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Bundled Transactions: 5 Steps to Determining Taxability
What Is a Bundled Transaction?
A bundled transaction is the retail sale of two or more products in which (1) the products are distinct and identifiable and (2) the products are sold for one non-itemized price. The reason this matters to businesses is that, if a bundled transaction includes a taxable product, then the entire transaction could become taxable. The 5-step process below will help you determine whether that is the situation for a particular bundled transaction although there are variances in each state’s individual application of these concepts.
“Products” recognized for the purpose of a bundled transaction include tangible personal property, services, intangibles, digital goods, and other products on which sales tax may be charged in a retail sale which may vary from state to state. However, “products” excluded from consideration are real property and services to real property. Examples of services to real property include building framing, roofing, plumbing, electrical, painting, janitorial, pest control, and window cleaning.
Step 1: Two or More Products Distinct and Identifiable Products
If items are included in a state’s definition of sales price or purchase price, then a retail sale may not be considered to consist of “two or more distinct and identifiable products.” For example, a delivery service charge in connection with the sale of a good will constitute a single sales price in many states. Items that are usually considered as part of the definitions of “sales price” and “purchase price” are:
- Costs of property sold
- Costs of materials used, labor or service costs, interest, losses, costs of transportation to the seller, taxes imposed on the seller, and expenses of the seller
- Packaging if the wrapping or packing accompanies the retail sale of a product and such packaging is incidental or immaterial to the retail sale of the product
- Charges for services necessary to complete the sale of a product (some states exclude this from the sales price of a product if separately itemized on an invoice given to the purchaser)
- Delivery charges (some states exclude this from the sales price of a product if separately itemized on an invoice given to the purchaser)
- Installation charges (some states exclude this from the sales price of a product if separately itemized on an invoice given to the purchaser)
- Credit for any trade-in as determined by state law (some states exclude this from the sales price of a product if separately itemized on an invoice given to the purchaser)
Step 2: One Non-Itemized Price
The second basic element of a bundled transaction is that the sales price of the bundled products must be for one price that is not itemized on the invoice or sales-related documents made available to the purchaser. If a retail sale of two or more products is not made for one non-itemized price, then the retail sale is not a bundled transaction. Also, a bundled transaction does not exist when the sales price varies (whether by negotiation or otherwise) or with the selection of the distinct and identifiable products by the purchaser.
Step 3: Taxable Product is Not De Minimis
De minimis means the seller’s “purchase price” or “sales price” of the taxable products is 10% or less of the total “purchase price” or “sales price” of the bundled products. A seller may not use the sales price for some of the products and purchase prices for other products to measure whether the taxable product in the transaction is de minimis. Sellers should use the full term of a service contract to determine if the taxable product is de minimis. When a taxable product is determined to be de minimis, the transaction is not defined as a bundled transaction. De minimis products will include those that are provided free of charge.
Step 4: Exempt TPP is Less Than 50% of Bundled TPP
The analysis of specified categories of exempt tangible personal property (TPP) compared to the amount of taxable TPP only applies if the entire bundled transaction consists of TPP. As such, one of the products must be: food and food ingredients including soft drinks, candy, and dietary supplements; drugs including over-the-counter and grooming and hygiene products; durable medical equipment; mobility enhancing equipment; prosthetic devices; medical supplies; or other similarly specified TPPwhich may vary from state to state. If the exempt TPP is less than 50% of the purchase or sales price of the bundled transactions, then the bundled transaction is taxable.
Step 5: True Object Test to Determine Primary TPP or Service
For bundled transactions involving both taxable TPP and non-taxable services, then the true object test is used to make the determination. If the intent of the purchaser was to purchase the services with TPP, which is merely incidental to those services, then the true object of the transaction is the non-taxable service. In this case, the bundled transaction is not taxable. An example of this would be tangible learning materials provided with the service of professional training; another example would be blueprints provided to the customer of architectural design services.
Similarly, if a bundled transaction includes two services, the first taxable and the second being exempt from taxation, then the true object test is applied. If the second service in a bundle is included because it is essential to the use or receipt of the first service and the second service is only provided in connection with the first service, then the primary purpose of the bundle is for the customer to use or receive the first service, which is taxable and which then makes the bundled transaction taxable. If the primary service is non-taxable, then the entire bundle would likely be non-taxable. De minimis rules applied earlier will have eliminated many of those kinds of non-taxable service bundles.
Tips for the Taxpayer
From a business perspective, bundled transactions can make sense in order to appropriately advertise and sell products as well as to increase revenue. Also, bundled transactions can reduce the administrative burden of itemizing each product in a sale and separately determining and applying sales tax. As such, there are numerous factors especially in complex commercial transactions where bundling makes sense.
The best approach then is to be knowledgeable about how each item would be taxed separately as a product (whether good or service) which does vary greatly by state. This base knowledge will allow you to create various combinations of goods and services and then apply the outlined 5-step process for review in a streamlined manner. There are a limited number of bundle categories which may require closer scrutiny such as those involving taxable digital services as well as warranty, repair and service contracts. However, in those bundled transaction types which are most often encountered by businesses, the above approach will provide clarity as a guiding tool.
How Can We Help?
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Contributor: Stephen Wilhelm
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