Legal Question in Consumer Law in California

It is not only legal it is mandatory under California tax law.

I doubt it. Sales tax is a percentage of the amount an item is sold for, not of its value. Would the taxing service allow you to argue that you overpaid for any item, could stores withhold from paying the FTB the portion of the sale's price representing their overhead and profit margins, do you pay sales tax on the amount you pay a car dealer or is it reduced by the $500 or more it instantly looses in value when driven off the lot, etc. You should call up the merchant and find out their rationale and check with the FTB and then call the merchant back and demand reimbursement/dropping of the additional charge. This may be a scam by the company and they probably do not pay the full tax collected to the FTB.

In light of Mr. McCormick answer, which I did not see before posting mine, I would have to say my answer might be wrong. It may very well depend upon how the price is described; if they say it is sold to you for $500 but they will refund $450 back to you, the sales tax would be on $500, but if they say the phone is normally $500 and they are selling it to you at a special price of $50 without your having to pay anything else [such as a contract to use their services for 2 years and pay for those services -- in which case they have sold you for more than $50 a usage plan] I doubt it. You need to clarify what actually was sold to you and at what price, then contact the FTB or othe agency and find out what the situation is.