Technical Information Release  TIR 24-3: Pixley v. Commissioner of Revenue: Taxable Sales Price of Cell Phones Sold in Bundled Transactions

On June 22, 2023, the Massachusetts Appeals Court issued a decision in favor of the taxpayers in Pixley v. Commissioner of Revenue, 102 Mass. App. Ct. 720 (2023), reversing the Superior Court’s dismissal of the taxpayers’ claim for a declaratory judgment that Department of Revenue Directive 11-2 is invalid.[1]  Directive 11-2 provided that the taxable sales price of a cellular telephone sold as part of a “bundled transaction,” in which a consumer purchased a phone and agreed to purchase wireless services for a period into the future, was the higher of the amount paid by the retail consumer or the wholesale cost of the phone.  The Appeals Court held that M.G.L. c. 64H, § 2 does not allow the imposition of sales tax on an amount higher than the amount paid by the retail consumer and, therefore, Directive 11-2 was invalid.  This Technical Information Release (“TIR”) explains the position of the Department of Revenue (“Department”) with respect to the Appeals Court’s decision.

A.  Legal Background

Massachusetts imposes a sales tax on the “gross receipts” from sales at retail of tangible personal property and telecommunications services.  M.G.L. c. 64H, § 2.  The term “gross receipts” is defined as “the total sales price received by a vendor as a consideration for retail sales.”  M.G.L. c. 64H, § 1.  “Sales price” is defined as “the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise.”  M.G.L. c. 64H, § 1.  At issue in Pixley was the “sales price” of cell phones that were sold in bundled transactions, where the phone was sold at a discount to retail customers who also signed wireless service contracts.

Prior to the issuance of Directive 11-2, the Department had issued two Directives and a regulation addressing bundled cell phone transactions: Directive 93-9, Directive 94-2, and 830 CMR 64H.1.4.  Directive 93-9 pertained to bundled transactions involving sales by independent retailers.  Under Directive 93-9, the taxable sales price of a discounted phone sold by an independent retailer as a part of a bundled transaction that included a third-party wireless service contract for an agreed upon period was the sales price a retailer would charge for the same phone in an unbundled transaction.  Directive 93-9 concluded that the difference between the discounted price of the phone and the price a retailer would charge for the same phone in an unbundled transaction represented the non-cash consideration, “valued in money or otherwise,” paid by the consumer and, therefore, was included in determining the sales price of the phone.

Directive 94-2 pertained to bundled transactions involving sales by wireless service carriers.  Under Directive 94-2, a phone sold by a wireless service carrier at no cost or for an amount substantially below cost as a part of a bundled transaction along with a contract for the carrier’s wireless services was considered a “promotional item” for sales tax purposes and, as such, the retail customer did not owe sales tax on the phone.  Rather, the wireless service carrier was the consumer of the phone and was required to pay sales tax on the phone’s wholesale price.  If the wireless service carrier collected sales tax from its customer based upon the amount of any nominal consideration charged for the phone, it could claim an offsetting credit for those amounts.

830 CMR 64H.1.4, promulgated in 2000, addressed the imposition of the sales tax when sales involved discounts, coupons, or rebates.  The regulation provided that in general, if a discount, manufacturer’s coupon, or retailer’s coupon reduced the consideration due at the time of a sale, the reduction was treated as a “cash discount” and reduced the amount on which a retail customer owed sales tax.  830 CMR 64H.1.4(1)-(2).  The regulation restated Directive 94-2, explaining that if a vendor sold a phone for a nominal amount as part of a bundled transaction, the phone was considered a promotional item, and the vendor was responsible for sales tax on the phone’s wholesale cost.  The vendor was permitted to collect sales tax from the retail customer, but only on the nominal price charged.  830 CMR 64H.1.4(1), Example 5.  In such instances the vendor was permitted to credit this collected tax against the tax that it would otherwise owe with respect to the wholesale charge.  Id. 

Directive 11-2, effective July 1, 2011, eliminated the distinction between sales by retailers versus wireless service carriers set forth in Directives 93-9 and 94-2.  It provided that, irrespective of whether the vendor was a retailer or service provider, the sales price of a cell phone sold in a bundled transaction was “the higher of the amount paid by the retail customer or the wholesale cost of the phone.”  Directive 11-2 permitted vendors to collect the full amount of sales tax from their customers, even if the sales tax was based on the wholesale cost of the phone.  Alternatively, vendors could choose to collect tax from their customer on the lesser amount actually paid by the customer and pay the remaining tax themselves.  Directive 11-2 superseded Directives 94-2 and 93-9 prospectively to the extent they were inconsistent with Directive 11-2.

The taxpayers in Pixley sought a declaratory judgment in Superior Court that Directive 11-2 was invalid.  The Commissioner filed a motion to dismiss. The Commissioner argued, defending Directive 11-2, that the sales price in a bundled cell phone transaction is comprised of both the consumer’s monetary payment for a phone and the non-cash value of the contractual commitment.  The Superior Court granted the Commissioner’s motion to dismiss.

B.  The Appeals Court’s Decision

The Appeals Court reversed the Superior Court, holding that the taxpayers were entitled to a declaratory judgment that Directive 11-2 was invalid.  Pixley, 102 Mass. App. Ct. at 727-728.  The Appeals Court held that, with respect to bundled transactions, the language in M.G.L. c. 64H, § 1 defining sales price does not include any non-cash value of committing to a third-party wireless service contract for a minimum period.  Id. at 725-727. The Appeals court reasoned that Directive 11-2 was “at odds with” the statute “because it direct[ed] the collection of a tax on more than the ‘total sales price received’ by the vendor.”  Id. at 724.

Pursuant to Pixley, the taxable sales price of a cell phone sold as a part of a bundled transaction, in which a consumer purchases a discounted phone from a wireless service carrier or an independent retailer and agrees to purchase wireless services for a period into the future, does not include any non-cash value of committing to a wireless service contract for a minimum period.  As a result, as determined by Pixley, Directive 11-2 is invalid.  In addition, Directive 93-9 is invalid because that Directive also required the collection of tax on non-cash consideration tendered in bundled transactions.

In contrast, 830 CMR 64H.1.4 and Directive 94-2 remain valid and apply to all open tax periods. 

Accordingly, the following rules continue to apply to bundled cell phone transactions.

• Discounts on the price of a cell phone at the time of a sale must be excluded from the sales price of the phone.[2]  See 830 CMR 64H.1.4(1). 

• If a phone is provided to a customer as part of bundled transaction at no cost, or for a nominal cost, the phone constitutes a “promotional item,” meaning the wireless service carrier or independent retailer is the consumer of the phone and is responsible for paying sales or use tax on the wholesale price of the phone.  The wireless service carrier or independent retailer may collect sales tax from the retail customer on the nominal price of the phone.  If the carrier/retailer does collect tax from the retail customer, that collected tax amount may be credited against the tax the carrier/retailer would otherwise owe with respect to the wholesale charge.  See 830 CMR 64H.1.4. Example 5; Directive 94-2.   

The Department will apply 830 CMR 64H.1.4 and Directive 94-2 to sales of cell phones sold at a discount in bundled or unbundled transactions prospectively, as well as retroactively to any open tax period.  Wireless service carriers and independent retailers who collected and remitted sales tax based on an amount higher than the retail price of a phone may seek an abatement for any open tax period, pursuant to the rules set forth in M.G.L. c. 62C, § 37. 
 

                                                                        /s/Geoffrey E. Snyder
                                                                        Geoffrey E. Snyder
                                                                        Commissioner of Revenue

GES:RHF:rvd

May 7, 2024

TIR 24-3