Guide to Bundled Transactions in US Sales Tax
A bundled transaction involves selling two or more products or services that are distinct and identifiable for one non-itemized price. In other words, the seller combines multiple items into a single transaction.
This can create complexities and challenges when determining the taxability of a transaction. The reason this matters to businesses is that if a bundled transaction includes a taxable item, the entire transaction could become taxable.
This article will explore bundled transactions in United States’ sales tax, including the true object test, de minimis rules, and some practical examples and tips for dealing with these transactions.
What are bundled transactions?
The concept of bundled transactions becomes relevant when 1) combining more than one item in a single transaction with a 2) single, non-itemized price. This could include tangible personal property, services, intangibles, or any combination of them.
- Distinct and Identifiable Items: To qualify as a bundled transaction, each item included in the bundled transaction should be otherwise distinct and separately identifiable. Some states may not recognize specific items as being distinct and identifiable products in a retail sale, depending on how their definition of sales price or purchase price is written. For example, a delivery service charge added to a product’s sale price may be deemed part of a single sales price in certain states.
- Non-Itemized Price: The transaction should be priced as a single, non-itemized amount that a buyer pays for all the included products or services. If retail sales of two or more items are not priced at a single, non-itemized amount, the sale is not considered a bundled transaction.
Why are bundles important?
One crucial consideration when dealing with bundled transactions is the potential for a change in the taxability of what is sold. Bundling taxable and non-taxable products or services together on an invoice may save time and effort for businesses and may also provide more straightforward pricing to the customer. However, this simplification may have a negative impact on the sales/use tax treatment of the bundled items.
For example, combining taxable tangible personal property items with a non-taxable service charge can make the entire bundled charge taxable. “Unbundled” invoices can help to identify non-taxable items separately, potentially resulting in a lower tax liability for the purchaser. It can also help provide a clearer understanding of the taxability of each item.
True Object Test
How can we determine the taxability of a bundled transaction?
Applying the true object test, also known as the "essence of the transaction" doctrine, is common practice in determining the taxability of bundled transactions. It is a widely utilized rule in US sales tax laws and can be found in state statutes, regulations, and court cases.
The primary objective of this test is to understand the true purpose of the transaction and the purchase intent behind it. However, it is a subjective test, which can be challenging to apply in practice, particularly when dealing with complicated bundled transactions. It may be difficult to separate certain transactions into neatly divided components of service and tangible personal property.
Some questions that you can (and the auditor or the court will) ask to determine the true object of the bundled transaction in question:
- What was the true object of the transaction?
- What did the purchaser want?
- What did the parties in the transaction bargain for?
- What is the weighted value of the service and TPP components of the transaction?
Now let’s see the true object test in practice. In a recent ruling in Colorado, the true object test was used to assess a tax liability against an online learning platform. The platform sold various subscription plans, providing digital courses featuring streaming video lessons and transcripts (taxable tangible personal property). Furthermore, students were able to access online tutoring services, meaning that they could interact and ask questions from the tutors in relation to the classes (non-taxable services).
The Department found that the tangible products offered in the form of streaming video lessons and written transcripts were the true object of the transaction. While the subscription plans also provided services, such as directing users to online tutors, these services only served to support customers' use of the platform. The court ruled that, as a result of a true object test, the learning plan subscriptions were more comparable to tangible personal property sales and thus subject to Colorado's sales and use tax.
De Minimis Rules
Another method governing the tax treatment of bundled transactions is the de minimis rules. De minimis is a Latin term meaning “too trivial.” It refers to something so minor or insignificant that it is considered too trivial for attention or concern.
In some states, a bundled transaction that includes taxable products or services may not be taxed if these items are deemed de minimis in relation to the total charge. For example, if taxable tangible personal property costs make up 10% or less of the transaction's total cost, the entire transaction could be considered a service and taxed accordingly. Given the trivial cost of the tangible personal properly, some states would effectively disregard this tangible personal property for the purposes of taxability and retain only the taxability of the principle nontaxable service.
The specific application of de minimis can vary among state sales tax laws, but most states define it as 10% or less of the bundle's total cost.
How can Fonoa help with sales and use tax?
With the complex and constantly changing sales tax landscape across jurisdictions, staying compliant with sales and use tax rates and laws can be daunting for many businesses. Fonoa offers a global tax engine that can be a valuable tool for companies operating in the US, providing a simple and efficient solution for managing sales and use tax obligations.
Get in touch to discover how we can help you meet the challenges and take the complexity out of tax.