The Country’s Most Expensive iPhone

My phone, until six days before, had been a three-year-old iPhone 3G, which I had kept despite the temptation of each new model. Attribute this as you wish to random carelessness or subconscious desire, but the weekend preceding Apple’s Friday launch of the iPhone 4S, I left the old phone in a movie theater, and it was never found. With no way to know how many iPhones the Providence Place Apple Store would have in stock on launch day or how many people would be in line for them, I decided to play it safe. The hassle of getting a free flip phone, transferring my number, waiting a few weeks until the iPhone 4S was back in stock, buying it, and transferring my number again was more than I was willing to risk. And so it was that, after a rather cold and creepy walk, I found myself sitting in a line outside the shopping center behind a Rhode Island School of Design professor and a handful of Providence College students and with a a copy of “The Name of the Rose” that I read by the glow of the mall’s security light and the stars of the morning.

I write all this only to give you a better appreciation for what I remember most vividly about the whole ordeal: insight about the Rhode Island sales tax code.

According to Rhode Island state law, a good sold must be taxed at a proportion (usually 7 percent) of its “true value” — not, that is, of the price at which it truly happens to be sold. With few exceptions, for example, goods on sale are taxed at pre-discount prices. Intuitively, this should strike anyone as absurd, since the market price of a good is defined by its “real value,”value, and no one would pay more for it as long as the discounter has it in stock. A discount is just a temporary fluctuation in the value of the good; if the sales tax would follow naturally falling market prices, it just as well ought to acknowledge price changes that last only a few days. It takes no profound economics to understand that whatever discounts or surcharges compose the final transaction, a sold good is “actually worth” no more than the most that its buyer was willing to pay for it and no less than the least than that its seller was willing to accept.

As terrible as it is that Rhode Islanders are perpetually overtaxed on their mattresses and kitchen appliances, though, the policy’s silliness is magnified in the case of contract-subsidized items such as iPhones. A contract-free iPhone sells for between $649 and $849, depending on the model, since (when one includes research and development per unit and so on) they cost a lot to make. Signing a two-year contract with a carrier at the point of purchase lowers the price to $199, but Apple can profit by selling units this cheaply only because carriers pay Apple a certain sum for the iPhone contracts that people sign with them, and one’s $199 plus a fraction of the money from the carrier exceeds Apple’s various costs. Though it is not specified on one’s monthly bill, Apple will receive about $400 of the $2,000 or so that one will pay the carrier over the next 24 months The Rhode Island law nonetheless taxes one on the really-$600 value of the phone and on the monthly fee, which amounts to double taxation on the $400 one pays Apple through the carrier. Contract subsidies magnify the effects of the law’s error, but it is the same error as that induced by an ordinary sale: In some way or another, the buyer always compensates the seller the “real value” of the product, or else the seller would not be selling it to him. The state inevitably over taxes when it tries to redefine the terms of the transaction.

When my hours of waiting through the night had come at last to an end, and I had dutifully picked out the least expensive iPhone 4S available and switched my plan to the least expensive option from Sprint, the least expensive carrier, I found that the sale would effectively be taxed at 21 percent. The duty on my “$600 purchase” came to $42 — more than the cost of a round-trip bus ticket to my home in New York City, which I might well have taken that morning had I known about the law beforehand. While it is true that Massachusetts has a similar “real value” sales tax policy, Connecticut, New York and every other state except California do not, and I would imagine that more than a few consumers have driven across the border to dodge the massive sales tax that this law arbitrarily creates. As the smallest state in the union, Rhode Island stands to lose a lot of business with a law as unfair, illogical and counterproductive as this one.

I wish I could say I put my foot down that morning and took my business elsewhere, but in the end, I feared a shortage and I had no phone. I will not make that mistake again. The shortage never came, and the store remained stocked, and Rhode Island ran out not of iPhones but of college freshmen ignorant and desperate enough to leap out of bed, brush their teeth and shiver for hours awaiting a phone with the sunrise.

 

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