Taxability of Cell Phone Discounts/Giveaways Varies by States

States vary on the treatment of cellular telephones and equipment when sold below cost and contingent on the purchase of airtime from a retailer or an independent carrier. It is a common practice for retailers to sell cellular phones for a significant discount with a contract for cellular phone services. Selling the phone at a significantly discounted price may constitute a sale at the reduced price or tax may be due on the normal retail value or the cost of the item sold. For example, Alabama and Illinois tax the cellular phone at the discount price, while California requires tax to be paid on the normal retail price if below 50% of the cost. Texas requires tax be paid on the cost of the item if the sales price is less than 25% of the dealer’s acquisition cost. In Massachusetts, an item transferred from a vendor to a customer for a nominal consideration or substantially below cost is considered, for sales tax purposes, a promotional item. Items sold at 50% or less of the vendor’s cost are considered substantially below cost. However, situations such as fire sales, going-out-of-a-business sales, and clearance sales may not meet this presumption.

Posted on June 19, 2009