see DD 11-2 for transactions on or after July 1, 2011

I. Facts

It has become a common practice in the cellular telephone industry for dealers to sell cellular telephones to their customers in so-called "bundled" transactions. In these transactions, a dealer gives a purchaser an allowance with respect to the usual retail sales price of the cellular telephones in exchange for the purchaser's agreement to become and to remain a subscriber with a particular cellular phone service carrier for a minimum service period. The carrier, in turn, pays the dealer a set amount on behalf of each new subscriber pursuant to an agreement with the dealer. [1]

II. Issue

What is the sales price of cellular telephones that are sold in "bundled" transactions?

III. Discussion of Law

Massachusetts imposes an excise upon sales at retail of tangible personal property, measured by a vendor's gross receipts from such sales. G.L. c. 64H, § 2. A "sale at retail" is defined in pertinent part as a sale of tangible personal property for any purpose other than resale in the regular course of business. G.L. c. 64H, § 1. A "sale" includes "any transfer of title or possession, or both, exchange, barter, lease, rental, conditional or otherwise, of tangible personal property...for a consideration, in any manner or by any means whatsoever." Id.

For purposes of the sales tax, the term "gross receipts" is defined as "the total sales price received by a [vendor] as a consideration for retail sales." Id. The term "sales price" is further defined (in pertinent part) as "the total amount paid by a purchaser to a vendor as a consideration for a retail sale, valued in money or otherwise." Id. No deduction may be taken for any amount for which credit is given to the purchaser by the vendor.

Under these provisions, the consideration a vendor receives comprises the item or items of bargained-for exchange that form the basis of the sales contract. This consideration may be in the form of cash, other property or services. See, e.g., 830 CMR 64H.1.4(2) (coupons). Where a vendor receives a non-cash item as part of the consideration for a retail sale, the vendor must include the value of that item in its gross receipts, unless a specific statutory exemption applies. See, e.g., G.L. c. 64H, § 26 (trade-in of a motor vehicle or trailer).

In general, the value of the non-cash consideration received depends upon either its intrinsic fair market value or the payments, if any, that the vendor receives from a third party for the item. See, e.g., 830 CMR 64H.1.4(2) (coupons). In these situations, the amount which the vendor must include as part of the sales price is generally equal to the amount allowed to the purchaser for the non-cash item. In this instance, the value of the purchaser's non-cash consideration in executing the minimum service agreement is the difference between the amount the dealer charges for a particular telephone in a bundled transaction and the price the dealer would charge for that same telephone in an unbundled transaction.

IV. Directive

For sales tax purposes the sales price of a cellular telephone sold in a "bundled" transaction is the same as the sales price of the telephone sold in an "unbundled" transaction.

/s/Mitchell Adams
Mitchell Adams
Commissioner of Revenue

MA:HMP:kt

December 23, 1993

DOR-D 93-9



[1] In the event that the subscriber breaches the minimum service agreement, these carrier-to-dealer payments are subject to "recapture", in whole or part, by the carrier.

Also, pursuant to the "bundled" sales contracts with their customers, the dealers often provide for "recapture" from the customer (subscriber) of the difference between the "bundled" price and the "unbundled" price for the cellular telephone if the customer breaches the minimum service agreement. Dealers routinely require cash customers to pay an additional amount at the time of sale as a so-called "deactivation fee deposit". This payment is retained by the dealer specifically to effect such "recapture" in the event the customer breaches the minimum service agreement. Similarly, dealers routinely require credit card customers to execute an authorization of payment at the time of sale which permits the dealer to charge the customer an additional amount in the event of such a breach. Here again, this payment authorization is for the purpose of insuring such recapture. Alternate arrangements may require forfeiture of the telephone and a substantial "restocking" fee.

As an example, a dealer has a cellular telephone with a wholesale cost of $200, which he sells in unbundled transactions for $259.95. If a customer signs a minimum service agreement with the carrier with which this dealer is under contract and remains with that carrier for 18 months, the dealer will receive a payment of $300 from that carrier. If the customer leaves the carrier, the payment to the dealer will be reduced or eliminated altogether. The dealer also requires the customer to leave a cash deposit or credit card authorization for $300 to be used by the dealer if the customer does not stay with the carrier for the specified period. The dealer may use other means to recoup the loss of wholesale value or payment from the carrier. The dealer advertises the price of this telephone at $129.95 in the bundled transactions.