3. Making sales tax less taxing
Bundled Transactions: Agenda
• What is a Bundled Transaction?
• How to determine the taxability of bundled
transactions?
• Why are items treated differently at all?
• What are options for vendors?
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4. Making sales tax less taxing
Bundled Transactions.
• What is a Bundled Transaction?
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5. Making sales tax less taxing
Bundled Transactions: Defined
• A “Bundled transaction” is a sale of multiple
sales tax objects with a single sales price.
The sale may include both taxable and
nontaxable objects.
• The vendor charges a customer one sales
price for all objects sold instead of
separately charging for each individual
object.
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6. Making sales tax less taxing
Bundled Transactions: Defined
An “Object” is a distinct and identifiable
sales tax component of a sale:
• TPP
• Services
• Maintenance Agreement Labor or Parts
• Digital Goods
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7. Making sales tax less taxing
Bundled Transactions: Defined
NOT distinct and identifiable sales tax
components of a sale:
• Packaging
• Promotional Items
• Objects whose inclusion or not does not
affect price
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8. Making sales tax less taxing
Bundled Transactions: Who Decides?
• Most states include certain elements of a sale in
the regulatory definition of “sales price”:
• FL: ““Sales price” means the total amount paid for tangible personal
property, including any services that are a part of the sale …” Fla.
Admin. Code Ann. 12A-1.016 (2).
• IA: “<“sales price” includes> (3) charges by the seller for any
services necessary to complete the sale, other than delivery and
installation charges;(4) delivery charges;(5) installation charges;”
Iowa Code § 423.1 (51) (a).
• These elements are not part of a bundle. They are
part of the “sales price”: the amount on which the
sales tax is based for a given taxable sale.
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9. Making sales tax less taxing
Bundled Transactions: Who Decides?
• “Distinct & Identifiable”
– Is a service contract for labor a “distinct
and identifiable object” when bundled with
a sale of tpp?
– Is a digital subscription a “distinct and
identifiable object” when combined with a
print subscription?
• Some states allow a legal test, others
are less charitable to bundles.
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10. Making sales tax less taxing
Bundled Transactions: Examples
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Object A Object B
Taxable TPP Exempt TPP
ie: Gift Baskets*
Object A Object B
Taxable Services Exempt Services
ie: Installation and Maintenance*
Object A Object B
Taxable TPP Exempt Services
ie: Installation of Sold TPP*
There are a lot of possibilities for bundling, here are a few examples:
* taxability depends on specific state law.
11. Making sales tax less taxing
Bundled Transactions.
• How to determine the taxability of
Bundled Transactions?
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12. Making sales tax less taxing
Bundled Transactions: Taxable or Not?
• “True Object Test” and “Dominant Purpose Test” are
legal tests to determine whether a bundle actually
contains distinct objects or not.
• Some states reference a version of these tests to
determine whether a bundle is a bundle or not for
sales tax purposes.
• Keep in mind these tests were developed when
services were not broadly taxable and when services
made up a smaller segment of our economic activity.
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13. Making sales tax less taxing
Bundled Transactions: Taxable or Not?
An auditor may or may not apply a “true
object” or “dominant purpose” test in a
manner that benefits your position.
The tests are inherently legalistic and at
best require a lot of judgment.
Document the decisions you make and
probably the best thing to keep in mind:
If it quacks like a bundle, it probably is one.
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14. Making sales tax less taxing
Bundled Transactions: Taxable or Not?
• Other states do not provide for a legal test at
all.
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15. Making sales tax less taxing
Bundled Transactions: Taxable or Not?
• Some states: Any object in a bundle is
taxable, the entire bundle is taxable.
• AR: “sales tax must be collected on the sales price of a
bundled transaction if any product included in the bundled
transaction would be taxable if sold separately.” Ark. Regs.
GR-93 (A).
• IN: “Sales tax and use tax are imposed on the gross retail
income received by a retail merchant in a retail unitary
transaction.” “A “unitary transaction” includes all items of
personal property and services furnished under a single
order or agreement, for which a total combined charge is
calculated.” Ind. Code § 6-2.5-2-2 (a) & Ind. Code § 6-2.5-1-1
(a).
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16. Making sales tax less taxing
Bundled Transactions: Taxable or Not?
• Some States: Exempt Services are Taxable
when Bundled with Taxable TPP.
• AZ: “Gross receipts from services rendered in addition to
selling tangible personal property at retail are subject to tax
unless the charge for service is shown separately on the
sales invoice and records.” Ariz. Admin. Code R15-5-105.
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17. Making sales tax less taxing
Bundled Transactions: Taxable or Not?
• No states provide for exemption of a
bundled item per se.
• Only states that allow a “true object”
test or “dominant purpose” test will
ever view a bundle as exempt based
on the inclusion of an exempt object in
the bundle.
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18. Making sales tax less taxing
Bundled Transactions.
• Why are tpp and services taxed
differently (or not at all)?
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19. Making sales tax less taxing
Bundled Transactions. Why?
• The states vary in the manner in which they
treat the sales of various objects.
• Services are an area of growth in terms of
taxability.
• The growth of the service economy has
triggered responses state by state.
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20. Making sales tax less taxing
Bundled Transactions. Why?
• As services take a larger and larger role in
commerce, more and more transactions include an
element of service.
• Stand alone services, or at least those separately
stated, present a significant challenge in
determining taxability by themselves.
• Bundling services with tpp compounds the
challenge.
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21. Making sales tax less taxing
Bundled Transactions. Why?
• Evasion of taxes is an issue for the states
when otherwise taxable objects are bundled
with exempt objects (services or tpp).
• States recognize the growth of the service
element of many transactions and are not
keen on allowing exemptions for bundled
transactions even when exempt objects are
included.
• Most states take a dim view of bundling.
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22. Making sales tax less taxing
Bundled Transactions.
• What are options for vendors?
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23. Making sales tax less taxing
Bundled Transactions: Allocation
• Otherwise known as “books and records
unbundling”
• Only about half the states allow this
technique at all. However most of them limit
this strategy to certain industries:
– Telecommunications
– Internet Access
– Audio/Video Programming
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24. Making sales tax less taxing
Bundled Transactions: Allocation
• Allocation or “books and records
unbundling” is not allowed in half the states
at all, and limited in its scope in most others.
• Where does that leave a vendor?
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25. Making sales tax less taxing
Bundled Transactions: Allocation
• In the absence of a binding legal
determination from a state, in the form of a
PLR or specific publication, the practice of
bundling can leave your company exposed
to under or over collection of sales taxes.
• There is no magic bullet.
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26. Making sales tax less taxing
Bundled Transactions: Re-Cap
• What is a Bundled Transaction?
– a sale of multiple sales tax objects with a single sales price
– not applicable to items defined as part of the “sales price”
• How to determine the taxability of bundled
transactions?
– state specific bundling rules
– in some states, the application of a legal test
• Why are items treated differently at all?
– move to a service economy has forced the states to address
their taxability
• What are options for vendors?
– get a specific OK from a state, stop bundling, or risk
adverse audit results
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