People often ask their tax lawyer how to respond to the CDTFA when they receive an audit letter. A CDTFA audit can present may issues for the taxpayer to consider and address. One issue that comes up in a CDTFA audit is what is called a bundled sale. The CDTFA began focusing its audit efforts on businesses that sale cell phones in bundled transactions.
Your business may require its customers to purchase a service contract of greater than one month (typically one or two years) with a particular service provider to purchase a cell phone; additionally, the requirement means that the customer can purchase the cell phone at a discounted sales price, or even at no charge. This is a bundled transaction, and is a 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.
On the other hand, you may sell a cell phone without requiring your customer to purchase a service contract. This is called an unbundled transaction. Moreover, tax applies to the actual gross receipts a business receive from its customers when a cell phone is sold in an unbundled transaction, just like a normal sale of tangible personal property.
What is a CDTFA Bundled Sale?
A Bundled Transaction is the retail sale of a wireless telecommunication device (like a cell phone) which contractually requires the retailer’s customer to activate or contract with a wireless telecommunications service provider for utility service for a period greater than one month as a condition of that sale. Furthermore, a transaction is a bundled transaction within the meaning of this regulation without regard to way the price is stated to the customer. Also, it is immaterial whether the wireless telecommunication device and utility service are sold for a single price or are separately itemized in the context of a sale or on a sales invoice.
A transaction is a bundled transaction if goods and services are sold as a single package. In such transactions, wireless devices may be sold at a “discounted” price, as an inducement for the customer to enter into an extended service contract. However, the fact that a wireless telecommunication device, may, because of its technological specifications, require activation with only one service supplier, does not alone mean that the sale of the device will be treated as a bundled transaction.
How Does the CDTFA Tax Bundled Sales?
Sales tax applies to the gross receipts from the retail sale of a wireless telecommunication device sold in a bundled transaction, measured by the unbundled sales price of that device. Tax applies to the unbundled sales price whether the wireless telecommunication device and utility service are sold for a single price or are separately itemized on a sales invoice. The retailer of the cell phone is required to report and pay tax measured by the unbundled sales price of the device and may collect tax from its customer measured by the unbundled sales price.
What is the CDTFA Undundled Sales Price?
The unbundled sales price is the price that the retailer has sold wireless telecommunication devices to customers who are not required to activate or contract for utility service as a condition of that sale. The CDTFA sales tax auditor will take the position that if the business cannot establish an unbundled sales price to the satisfaction of the Board based upon its own sales records, the unbundled sales price will equal the fair retail selling price of that device. If tax is reported and paid on an amount equal to the cost of the device plus a markup on cost of at least 18 percent, such amount shall be regarded as the fair retail selling price of the device. The unbundled sales price of an obsolete wireless telecommunication device shall equal the actual selling price of that device.
Have you or your business received a CDTFA Audit Letter?
If you have received a CDTFA audit letter and have questions about the CDTFA bundled sales, contact an attorney at Disparte Tax Law for a free consultation.