22 April, 2015
The True Cost of Prepaid Wireless Service
If you are a prepaid wireless customer using a major nationwide network, you are probably very familar with purchasing service in the form of a gift card like one of these.
AT&T GoPhone refill card T-Mobile refill card Verizon Wireless refill card
And after making a retail purchase of one of these refill cards, you quickly discover that you are likely paying much more that the face for your service. The extra costs come in the form of sales tax and E911 fees. So, with taxes and fees, what is the true cost of prepaid wireless service (and can we lower it)?
Ground Rules
The added costs of prepaid wireless are state (and possibly local) sales tax(es) (unless you live in Delaware, Montana, New Hampshire or Oregon, the states which do not collect sales tax) and a fee for funding state Enhanced 911 services.
The average combined (state and local) sales tax rate for the fifty states and the District of Columbia is 6.32% (1). If we recalculate while excluding those four states that do not collect sales tax (DE, MT, NH & OR), the average sales tax rate is 6.91%.
E911 fees are collected in several different ways depending on the state. For those states which collect E911 fees as a percentage of the retail transaction, the average E911 fee is 1.32%.
With the average combined sales tax and E911 fees in hand, let's make our calculations based on the state of Colorado. The average combined sales tax in Colorado is 7.39% (0.48% above the national average for states collecting sales tax) and the E911 fee for prepaid wireless customers is 1.4% of the retail transaction (0.08% above the national average for states collecting E911 fees as a percentage of the retail transaction). This should give us a good feel for what the national landscape is like for the prepaid wireless customer, a bit above average, but in the ballpark.
And for service values, let's make the calculations on a retail purchase of sixty dollars ($60). This is near the typical cost of a monthly smartphone plan with reasonable data allowances on a major nationwide network.
All that is left to do then is to make the calculations for all the reasonable variations in which the retail purchase could be made, see what premium taxes and fees add to the cost of service and, maybe, optimize purchasing behavior along the way.
Cash
Making the retail purchase with cash will cost you the highest premium—because there is nothing in the retail transaction for you (excepting the anonymity that cash transactions provide—which may well be worth the extra cost).
Service
$60.00
Sales Tax
$4.43
E911 Fee
$0.84
Total Cost
$65.27
A $60 retail purchase will cost you $65.27 when sales tax and E911 fee are included. That is a premium of 8.8% over the service value.
Alright, that gives us a baseline to work against. What can we change in purchasing habits to lower the premium imposed on prepaid wireless retail transactions?
Credit Card
Used properly (in brief: as a very short-term loan, paid in full each billing cycle, never carrying a balance), a credit card can shift the total cost of prepaid wireless service a bit in your direction. The basic credit card reward (the credit card industry is complex, there are many different benefit offers and you may be able to do better—we'll hold to the earliest models) is 1% of your total purchases back as cash (from a card such as Discover, there are many others). Using a 1% reward credit for the purchase looks like this.
Service
$60.00
Sales Tax
$4.43
E911 Fee
$0.84
Purchase Price
$65.27
1% Reward
($0.65)
Total Cost
$64.62
With the cash reward of 1%, the total cost is of the service is reduced to $64.62, a 7.7% premium over the face value of the service. Certainly this is less expensive than the cash price, but not by much (the obvious 1%). Can we do better?
Credit Card + Fuel Rewards
To do better than the credit card reward, we need to know a little about the gift card industry. That little bit you need to know, and it should be self-evident, is that retails who sell gift cards for face value do not pay merchants (in our case wireless service providers) face value. Clearly the retailer is making a profit on gift card sales; the best evidence is that you see gift card racks in nearly every retail outlet—there must be good profits in selling them.
While it is good for the retailer selling the gift card, why is it good for the issuer of the gift card, the provider who will ultimately honor that gift card, providing goods and services in the face value amount? The reasons are numerous for rise of gift cards. We will just mention a few reasons why they are a common business practice. The first reason is that the issuer of the gift card has their money long before goods and services are rendered (and don't think they don't know that consumers loose and forget about gift cards such that they never have to render service). Also, consumers tend to treat gift cards distinctly from cash and may not be as bargain hungry when using a gift card—the "free money" syndrome. For these and other reasons gift cards are a valuable proposition for gift card issues.
Since retailers are making a nice profit selling gift cards for very little work or retail space, some are often willing to pass on some of those profits in the form of savings to their customers. A classic exam is a grocery store with a linked fuel rewards program. The general pattern is that the grocery store will offer so many cents off per gallon of gasoline at a participating filling station for each five or ten dollar increment spent on groceries. And they will offer much larger rewards on gift card purchases—gift card purchases include prepaid wireless service refill cards.
Remembering that we are using Colorado as our example state, we'll need to find a typical fuel rewards program operating in that state. The large western grocery store chain Safeway operates the Safeway Reward Points program that provides 2 Safeway Reward Points for each $1 spent on gift cards. One hundred points can be redeemed for 10¢ off per gallon at Safeway and other participating gas stations. Remembering that our target purchase is a $60 service refill card, that purchase will earn 120 Safeway Reward Points. They can, however, only be redeemed in multiples of 100, so we'll ignore the value in those extra 20 points—they will still be around next month, or can be used if buying other items, but for now we'll consider only the single purchase. Also, the maximum fuel volume available at the discount price is 25 gallons. We'll maximize the reward assuming you drive a 1993 Ford F-150 with dual tanks holding 34+ gallons. Your reward will not be as large if you drive a compact vehicle and can't purchase 25 gallons of gasoline in a single transaction.
Service
$60.00
Sales Tax
$4.43
E911 Fee
$0.84
Purchase Price
$65.27
1% Reward
($0.65)
10¢/gal for 25 gal
($2.50)
Total Cost
$62.12
With the extra reward in reduced fuel costs, the total spending for $60 in service is $62.12, a 3.5% premium over face value. We've managed to cut the taxes and fees premium by more than half by combining credit card and fuel rewards when purchasing refill cards from a participating grocery store.
However, we are still paying face value plus a modest premium. Might there be another buying option in which some of the service provider's discount is shared directly with the customer in the form of paying less than face value for the gift card, and can we do better purchasing service refills there?
Club Store + Credit Card
The model for the wholesale club stores (BJ's Wholesale Club, Costco Wholesale or Sam's Club in the United States) is that a annual membership allows you access to reduced pricing on many (often oversized) items. The discount they offer isn't exactly wholesale, and the prepaid wireless refill cards available will vary by location and chain (and will usually be only the large denominations, like most other products in the warehouse store), but the club stores are the most likely to share a portion of that discount with their members.
On average you might expect a 5% discount from the face value of your refill card (but you'll have to visit your club store for details—these discounts don't make their online sales listings). With that size discount, and our calculations of the purchase premium above, we can quickly calculate that we're likely to do better (larger discount), but probably will still be paying a small premium over the face value of the service following those discounts. The numbers are as follows.
Service
$56.98
Sales Tax
$4.21
E911 Fee
$0.80
Purchase Price
$61.99
1% Reward
($0.62)
Total Cost
$61.37
With the club store discount from the face value (just about 5%), the resulting premium is just $1.37, or 2.3%. This cost is a bit lower ($0.75) than the full complement of discounts from a grocery store (assuming you can purchase the full discounted fuel volume in one transaction), but you'll need a membership in the wholesale warehouse club—a membership which is upward of $50 annually. Clearly this route is a good choice if you are a club member already, but a seventy-five cent monthly savings will not be paying for your annual membership.
Summary
When purchasing wireless refill cards from a retail outlet, you are likely to face sales tax and an E911 fee that will raise your cost of mobile service. Paying with cash is the best option if you value your anonymity over a few dollars (if you truly value your privacy, you had better also be changing SIM cards, and possibly handsets, regularly as well—saving a little money certainly isn't the key motivating factor if anonymity in telecommunications is what you desire). Making retail purchases with a credit card, used properly, will save you a bit on the premium of taxes and fees, but if you'd like to eat into those taxes and fees in a meaningful way, you'll need to seek out a seller who will let you in on some of the gift card discount. Many grocery store chains around the country offer sizable fuel discounts for gift card purchases. This option makes sense if you regularly buy gasoline (not much use for those living in cities where driving often unnecessary). This is the best retail option shy of using a wholesale club membership. If you have a membership, your member discount will be the best route, but the savings you'll realize are unlikely, in and of themselves, to make the club membership a true savings for only your prepaid wireless purchases.
References
(1).  Drenkard S. (2014) State and Local Sales Tax Rates in 2014. FISCAL FACT No. 420.
Home |  Page generated in 0.02388 seconds.