unbundled and bundled transactions
  • Examples
  • Additional Information

This publication explains how tax applies to sales of cell phones, wireless telecommunication devices, and accessories sold with those devices.

Regulation 1585, Cellular Telephones, Pagers, and Other Wireless Telecommunication Devices, describes how tax applies to sales of cell phones and other wireless communication devices. The type of transaction will determine how tax applies to mobile phones or other wireless devices. Sales of cell phones or other wireless devices are considered either “unbundled” or “bundled” depending on whether the buyer is required to enter into a service contract as a condition of the sale.

Unbundled transaction

You may sell a cell phone without requiring your customer to purchase a service contract. This is an unbundled transaction. Tax applies to the actual gross receipts you receive from your customer when a cell phone is sold in an unbundled transaction, just like a normal sale of tangible personal property.

Bundled transaction

You may require your customer to purchase a service contract of greater than one month (typically one or two years) with a particular service provider in order to purchase a cell phone at a discounted sales price, or even at no charge. This is a bundled transaction, and is generally the most common type of cell phone sale. It does not matter whether the device and the utility service are sold for a single price or are separately itemized on the sales invoice. To apply tax in a bundled transaction, you must know the “unbundled sales price” of the device sold.

Unbundled sales price

The “unbundled sales price” is either:

  • The sales price you typically charge for the specific cell phone when sold without also requiring the purchase of a service contract (an unbundled transaction), or
  • If the above cannot be established based on your records, the fair retail selling price. The cost of the phone plus a markup of 18 percent will be regarded as a fair retail selling price.

How is tax determined?

As stated above, in an unbundled transaction tax applies to the actual gross receipts you receive from your customer when a cell phone is sold.

In a bundled transaction tax is measured by the “unbundled sales price” of the phone, not the discounted selling price that you actually charge to your customer. Even if the phone is free to your customer when they purchase a service contract, sales tax is calculated on the “unbundled sales price.”

Note: Tax calculated on a price greater than what your customer actually pays may be confusing to your customer, but it is correct. And remember, you owe the tax based on the “unbundled sales price” whether or not you collect tax reimbursement from your customer.

Accessories

Sometimes retailers include “free” accessories such as charges, adapters, and phone converters when selling cell phones. Accessories are not discussed in Regulation 1585. However, when an accessory is given to a customer for free when he or she purchases a phone, the accessory is considered to be a premium item under Regulation 1670, subdivision (c). The sale is of both the purchased item and the premium item.

If a customer purchases a phone in a bundled transaction and receives a free accessory, the “unbundled sale price” is still the price at which you have sold the specific cell phone to customers in unbundled transactions, regardless of whether those sales included free accessories. Similarly, if you are using the fair retail selling price to establish the “unbundled sales price,” the markup of 18 percent is applied to the cost of the phone only, not the combined cost of the phone and accessory.

When an accessory is sold with a phone and a separately stated amount is charged for the accessory, then tax applies to the gross receipts received from the customer for the accessory like a normal sale of tangible personal property.

Sales of obsolete wireless devices

When you sell an obsolete wireless device, whether in a bundled or unbundled transaction, the tax is based on the actual selling price of that device. An obsolete wireless device is one that is either functionally or economically obsolete.

Sales of phones for less than 50 percent of cost

If the “unbundled sales price” of a (nonobsolete) phone is less than 50 percent of your cost of the phone, you are considered the consumer of the phone and tax is calculated on the cost of the phone. You may not collect tax from your customer on this type of transaction. You are liable for tax on the cost of the phone to you.

Note: This is a rare exception to the general rules, and retailers often mistakenly believe it applies. Remember, it is the “unbundled sales price” of the phone that must be less than 50 percent of your cost for this rule to apply, not the discounted price charged in a bundled transaction. It is extremely unusual for the “unbundled sales price” of a (nonobsolete) phone to be less than 50 percent of cost.

Are fees for activating the cell phone taxable?

Fees for one-time activation and charges for wireless service are generally not taxable.

Note: This publication summarizes the law and applicable regulations in effect when the publication was written, as noted above. However, changes in the law or in regulations may have occurred since that time. If there is a conflict between the text in this publication and the law, decisions will be based on the law and not on this publication.

Example—bundled transaction
As a seller, you purchase a phone for $100. Your customer, who agrees to activate the phone with a specific service provider for a one-year period, can purchase the phone for $25 (bundled/discounted price). Customers who purchase the same model phone without the activation agreement are charged $110 (“unbundled sales price”). Tax is calculated based on the $110 “unbundled sales price” of the phone. You may collect tax reimbursement from your customer.

Note: It is particularly important to keep records establishing the typical “unbundled sale price” of the phone when the markup is less than 18 percent as shown in the example above.

Example—bundled transaction, accessories included with no separate amount charged
As a seller, you purchase a phone for $100 and a car adapter for $25. Your customer, who agrees to activate the phone with a specific service provider for a one-year period, purchases the phone for $40 (bundled/discounted price) and receives a free car adapter. Customers who purchase the same model phone without the activation agreement are charged $150 (“unbundled sales price”). Tax for the phone, including the free adaptor, is calculated based on the $150 “unbundled sales price” of the phone. You may collect tax reimbursement from your customer.

Example—bundled transaction, “unbundled sales price” determined by fair retail selling price, accessories sold for a separate price
As a seller, you purchase a phone for $100 and a car adapter for $25. During a special promotion, customers can purchase a car adapter for $15 with the purchase of a phone. Your customer, who agrees to activate the phone with a specific service provider for a one-year period, can purchase the phone for $25 (bundled/discounted price) and the adapter for $15. You do not sell this type of phone in unbundled transactions; therefore, the “unbundled sales price” of the phone equals its fair retail selling price. To determine the fair retail selling price you may add an 18 percent markup to the cost of the phone ($100 cost x 118% = $118). Tax on the phone is calculated on the $118 fair retail selling price/“unbundled sales price” of the phone. Tax is separately calculated on the $15 sales price of the adapter. In this transaction, you may collect tax reimbursement from your customer.

Example—phone sold for less than 50 percent of your cost
As a seller, you purchase a cell phone for $100. Your customer, who agrees to activate the phone with a specific service provider, receives the phone for free. Customers who purchase the same model phone without the activation agreement are charged $40 (unbundled sales price). Since the $40 “unbundled sales price” of the phone is less than 50 percent of your cost of the phone ($100 cost x 50%=$50), you owe tax based on your $100 cost of the cell phone. You may not collect tax from your customer on this type of sale.

For additional information on bundled and unbundled sales of cell phones and other wireless telecommunication devices, please contact our Customer Service Center at 1-800-400-7115.

Regulation

1585, Cellular Telephones, Pagers, and Other Wireless Telecommunication Devices