Legislation aims to reduce sales tax on cellphones

SACRAMENTO, Calif. (KGO) -- Millions of people buy cellphones at a discount or even get them free with a service contract, but you may notice you are paying a high sales tax even if you get the phone for free. That might change.

7 On Your Side has received dozens of complaints about this over the years. Consumers buy cellphones only to find out the sales tax can be as much as the price of the phone. Now there's a move in Sacramento to reduce the cellphone tax.

Jon Vennarucci couldn't resist. AT&T was offering iPhones for just $49 with a two-year contract. He marched right down to get one, then the shock. "The price of the phone in the end was not $49, it was double that," he said. He is still fuming. He was charged $49 for the iPhone, but the sales tax was another $45, nearly as much as the phone itself and certainly more than the 8.5 percent tax he was expecting. "How could the tax be 100 percent? It's a $50 phone and they said, 'Oh no, the total price and the tax is based on the presale amount.'"

He was upset with AT&T for failing to display the full price, but the carrier said it's the state charging a sales tax, not the company. Regulation 1585 says if you receive a cellphone at a discount or for free with a wireless plan, you still have to pay sales tax on the full retail price -- a big tax when iPhones cost $500 and up without a contract.

"There's a lot of goofy things with the way California does things," St. Sen. Joe Dutton, R-Rancho Cucamonga, says. He says it's not fair. He just proposed a bill to charge the sales tax, based on the actual price you pay, not the full retail value. "It's a matter of fairness. Frankly, it's common sense."

The State Board of Equalization enacted the regulation back in 1999. A spokesman said, "The sales tax rule is based on the premise that service contracts are taxable." The board says consumers receive a phone at a discount only because they are buying a wireless plan. So the board decided to collect sales tax based on the full value of the phone. "Frankly, they'll try to tax as many things as possible and they alway try to tax on the highest value possible," Dutton says.

Dutton says the system is confusing for consumers. The state taxes all other sale price merchandise based on what you pay, not the full value. Vennarucci couldn't agree more.

"You're trying to avoid any kind of discrepancy or misunderstanding, to the effect of, 'Is this the price? Is this not the price?' It shouldn't be a surprise," Vennarucci says.

If Dutton's bill passes it would save consumers an estimated $82 million per year, of course that means the state loses that revenue. Hearings will take place in the coming weeks and we'll let you know what happens.

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iphone, cellphone, smartphones, AT&T, verizon, t-mobile, sprint, taxes, 7 on your side, michael finney

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