March 23, 2009
You have requested a letter ruling pursuant to Massachusetts Regulation 830 CMR 62C.3.2, to confirm the application of Massachusetts sales/use tax to the sale of wireless telecommunication devices by [Vendor]. The facts, given below, are condensed from your letter of November 7, 2008.
Vendor sells the [Phone], a wireless telecommunication device, at retail through its stores located throughout Massachusetts. Retail purchasers of the Phone must qualify for, or already have, a wireless service plan with [Telecommunications Provider] and must activate the Phone before leaving the Vendor's store.
Vendor sells the Phone to the consumer at a nominal price of $*****, $*****, $*****, or $*****, based on whether the Phone is ***** G [Gigabyte] or G, and on whether or not the consumer already has a wireless service plan. In reality, however, since the Phone is never sold without activation, there is no separate price for the Phone. Vendor has nonetheless established a "fair retail selling price" of $***** for the ***** G and $***** for the ***** G Phones, and currently charges its customers Massachusetts sales/use tax based on this price. These are the highest of the different prices charged by Vendor for these Phones depending on the customer's service plan profile. Vendor also receives a commission from Telecommunications Provider in connection with the sale of the service plans that are bundled into Vendor's sale of these Phones. You ask whether use of the "fair retail selling price" as the "sales price" on which to charge Massachusetts sales/use tax is appropriate under Massachusetts sales and use tax law.
Massachusetts imposes an excise of 5% of a vendor's gross receipts upon sales at retail of tangible personal property. A "sale at retail" is defined as a sale of tangible personal property for any purpose other than resale in the regular course of business, and 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." G.L. c. 64H, § 1.
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." G.L. c. 64H, § 1. 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. Id.
When the sale of a Phone is made together with a required service contract, the result is called a "bundled transaction." The general rules for dealing with these transactions are outlined in Directive 93-9, "Sales Price of Cellular Telephones Sold in Bundled Transactions," which states:
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. 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.
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. 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.
Id.(textual emphasis supplied; citations omitted).
Directive 93-9 is not strictly applicable to the situation at hand, as Vendor only sells the Phone in bundled transactions. The Directive, however, stands for the general principle that in such transactions, tax is due on either (1) the amount the retailer typically charges for the Phone without a service contract, or (2) the intrinsic fair market value of the tangible personal property sold. As (1) is inapplicable here, tax is due on the fair market price of the property sold.
After examining the documentation submitted, we conclude that the $***** and $***** prices for the ***** G and ***** G Phones respectively ( i.e., the higher of the prices charged, depending on the customer's service plan profile) reasonably represent the "intrinsic fair market value" of the Phones. We do so based on several factors. Among these is that Vendor has in publicly available press releases established the above prices as "manufacturers suggested retail prices" for the Phones in question. For our purposes then, these prices may by regarded as the highest published or advertised prices the use of which was regarded as indicative of the price properly subject to tax in Directive 93-9. See id., at IV, "Directive," ¶ 3.
We also note that these prices are also expressly reflected in an arrangement between Vendor and Telecommunications Provider, allowing Telecommunications Provider to sell the sell the bundled Phones at the same prices Vendor uses in its stores, i.e., $***** - $***** with activation. Vendor provides these Phones to Telecommunications Provider for a total amount of $***** and $***** for the ***** G and ***** G Phones, respectively, and these total charges are broken down into two parts, a portion allocable to the Phone and a portion allocable to a commission or arrangement fee paid by Telecommunications Provider as part of its contractual relationship to serve as the wireless provider of Phone service, as follows:
[Chart containing proprietary information has been redacted.]
When the commission or arrangement fee is factored out, the higher of the prices charged for the ***** G and ***** G Phones (depending on the customer's service plan profile) correspond with the Vendor "fair retail prices," viz. $***** for the ***** G and $***** for the ***** G Phone.
Finally, we note that the California State Board of Equalization has approved use of these prices as a basis for imposition of the California sales tax based on a regulation allowing for use of "fair retail selling price" if the retailer cannot establish an unbundled sales price. See Cal. Reg. 1585 subd. (4)(a). While Massachusetts has no equivalent provision, we find the Board of Equalization's acceptance of $***** and $***** as the fair retail selling prices of the Phone persuasive.
Vendor's application of sales tax on the stated selling price of $***** for all the ***** G Phones and $***** for all the ***** G Phones sold at retail is consistent with the guidance given in Directive 93-9 on the use of an established fair retail selling price for calculating tax on a Phone sold in a bundled transaction. If Vendor changes its fair market prices for Phones, tax on sales of these Phones must be adjusted accordingly. In addition, we note that this letter ruling applies only with respect to Phones sold by Vendor, and not to other vendors who may sell the Phone.
Very truly yours,
/s/Navjeet K. Bal|
Navjeet K. Bal
Commissioner of Revenue