Earlier this May, the Massachusetts Appeals Court issued a decision on the Pixley v. Commissioner of Revenue case which made Department of Revenue (DOR) Directive 11-2 invalid. DOR Directive 11-2 allowed the taxable sales price of a cellular telephone sold as part of a “bundled transaction”, or a transaction where the phone purchased along with the purchase of a wireless service for a future period, to be the higher amount paid by the retail consumer or the wholesale cost of the phone.
Be that as it may, the appeals court in the Pixley v. Commissioner of Revenue case nullified this directive citing that Section 64H:2 of the General Laws of Massachusetts does not allow sales tax to be applied on an amount higher than the amount paid by the retail consumer.
Following this decision, the Massachusetts DOR responded by clarifying the rules applied to bundled cell phone transactions: 1) discounts on the price of a cell phone at the time of a sale must be excluded from the sales price of the phone; 2) if a phone is provided to a customer as part of the bundled transaction at no cost, or for a nominal cost, the phone constitutes a “promotional item”, subject to sales or use tax on the wholesale price of the phone according to Directive 94-2; and 3) wireless service carriers and independent retailers who collected and remitted sales tax based on an amount higher than the retail price of a phone may seek an abatement for any open tax period under the rules.
So, if you find yourself buying a cell phone in a bundled transaction, and the sales tax seems higher than it should be, always remember Pixley v. Commissioner of Revenue!
Osmani Rodriguez, Audit & Tax Associate at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.