Revenue dings the rings of cheap cellular phones.

Talk is cheap, but cellular phones aren't. So when retailers began selling them for a buck or sometimes even a penny, that attracted attention - from the state Department of Revenue.

In January, it started requiring retailers to cough up a 6% use tax when they sell cell phones. The tax is based not on the sale price but the cost of the phone, which can run upward of $200.

"They're paying it in protest," says Betsy Justus, president of the Research Triangle Park-based trade group North Carolina Electronics & Information Technologies Association. "You are levying a tax on a product simply because we're not asking the buyer to pay full value. The tax ends up being more than the value of the phone."

But William C. Smith, administrative officer at the Department of Revenue's Sales and Use Tax Division, isn't buying it. The reason? Service contracts. When a customer buys his phone for a penny, he also signs up for cellular service. The service providers, he says, give retailers "a commission that helps offset the cost of the phone." "We do pay [retailers] a fee to represent our products and services," says Karen Puckett, Southeast president of Cellular One in Raleigh. "They're not going to do it for us for free."

Before levying the tax, two-thirds of which goes to the state and one-third to counties, the department looked at how other states handle such sales, Smith says. Some tax the commission or the undiscounted retail price. Others simply tax the pittance the phones sell for. Given state statutes, Smith says, "we felt that this [6% tax] was the right approach."

Cellular phones aren't the only target. The tax applies to so-called "bundled" products and services. That includes beepers, security systems and satellite TV dishes.

The NCEITA plans to fight back. It wants the tax repealed. Puckett, a member of the NCEITA's board of directors, says, "We have hired a lobbyist."

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