When you sign a contract, the carrier is not discounting the price of the phone, they merely give you a credit to use toward the purchase of the phone. The cost of the phone still remains the same and if you look at your receipt, it will also show that the cost of the phone has not been discounted. You still pay taxes on the full amount of the phone, because that is what is being reported to the government as the cost of the goods sold. Another reason that probably factors into why the phones are subsidized rather than discounted is to not affect reporting on sales revenue.