Beware of Best Buy’s Big iPhone Gotcha

It was the Friday before Christmas and I was getting ready to pay for my new iPhone 4S at a Best Buy store here in San Francisco. I was about to swipe my credit card, when the clerk said “That will be $105.16.”

“Excuse me,” I said. “The ad says the phone costs $49.99. Am I confused?”

Turns out I wasn’t confused; I was simply unaware of a huge gotcha that smartphone buyers in three states should know about. California, Massachusetts and Rhode Island have provisions in their tax codes requiring merchants to charge sales tax on the full price of a mobile phone, even if that item has been sold at a subsidized price.   

In the case of my 16GB iPhone 4S, the price to buy it without a contract would be $650, according to my receipt. Since sales tax here in the City by the Bay is 8.5 percent, I’m sending the state $55.17, which is more than the advertised price of the phone.

I checked with the California Board of Equalization and was told the law says that when a phone is sold with a service contract from a carrier, it is called a bundled transaction. And when your transaction is bundled, the merchant is required to charge tax on the full value of the unbundled item. What’s more, the sales tax will be charged even if the phone is free.

One could argue about the fairness of that rule, but let’s put that aside for now. My beef is this: Why don’t Best Buy and other retailers make that provision clear in their advertisements? I went back and looked at Best Buy’s ads for these phones and couldn’t find that disclosure anywhere. Why not?

I have another unanswered question for Best Buy as well. If you look at my receipt on the left, you’ll note that the full price is listed as $650, which explains the $55.17 sales tax charge. But when you dig deeper into the Best Buy site, you’ll see that the company advertises the same phone in its unlocked version for $599 and Apple charges $549 for the same phone.

That makes no sense at all. Naturally, I asked Best Buy about these issues and a company spokeswoman merely repeated the language of the California law, while ignoring the other issues. There may well be a rational explanation for this discrepancy, and if I get a better answer from Best Buy, I’ll add it to this post.

To be clear: Best Buy and the other retailers have no choice. They have to collect sales tax as directed by the states in which they do business. My problem is the lack of prominent disclosure, and the apparent inconsistencies in setting the unbundled price ($650). Consumers have every right to know the real price of an item before they’ve taken the trouble to come to the store with their credit cards in hand. Best Buy, we’re waiting for your response.