Is it Legal for a Cell Phone Company to Charge Tax on an Early Termination Fee?

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Early termination fee taxes can be bad news.
Early termination fee taxes can be bad news. (Image: Dynamic Graphics/Creatas/Getty Images)

After you've signed a two-year contract with a wireless provider, you may be shocked to find your first monthly bill significantly higher than you were expecting because of miscellaneous charges and taxes. If you decide to cancel the contract early, your contract may require you to pay an early termination fee. As if to add insult to injury, you might find a tax added to the fee. Is the tax legal? It depends.

Service or Penalty

To determine whether a n early termination fee (ETF) is legal or not you must determine whether your contract with the phone company specifies it as a penalty or as part of your service. If it is the former, then it probably isn't taxable, since states don't levy taxes against penalties. If it is the latter, then it may be taxable, since services are generally taxable, but it depends on your local tax codes. To find out for sure, you'll have to consult those codes or enlist the services of a tax attorney.

Call the Company

The contract may not specify whether the ETF is a penalty or a service, and even if it does, you can probably save the time and effort of researching its legality by calling the company. The representative you speak with should be able to provide justification for it. If not, ask to speak with someone else until you get a satisfactory response. Class action attorney Michael Aschenbrener, who has been following the early termination issue, encourages consumers to do this. It is a reasonable question, he says, that deserves a straightforward answer.

The Importance of Clarifying the Issue

In 2009, consumers paid at least $216 billion in miscellaneous financial fees, according to Consumer Reports. While credit card finance fees and late charges account for most of these, a significant portion goes to hidden fees charged by wireless service providers. CBS News reported that in 2009 they amounted to approximately $94 million per month. They are typically charges leveled across the board, and some of them, like an ETF tax, may not apply in all cases. Clarifying the propriety of the tax is prudent, and if the company can't justify it, they may waive it.

Remedies

In the event you can't get a satisfactory answer to your questions from the phone company, you could pursue legal action, but the tax on a $150 to $300 ETF probably isn't enough to warrant it. Aschenbrener suggests contacting a class action attorney. He says that even if a small portion of the clientele of any of the major wireless carriers have experienced a similar issue and join the case, it could have a significant effect. You may have other remedies, depending on the wording in the contract and your local tax laws, but you may need the help of an attorney to pursue them.

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