When Shari Worthington upgraded to an iPhone 4S, she expected to pay more for the latest technology from Apple. But the hefty sales tax tacked on to her purchase came as a surprise.
“Why am I paying $40 tax on a $149 phone?’’ Worthington, a Worcester advertising executive, said she asked the Verizon Wireless sales clerk in Shrewsbury.
The answer: Because state tax regulations treat cellphones differently than other consumer products.
In Massachusetts, a phone that is deeply discounted when it’s tied to a cellular service contract is supposed to be taxed at the product’s actual value, which is typically a lot higher. And as the list price of some phones has soared to as high as $850, more people are noticing, and complaining about, the added cost.
State lawmakers have introduced bills to eliminate the policy, and the Retailers Association of Massachusetts is calling for cellphone buyers to be taxed on what they are charged at the register.
“In reality, people get these phones tied into a contract, and that’s the price of the phone,’’ said Bill Rennie, vice president of the retail association. “The easiest thing to do is to treat these transactions like any other item.’’
In Worthington’s case, she was charged the state’s 6.25 percent sales tax on her iPhone’s actual value, $650. “That just drove me absolutely nuts,’’ she said. “If I go in to buy a washing machine that’s on sale, I don’t have to pay sales tax on the full price.’’
The state issued its first policy on taxing cellphone sales in 1993. The thinking then was that since phones were essentially being treated as giveaways by companies to promote lucrative long-term service contracts, they were undertaxed.
Robert Bliss, the Revenue Department’s director of communications, compared a discounted cellphone to a used car that is sold for $1. The buyer, he said, would still have to pay sales tax based on the vehicle’s real value, not the bargain basement price.
State policies vary widely when it comes to cellphone taxes. But only Massachusetts and Rhode Island base cellphone sales tax on the higher price of the phone, not on the lower bundled cost, and tax wireless service throughout the contract, according to an analysis from KSE Partners, a Montpelier consulting firm that specializes in government affairs.
Last spring, the Massachusetts Department of Revenue clarified the cellphone tax rule after it found many wireless phone sellers - from major carriers to small independent stores - were not collecting full-price sales taxes, as required. The state does not calculate how much money it collects through the tax, Bliss said, but he estimated it totals millions of dollars annually.
“It’s not a new tax. It’s not some fresh revenue gambit,’’ he said of the directive. “It’s just trying to refine existing policy.’’
That notice came too late for Tim Blakeman, who owns Wireless Zone stores in Plymouth and Kingston. After an audit two years ago, the state ordered him to pay $23,000 in back taxes on discounted phones he had sold. Blakeman said he had to borrow money from relatives and close a third store in Buzzards Bay to pay. Nobody had told him about the cellphone sales tax, he said.
“If I had known, that’s what I would have been doing from the beginning,’’ Blakeman said.
He now collects the higher tax, but his customers are not happy.
“We’ve actually been yelled and screamed at and they think we’re trying to rip them off,’’ Blakeman said.
As part of its recent clarification of the 1993 regulations, the state told wireless sellers they can cover some of the sales tax that would otherwise be paid by customers, Bliss said.
Sprint does so, charging tax based on the price consumers pay for phones, not on what it pays the manufacturer, said John Taylor, a Sprint spokesman. AT&T, T-Mobile, and Verizon Wireless charge their customers the entire sales tax.
Mike Murphy, a Verizon Wireless spokesman, said the Massachusetts tax code puts retailers at a distinct disadvantage when they are trying to compete with those in nearby states.
“Verizon Wireless believes a ‘sales tax’ should apply to the sale price, as required in 48 states,’’ he said in a statement.
Republican state representatives Daniel Webster, of Pembroke, and Jay Barrows, of Mansfield, have separately introduced bills to treat the cellphone sales as any other consumer transaction.
But Scott Mackey, a tax analyst at KSE Partners, said the state might be reluctant to give up the tax, especially as the prices of smartphones climb and budgets remain stressed.
“With the iPhone,’’ he said, “now we are talking about a serious amount of money.’’