Thousands of units of the new iPhone 5 and other popular smartphones like Samsung's Galaxy S III will likely fly off California store shelves the last week of September, and many of the consumers purchasing them will probably do a double take at the total on the receipt.
That's what happened to CNET reader Debi Scott, who read my story on how much sales tax from new iPhone sales could add to local government coffers (JP Morgan also took note of the iPhone 5's potential as an economic booster shortly thereafter) and thought I might be understating the case. Scott told me how she purchased two iPhone 4S smartphones last year for $199 each at an AT&T store in Visalia, Calif., and was charged more than $100 in sales tax.
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If you're good with numbers and have memorized California's municipal tax tables, you already know that's nearly a 25 percent tax, well above Visalia's total sales tax, which is closer to 8 percent.
Many California smartphone owners have probably heard the explanation Scott received from the AT&T clerk about the quirk in state law that requires that sales tax be charged on the full price of a smartphone bought at a carrier-subsidized discount. In the case of Scott's iPhones, she was charged tax based on the $649 unsubsidized price of the phone, rather than the $199 she paid in reality.
The law, Regulation 1585, even applies to phones that are offered by the carriers for free. In other words, your new "no cost" smartphone could theoretically cost you $100 to get out of the store. That's just not cool.
Californians have been complaining about the law for years since it went into effect in 1999 to help ensure, in the state's eyes, that it gets its fair share of tax from the carriers. It's led to plenty of arguments at the cash register and unhappy letters directed at state lawmakers.
State Sen. Joe Dutton, a Republican from Rancho Cucamonga, introduced a bill (PDF) this year to change Reg 1585 and charge sales tax based on the actual price paid rather than the arbitrary retail value. Unfortunately for consumers, that bill has been stuck in a Senate committee since May, leaving no hope for paying a reasonable tax on a new subsidized iPhone 5.
You're not likely to hear California's ailing budget complain, however. In my previous post, I estimated that sales of just 1,500 new iPhones could generate upwards of $35,000 in sales tax at a store in Denver. In Visalia, and most other places in California, those same iPhones would send more like $90,000 to city hall and Sacramento.
On the upside, if the iPhone 5 is the success everyone expects it to be, maybe Californians will get some of their state parks back. Maybe.