Cell Phones and Other Wireless Telecommunication Devices
(Publication 120)

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 determines how tax applies to cell phones or other wireless devices. We consider sales of cell phones or other wireless devices 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 more 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 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 that cell phone when it is 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. We consider the cell phone's cost plus an 18-percent markup to be a fair retail selling price.

How is tax determined?

Accessories

Sometimes retailers include "free" accessories such as chargers and adapters when selling cell phones. Accessories are not discussed in Regulation 1585. However, when a retailer gives a free accessory to a customer with the purchase of a cell phone, we consider the accessory 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 cell phone in a bundled transaction and receives a free accessory, the unbundled sales price is still the price at which you have sold that specific cell phone to other 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, you should apply the markup of 18 percent to the cost of the cell phone only, not to the combined cost of the cell phone and accessory.

When you sell an accessory with a cell phone and you charge a separately stated amount for the accessory, tax applies to the gross receipts you receive from the customer for the accessory, just 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 cell phones for less than 50 percent of cost

If the unbundled sales price of a (non-obsolete) cell phone is less than 50 percent of your cost of the cell phone, we consider you the consumer of the cell phone. Therefore, tax is calculated on the cost of the cell phone. You may not collect tax from your customer on this type of transaction. You owe tax on the cost of the cell phone to you.

Please 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 cell 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 (non-obsolete) cell phone to be less than 50 percent of cost.

Are fees for activating the cell phone taxable?

Local charges and 911 & 988 surcharges

Certain small sellers of prepaid mobile telephony services (MTS) are not required to collect the local charges from their customers. However, these sellers are still required to collect the 911 and 988 surcharges on their prepaid MTS sales to consumers even when their sales of prepaid MTS are below the threshold requiring them to collect local charges. A small seller of prepaid MTS is a seller (other than a telecommunications service supplier) that sold less than $15,000 in prepaid MTS sales during the previous calendar year. The annual sales threshold is based on the total of all retail locations operated by the seller and is subject to annual adjustment. However, because consumers are still responsible for the local charges, as a courtesy to their customers, small sellers may voluntarily continue to charge and collect the local charges and report the amounts to us.

For more information about this program, please read our Tax Guide for Sellers of Prepaid Mobile Telephony Services (MTS) and Telecommunication Service Suppliers.