If you buy a $199 iPhone in California, you might notice that the tax is $56.91, which implies a 28.6% sales tax rate. California sales tax should be between 7% and 9% (depending on the city), so what gives?
Cell phone carriers typically subsidize the retail cost of a phone in exchange for locking you into a one or two year contract. AT&T pays Apple a few hundred dollars for every iPhone sold. State law requires sales tax be paid on the non-contract, retail price of the phone, which means your $56.91 in tax is actually against an estimated $700 cost of the phone.
Somewhat related: cell phone service fee taxes are linked to the area code of the phone, regardless of where you currently live. This means you’re paying taxes to whatever city you lived in when you bought the phone.
