Tried hooking the tablet to a 1080p HDTV and set the desktop resolution to 1080p 60Hz.
Noticed it appears to be using a low bit rate color setting , banding seen on the desktop, in videos etc...
UPDATE : Solved this issue by a full restart with the HDMI cable connected. The original problem occurred when I connected the TV with the device on. Works great now, full 1080P video and digital audio.
I am sorry but why don't you just take the thing back and get it replaced? I see post after post from you that all point to the same thing: a defective unit. At some point I am expecting to see you post a question asking whether people can get their device to turn on since you are having a problem and want to make sure it isn't an issue with all devices.