Ruling could reduce that last-minute charge you're hit with when you get a discounted phone with a service bundle

The Massachusetts Appeals Court ruled today that the state has been making wireless providers charge consumers too much in taxes to buy a discounted mobile phone bundled with a service agreement.

The 2-1 ruling overturns a state Department of Revenue directive that has required phone stores to charge consumers sales tax based on the price the companies paid for phones they bundle with wireless service, rather than on the discounted price they offer consumers as an incentive to sign up for a service plan. The court's majority said that violates state tax law, which requires consumers only pay taxes based on what they actually hand over to a retailer, in this case, a phone company.

The ruling reinstates a 2017 lawsuit against the state on the issue after a Superior Court judge dismissed it. However, the court ruled that the plaintiffs are owed nothing because the direct taxpayers in this case are phone stores and companies, who did not bring the lawsuit and because none of the plaintiffs showed evidence they had attempted to seek a rebate for what they paid the phone providers for the tax.

The state Department of Revenue, which has enforced its directive since 2011, noted that the law actually defines "sales price" as "consideration for a retail sale, valued in money or otherwise," and argued that consumer's commitment to sign a contract for a certain number of months or service is covered by the "or otherwise" clause because the service contract has a certain intangible value.

The court's majority disagreed and said the current taxing scheme unfairly soaks consumers:

A straightforward hypothetical transaction illustrates the commissioner's error. Assume the consumer enters into a so-called "bundled transaction" where he or she pays $100 for a cell phone, and also signs a two-year contract to use the vendor's wireless services, at $100 per month. Assume further that the wholesale cost of the cell phone was actually $600. Over the course of the two-year agreement, the consumer will pay the vendor $2,500 ($100 for the cell phone, plus twenty-four times $100 per month). Under the directive, however, the Commonwealth will tax the phone at its wholesale cost, and also tax the services as they are rendered and paid for. ... The Commonwealth thus will receive a sales tax on $3,000 in purported sales ($600 plus $2,400), even though the consumer only paid $2,500. And this entire tax will likely be passed onto the consumer, who then pays a tax on more than he or she paid for the "bundled transaction."

The court more directly addressed the "or otherwise" issue:

As applied to a bundled cell phone transaction, this nonmonetary "consideration" theory is both unprecedented, and incorrect. The consumer is paying money -- that is all. The two-year contractual commitment is to pay money for services; that monetary payment is fully taxed. ... There is no additional consideration coming from the consumer that otherwise goes untaxed. This is not a situation where the consumer is providing value to the seller in a nonmonetary form –- for example, some kind of barter. This is not a situation in which a store sells jewelry to a consumer for $300, but reduces the price by $100 based on the value of other jewelry a consumer provides in trade. In that circumstance, the sales price for tax purposes is $300, even though the consumer only paid $200 in money. The "or otherwise" clause exists to cover those nonmonetary payment situations, but it does not apply where all the consideration the consumer gives is money.

The majority added:

The concept finds no support in the statutory language, the case law, or other authority. From the vendor's perspective, the "commitment" may indeed have intangible value, but only if that "commitment" results in new and additional sales -- for example, sales of ancillary goods or services, or a "re-up" of the contract after two years. But the possibility that the consumer will enter into new and different contracts is not part of the "total amount paid" for the bundled transaction at issue. ...

At the end of the day, the commissioner's position fails because the only thing the consumer is providing here is money, and all the monies the consumer pays will be taxed. Where the cell phone is sold below wholesale cost, the vendor must be making up the difference through the sale of wireless services, and perhaps additional ancillary goods or services –- the sales of all of which will be taxed if and when they occur (unless specifically exempt). Obviously, if the vendor does not make up for selling the cell phone below cost through additional sales, it will be operating at a loss, and the laws of business say that it will not be operating very long.

Justice Vickie Henry dissented, in part because state administrators, in this case, the commissioner of revenue, should be granted some deference in how they enforce state law, in particular when no evidence is provided as to why they should be overruled:

The majority's decision is remarkable in that the majority substitutes its opinion for that of the commissioner, and does so in a case decided on a motion to dismiss, without any evidentiary support.