The Sacramento Superior Court ordered that the California Department of Tax and Fee Administration (CDTFA) be prohibited from applying California sales tax Regulation 1585 to the discounted price of a wireless telecommunications device (a cellular phone) that a carrier-retailer charges in a sale bundled with wireless service. The Court explained that Regulation 1585 conflicts with statutory definitions that require sales tax to be collected on the consideration paid for tangible personal property. The Court determined that Regulation 1585 may not be applied to any bundled transaction in which a wireless carrier pays no commissions to the retailer, that in such sales “Regulation 1585 is invalid.”
The case is a class action suit against the CDTFA brought by consumers that were charged sales tax on the full retail price of a cellular phone instead of a discounted price that the retailer advertised. The issues in this ongoing case are whether Regulation 1585, subdivisions (a)(4) and (b)(3), are invalid and contrary to California sales and use tax law in that Regulation 1585 imposes sales tax on the “unbundled sales price” of a cellular phone bundled with a service contract rather than the actual price paid by the consumer to the retailer.
According to Regulation 1585 (b)(3), in a bundled transaction of a cellular phone and wireless service, sales tax applies to the “unbundled sales price” of the cellular phone, no matter if the phone and wireless service are sold for a single price or stated separately on the invoice.
Regulation 1585 (a)(4) defines an “unbundled sales price” as “price at which the retailer has sold specific wireless telecommunication devices to customers who are not required to activate or contract for utility service with the retailer or with an independent wireless telecommunications service provider for utility service as a condition of that sale.” Further, “if the retailer cannot establish an unbundled sales price to the satisfaction of the Board based upon its own sales records, the unbundled sales price of the device shall equal the fair retail selling price of that device.”
In the case, the CDTFA argued that Regulation 1585 captures the true “price” of discounted cellular phones, which is represented in part by the price paid for the service agreement. The Court rejected this argument and held that “unbundled sales price” in Regulation 1585 attempts to capture the “value” of a cellular phone. The Court argued this is inconsistent with California sales tax statutes that impose sales tax on gross receipts, not a “value.” The Court found that Regulation 1585, as applied to bundled transactions sold by carrier-operated stores, is invalid and an attempt to tax wireless service. (Bekkerman et al. v. California Department of Tax and Fee Administration, Case No. 34-2015-80002242, Sacramento Superior Court October 27, 2020)