DOR has just issued Directive 11-2 on the subject of the sales/use taxation of cellular telephones in bundled transactions. The new Directive revises previously issued rules on these transactions.
Since Directive 93-9 issued in 1993, DOR has said that in a bundled transaction (involving both the purchase of a cell phone and a service contract) in which the real cost of the phone is subsidized by the service contract, the price of the phone for the purpose of calculating sales tax is the price that would have been paid for the same phone in an unbundled sale without a service contract.
Then, in Directive 94-2 issued in 1994, DOR applied a different analysis in the case of phones provided by a telecommunications carrier to a customer at no additional charge or for nominal consideration in connection with the sale of telecommunication services. DD 94-2 provided that when property such as the cell phone is transferred by a vendor to a customer for no additional consideration, or for nominal consideration, or for an amount substantially below cost, the property constitutes a promotional item for sales and use tax purposes, and the vendor is considered its consumer and must pay tax on the promotional item, less any sales tax paid by the customer.
However, starting July 1, 2011, D 11-2 announces rules amended in part because in the ensuing years since D 93-9 business models have changed. It may not be readily apparent to the retail customer who actually owns the cell phone store where they are making a purchase and which of the existing salestax rules would apply.
The new Directive makes it clear that the tax must be calculated on the higher of the amount actually paid by the retail customer or the wholesale cost of the phone or other wireless communication device.
But it also provides — and this is new — that the vendor responsible for collecting and remitting the sales tax now has a choice. In situations where the wholesale cost of the phone or other device is used for calculating the tax (because it is higher than the amount paid by the customer), the seller may collect and remit tax from the customer on the wholesale cost. Alternatively, the vendor may elect to assume a portion of the tax by collecting only on the lesser amount actually paid by the customer, in which case the vendor must also remit tax on the difference between that lesser amount and the wholesale cost.
So effective July 1, regardless of the identity of the vendor or its relationship to a telecommunications carrier, DOR will require tax to be paid on an amount higher than that paid by the retailer customer only in situations where a cellular phone or other wireless device is sold at an amount less than the wholesale cost to the vendor. In that situation, the vendor of a cellular phone or other wireless device is responsible for remission of tax on the wholesale cost. The seller may collect part or all of that tax from the retail customer.