Massachusetts Appeals Court Rules Sales Tax on Bundled Cell Phone Cost Limited to Price Paid

Since 2011, the Massachusetts Department of Revenue had a policy in place under Directive 11-2, where sales tax and/or use tax was required to be paid on an amount higher than that paid by the retail customer in certain situations. This concept was typically applied when a cellular phone (or other wireless device) was sold at an amount less than the wholesale cost to the vendor as part of a bundled transaction that included telecommunications services. Vendors had the option to collect sales tax from customers based on a higher sales price than what the customer was charged for a cell phone.

In Pixley v. Commissioner of Revenue,¹ the Massachusetts Appeals Court ruled that Directive 11-2 conflicts with the sales tax law and the application of “sales price” to the sale of a cell phone. Directive 11-2 provides the following example:

A vendor offers to sell a new cellular phone for $119.95 to any customer who also signs a two-year service contract including taxable telecommunications services. The wholesale cost to the vendor of the cellular phone is $200.00. The vendor may collect the entire tax due, $12.50 (6.25% of $200.00), from the retail customer. If the vendor elects to collect and remit tax from the customer only on the amount actually paid, $7.50 (6.25% of $119.95), then the vendor must also remit tax of $5.00 (6.25% of $200.00, less $7.50 credit for tax collected from the retail customer).

Among other issues, the Appeals Court determined that the policy under Directive 11-2 does not align with the definition of “sales price,” which is “the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise.”² The Commissioner of Revenue argued there was additional value from the service contract entered into by the customer. However, the Appeals Court rejected this position on basic sales tax principles that sales tax should apply to the sales price that was charged to the customer.

¹ Melissa Pixley & Others v. Commissioner of Revenue, Massachusetts Appeals Court No. 21-P-805 (June 22, 2023).

² Mass. Gen. L. Ch. 64H, § 1.

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