Wednesday, July 6, 2011

Is tax on early termination fees legal

You had to terminate that cellphone contract for some reason. Sadly, you end up paying the early termination fees. But that's not all. Your final bill may include a tax on the early termination fees! Yes, getting charged tax on early termination fee does look unfair. However, it may not be illegal after all.

Is it legal?
Unfortunately, there is no simple yes or no answer for this. There are several factors at work. Such taxes are usually imposed by the state, so you need to know the state tax laws. One of the things you would want to check is whether your contract lists the early termination fees as a charge/fees or as a penalty. Ideally, one can argue that there should not be any taxes to be paid on penalty, but if it is treated as a charge by your provider, it may be difficult to argue other way. So, look up that contract.

To give an example, T-Mobile contract states "The Early Termination Fee is part of our rates and is not a penalty." You can look up the T-mobile terms and conditions here. In this case it would be hard to argue that taxes should not be applicable.

Does that mean there is no way around?
Well what you need to do is to check the tax law of the state your service is in. It could vary from state to state.

1 comment:

  1. This is a very thought provoking article. I am glad to see this topic being covered. I really enjoy reading these types of articles they help to keep me in the loop.

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