Cell Phones and Other Wireless Telecommunication Devices
(Publication 120 LDA)

This publication explains how tax applies to sales of cell phones, wireless telecommunication devices, and accessories sold with those devices.

Regulation 1585, Cellular Telephones, Pagers, and Other Wireless Telecommunication Devices, describes how tax applies to sales of cell phones and other wireless communication devices. The type of transaction will determine how tax applies to mobile phones or other wireless devices. Sales of cell phones or other wireless devices are considered either "unbundled" or "bundled" depending on whether the buyer is required to enter into a service contract as a condition of the sale.

Unbundled transaction

You may sell a cell phone without requiring your customer to purchase a service contract. This is an unbundled transaction. Tax applies to the actual gross receipts you receive from your customer when a cell phone is sold in an unbundled transaction, just like a normal sale of tangible personal property.

Bundled transaction

You may require your customer to purchase a service contract of greater than one month (typically one or two years) with a particular service provider in order to purchase a cell phone at a discounted sales price, or even at no charge. This is a bundled transaction, and is generally the most common type of cell phone sale. It does not matter whether the device and the utility service are sold for a single price or are separately itemized on the sales invoice. To apply tax in a bundled transaction, you must know the "unbundled sales price" of the device sold.

Unbundled sales price

The "unbundled sales price" is either:

• The sales price you typically charge for the specific cell phone when sold without also requiring the purchase of a service contract (an unbundled transaction), or
• If the above cannot be established based on your records, the fair retail selling price. The cost of the phone plus a markup of 18 percent will be regarded as a fair retail selling price.

How is tax determined?

Accessories

Sometimes retailers include "free" accessories such as charges, adapters, and phone converters when selling cell phones. Accessories are not discussed in Regulation 1585. However, when an accessory is given to a customer for free when he or she purchases a phone, the accessory is considered to be a premium item under Regulation 1670, subdivision (c). The sale is of both the purchased item and the premium item.

If a customer purchases a phone in a bundled transaction and receives a free accessory, the "unbundled sale price" is still the price at which you have sold the specific cell phone to customers in unbundled transactions, regardless of whether those sales included free accessories. Similarly, if you are using the fair retail selling price to establish the "unbundled sales price," the markup of 18 percent is applied to the cost of the phone only, not the combined cost of the phone and accessory.

When an accessory is sold with a phone and a separately stated amount is charged for the accessory, then tax applies to the gross receipts received from the customer for the accessory like a normal sale of tangible personal property.

Sales of obsolete wireless devices

When you sell an obsolete wireless device, whether in a bundled or unbundled transaction, the tax is based on the actual selling price of that device. An obsolete wireless device is one that is either functionally or economically obsolete.

Sales of phones for less than 50 percent of cost

If the "unbundled sales price" of a (nonobsolete) phone is less than 50 percent of your cost of the phone, you are considered the consumer of the phone and tax is calculated on the cost of the phone. You may not collect tax from your customer on this type of transaction. You are liable for tax on the cost of the phone to you.

Please note: This is a rare exception to the general rules, and retailers often mistakenly believe it applies. Remember, it is the "unbundled sales price" of the phone that must be less than 50 percent of your cost for this rule to apply, not the discounted price charged in a bundled transaction. It is extremely unusual for the "unbundled sales price" of a (nonobsolete) phone to be less than 50 percent of cost.

Are fees for activating the cell phone taxable?

Prepaid Mobile Telephony Services Surcharge

Beginning January 1, 2017, certain small sellers of prepaid mobile telephony services (MTS) will no longer be required to collect the surcharge from their customers and report and pay those amounts to the California Department of Tax and Fee Administration (CDTFA). A small seller of prepaid MTS is a seller (other than a telecommunications service supplier) that sold less than $15,000 in prepaid MTS sales during the previous calendar year. The annual sales threshold is based on the total of all retail locations operated by the seller and is subject to annual adjustment. However, because consumers are still responsible for the surcharge, as a courtesy to their customers, small sellers may voluntarily continue to charge and collect the prepaid MTS surcharge and report the amounts to the BOE.

For more information about this program, please read our guide Prepaid Mobile Telephony Services (MTS) Surcharge.