Bundling for Tax Purposes

willyancey.com
Will Yancey, PhD, CPA
Email: will@willyancey.com

Address of this page: http://willyancey.com/tax-bundling.htm

Contents of this page:

Review articles and commentary son Bundling issues in taxation
Mobile Telecom Sourcing Acts (MTSA) on Bundling
Streamlined Sales Tax (SST) requirements and proposals on Bundling
State statutues, regulations, cases, and guidance on Bundling
Outside USA policies on Bundling for tax purposes

Related Web pages:

This web page is not an exhaustive list of all links and citations on Bundling for tax purposes. Please e-mail any comments or suggestions to will@willyancey.com

Review articles and commentary on Bundling issues in taxation

Beshears, Mark, "Testimony on Internet Tax Moratorium", US Senate Committee on Commerce, Science, and Transportation, July 16, 2003, http://commerce.senate.gov/hearings/testimony.cfm?id=861&wit_id=2374
Fallah, M. Hossein, "Telecommunications evolution and inequities of current tax policies: A case analysis for New Jersey", 29 Telecommunications Policy 255 (2005), http://howe.stevens.edu/CTMR/WorkingPapers/WP2005/Fallah,%20Telecommunications%20evolution%20and%20inequities%20of%20current%20tax%20policies.pdf
Nelson, Bruce, and Dee Tagliava, "Convergence and Bundling: The Impact on State and Local Telecommunications Taxes", State and Local Tax Lawyer, Volume 5, (2000). Abstract at http://www.abanet.org/tax/pubs/saltl/saltl00/saltl00abs.html
Yancey, Will, David Greaves, and Kathy Saxton, "Valuing Service Bundles for Tax Purposes", TeleStrategies Webinar, February 7, 2006. [Email will@willyancey.com for a copy.]
Yancey, Will, and David Greaves, "Valuing Service Bundles for Tax Purposes", TeleStrategies Communications Taxation conference, June 13, 2006. [Email will@willyancey.com for a copy.]
Yancey, Will, "Bundling and Communications Taxation", United States Communications Association (USCA), May 10, 2006. [Email will@willyancey.com for a copy.]

Mobile Telecom Sourcing Acts (MTSA) on Bundling

Mobile Telecommunications Sourcing Act (Public Law 106-252), enacted July 2000, amending United States Code, Title 4, Chapter 4, sections 116 - 126.

4 USC § 123, http://caselaw.lp.findlaw.com/casecode/uscodes/4/chapters/4/sections/section_123.html

Scope; special rules
(a) Act Does Not Supersede Customer's Liability to Taxing Jurisdiction.--Nothing in sections 116 through 126 modifies, impairs, supersedes, or authorizes the modification, impairment, or supersession of, any law allowing a taxing jurisdiction to collect a tax, charge, or fee from a customer that has failed to provide its place of primary use.
(b) Additional Taxable Charges.--If a taxing jurisdiction does not otherwise subject charges for mobile telecommunications services to taxation and if these charges are aggregated with and not separately stated from charges that are subject to taxation, then the charges for nontaxable mobile telecommunications services may be subject to taxation unless the home service provider can reasonably identify charges not subject to such tax, charge, or fee from its books and records that are kept in the regular course of business.
(c) Nontaxable Charges.--If a taxing jurisdiction does not subject charges for mobile telecommunications services to taxation, a customer may not rely upon the nontaxability of charges for mobile telecommunications services unless the customer's home service provider separately states the charges for nontaxable mobile telecommunications services from taxable charges or the home service provider elects, after receiving a written request from the customer in the form required by the provider, to provide verifiable data based upon the home service provider's books and records that are kept in the regular course of business that reasonably identifies the nontaxable charges.

Streamlined Sales Tax requirements and proposals on Bundling

The Streamlined Sales Tax (SST) is an organization of states formed in 2000 to work on state sales and use tax policy.

"Bundling Issue Paper", revised November 4, 2005. Revision with examples, February 20, 2006.
"SSTP Bundled Transaction Definition", February 1, 2005. http://www.streamlinedsalestax.org/bundled%20transaction%20definition_020105.pdf
Streamlined Sales and Use Tax Agreement (SSUTA), revised January 13, 2006, http://www.streamlinedsalestax.org/Final%20Agreement%20As%20Amended%2001-13-06.pdf

Section 330: BUNDLED TRANSACTIONS (Effective on and after January 1, 2008)

A. A member state shall adopt and utilize to determine tax treatment, the core definition for a "bundled transaction" in Appendix C, Part I of the Library of Definitions in the Agreement.
B. Member states are not restricted in their tax treatment of bundled transactions except as otherwise provided in the Agreement. Member states are not restricted in their ability to treat some bundled transactions differently from other bundled transactions.
C. In the case of a bundled transaction that includes any of the following: telecommunication service, ancillary service, internet access, or audio or video programming service:

1. If the price is attributable to products that are taxable and products that are nontaxable, the portion of the price attributable to the nontaxable products may be subject to tax unless the provider can identify by reasonable and verifiable standards such portion from its books and records that are kept in the regular course of business for other purposes, including, but not limited to, non-tax purposes.
2. If the price is attributable to products that are subject to tax at different tax rates, the total price may be treated as attributable to the products subject to tax at the highest tax rate unless the provider can identify by reasonable and verifiable standards the portion of the price attributable to the products subject to tax at the lower rate from its books and records that are kept in the regular course of business for other purposes, including, but not limited to, non-tax purposes.
3. The provisions of this section shall apply unless otherwise provided by federal law.

Appendix C: Library of Definitions. Part I. Administrative Definitions. Added April 16, 2005. A "bundled transaction" is the retail sale of two or more products, except real property and services to real property, where (1) the products are otherwise distinct and identifiable, and (2) the products are sold for one non-itemized price. A "bundled transaction" does not include the sale of any products in which the "sales price" varies, or is negotiable, based on the selection by the purchaser of the products included in the transaction. "Distinct and identifiable products" does not include:

1. Packaging - such as containers, boxes, sacks, bags, and bottles - or other materials - such as wrapping, labels, tags, and instruction guides - that accompany the "retail sale" of the products and are incidental or immaterial to the "retail sale" thereof. Examples of packaging that are incidental or immaterial include grocery sacks, shoeboxes, dry cleaning garment bags and express delivery envelopes and boxes.
2. A product provided free of charge with the required purchase of another product. A product is "provided free of charge" if the "sales price" of the product purchased does not vary depending on the inclusion of the product "provided free of charge."
3. Items included in the member state's definition of "sales price," pursuant to Appendix C of the Agreement.
4. The "retail sale" of exempt tangible personal property and taxable tangible personal property where: the transaction includes "food and food ingredients", "drugs", "durable medical equipment", "mobility enhancing equipment", "over-the-counter drugs", "prosthetic devices" (all as defined in Appendix C) or medical supplies; and where the seller's "purchase price" or "sales price" of the taxable tangible personal property is fifty percent (50%) or less of the total "purchase price" or "sales price" of the bundled tangible personal property. Sellers may not use a combination of the "purchase price" and "sales price" of the tangible personal property when making the fifty percent (50%) determination for a transaction.

State statutues, regulations, cases, and guidance on Bundling

Links to all state laws are at http://www.law.cornell.edu/states/listing.html

Florida

Florida Statute § 202.11(13) [After Ch. 2005-187 (S.B. 2070), Laws 2005, effective July 1, 2005 and applicable retroactively to October 1, 2001.] "Sales price" means the total amount charged in money or other consideration by a dealer for the sale of the right or privilege of using communications services in this state, including any property or other services that are part of the sale. The sales price of communications services shall not be reduced by any separately identified components of the charge that constitute expenses of the dealer, including, but not limited to, sales taxes on goods or services purchased by the dealer, property taxes, taxes measured by net income, and universal-service fund fees.

(a) The sales price of communications services shall include, whether or not separately stated, charges for any of the following:

1. The connection, movement, change, or termination of communications services.
2. The detailed billing of communications services.
3. The sale of directory listings in connection with a communications service.
4. Central office and custom calling features.
5. Voice mail and other messaging service.
6. Directory assistance.
7. The service of sending or receiving a document commonly referred to as a facsimile or "fax," except when performed during the course of providing professional or advertising services.

(b) The sales price of communications services does not include charges for any of the following:

1. Any excise tax, sales tax, or similar tax levied by the United States or any state or local government on the purchase, sale, use, or consumption of any communications service, including, but not limited to, any tax imposed under this chapter or chapter 203 which is permitted or required to be added to the sales price of such service, if the tax is stated separately.
2. Any fee or assessment levied by the United States or any state or local government, including, but not limited to, regulatory fees and emergency telephone surcharges, which is required to be added to the price of such service if the fee or assessment is separately stated.
3. Communications services paid for by inserting coins into coin-operated communications devices available to the public.
4. The sale or recharge of a prepaid calling arrangement.
5. The provision of air-to-ground communications services, defined as a radio service provided to purchasers while on board an aircraft.
6. A dealer's internal use of communications services in connection with its business of providing communications services.
7. Charges for property or other services that are not part of the sale of communications services, if such charges are stated separately from the charges for communications services.
8. To the extent required by federal law, charges for Internet access services which are not separately itemized on a customer's bill, but which can be reasonably identified from the selling dealer's books and records kept in the regular course of business. The dealer may support the allocation of charges with books and records kept in the regular course of business covering the dealer's entire service area, including territories outside this state.

Georgia

Georgia Code Annotated § 48-8-2 (4)(B).

(i) Charges, when applied to sales of telephone service, made for local exchange telephone service, except local messages which are paid for by inserting coins in coin operated telephones, but including the total amount of the guaranteed charge for semipublic coin box telephone services; except as otherwise provided in division (ii) of this paragraph.
(ii)(I) If a telephone service is not subject to the tax levied by this chapter, and if the amount charged for such telephone service is aggregated with and not separately stated from the amount paid or charged for any service that is subject to such tax, then the nontaxable telephone service shall be treated as being subject to such tax unless the telephone service provider can reasonably identify the amount paid or charged for the telephone service not subject to such tax from its books and records kept in the regular course of business.
(ii)(II) If a telephone service is not subject to the tax levied by this chapter, a customer may not rely upon the nontaxability of such telephone service unless the telephone service provider separately states the amount charged for such nontaxable telephone service or the telephone service provider elects, after receiving a written request from the customer in the form required by the provider, to provide verifiable data based upon the provider's books and records that are kept in the regular course of business that reasonably identifies the amount charged for such nontaxable telephone service.

Kansas

Kansas Statutes Annotated § 79-3603(b)(3), http://www.kslegislature.org/legsrv-statutes/index.do. The gross receipts from the provision of services taxable under this subsection which are billed on a combined basis with nontaxable services, shall be accounted for and the tax remitted as follows: The taxable portion of the selling price of those combined services shall include only those charges for taxable services if the selling price for the taxable services can be readily distinguishable in the retailer's books and records from the selling price for the nontaxable services. Otherwise, the gross receipts from the sale of both taxable and nontaxable services billed on a combined basis shall be deemed attributable to the taxable services included therein. Within 90 days of billing taxable services on a combined basis with nontaxable services, the retailer shall enter into a written agreement with the secretary identifying the methodology to be used in determining the taxable portion of the selling price of those combined services. The burden of proving that any receipt or charge is not taxable shall be upon the retailer. Upon request from the customer, the retailer shall disclose to the customer the selling price for the taxable services included in the selling price for the taxable and nontaxable services billed on a combined basis;

North Carolina

North Carolina General Statutes § 105-164.4C(c), http://www.ncleg.net/enactedlegislation/statutes/html/bysection/chapter_105/gs_105-164.4c.html Excluded From Gross Receipts. --Gross receipts derived from telecommunications service do not include any of the following:

(1) Charges for telecommunications services that are a component part of or are integrated into a telecommunications service that is resold. Examples of services that are resold include carrier charges for access to an intrastate or interstate interexchange network, interconnection charges paid by a provider of mobile telecommunications service, and charges for the sale of unbundled network elements. An unbundled network element is a network element, as defined in 47 U.S.C. Section 153(29), to which access is provided on an unbundled basis pursuant to 47 U.S.C. Section 251(c)(3).

North Carolina General Statutes § 105-164.4C(d). Bundled Services. --When a taxable telecommunications service is bundled with a service that is not taxable, the tax applies to the gross receipts from the taxable service in the bundle as follows:

(1) If the service provider offers all the services in the bundle on an unbundled basis, tax is due on the unbundled price of the taxable service, less the discount resulting from the bundling. The discount for a service as the result of bundling is the proportionate price decrease of the service, determined on the basis of the total unbundled price of all the services in the bundle compared to the bundled price of the services.
(2) If the service provider does not offer one or more of the services in the bundle on an unbundled basis, tax is due on the taxable service based on a reasonable allocation of revenue to that service. If the service provider maintains an account for revenue from a taxable service, the service provider's allocation of revenue to that service for the purpose of determining the tax due on the service must reflect its accounting allocation of revenue to that service.

North Carolina Department of Revenue, Important Notice 10-06: Sales Tax On Video Programming Service, www.dor.state.nc.us/taxes/sales/VideoNotice10-06.pdf, If a provider does not offer one or more of the services in the bundle on an unbundled basis, tax is due on the taxable service based on a reasonable allocation of revenue to that service.

North Dakota

North Dakota Statutue Chapter 57-39.2, section 1. Bundled telecommunications services including exempt services -- In the case of a bundled transaction of services that includes telecommunications services, if the price is attributable to services that are taxable and services that are nontaxable, the portion of the price attributable to the nontaxable services is subject to tax under this chapter and chapter 57-40.2 unless the provider can reasonably identify the nontaxable portion of the services from its books and records kept in the regular course of business.
North Dakota Tax Commissioner Rule 81-04.1-04-41.1. Communication Services. Amended effective April 1, 2006. Paragraph 5. Implements .

Ohio

Ohio Revised Code Annotated § 5739.012. Definitions

(A) As used in this section:

(1) "Bundled transaction" means the retail sale of two or more products, except real property and services to real property, where the products are otherwise distinct and identifiable products and are sold for one non-itemized price. "Bundled transaction" does not include the sale of any products in which the sales price varies, or is negotiable, based on the selection by the consumer of the products included in the transaction.
As used in division (A)(1) of this section:

(a) "Distinct and identifiable products" does not include any of the following:

(i) Packaging, including containers, boxes, sacks, bags, and bottles, and packaging materials, including wrapping, labels, tags, and instruction guides that accompany the retail sale of the products and are incidental or immaterial to the retail sale thereof;
(ii) A product provided free of charge with the required purchase of another product. A product is provided free of charge if the sales price of the product purchased does not vary depending on the inclusion of the product provided free of charge.
(iii) Items included in the definition of "price" under division (H) of section 5739.01 of the Revised Code.

(b) "One non-itemized price" does not include a price that is separately identified by product on binding sales or other supporting sales-related documents made available to the consumer in paper or electronic form, including, but not limited to, an invoice, bill of sale, receipt, contract, service agreement, lease agreement, periodic notice of rates and services, rate card, or price list.

(2) "De minimis" means the vendor's or seller's purchase price or sales price of taxable products is ten per cent or less of the total purchase price or sales price of bundled products. Vendors and sellers shall use either the purchase price or the sales price of the products to determine if the taxable products are de minimis, and shall use the full term of a service contract to determine if the taxable products are de minimis. Vendors and sellers shall not use a combination of the purchase price and sales price of the products to determine if the taxable products are de minimis.
(3) "Over-the-counter drug" means a drug that contains a label that identifies the product as a drug as required by 21 C.F.R. 201.66, and the label includes either a "Drug Facts" panel or a statement of the active ingredients with a list of those ingredients contained in the drug.

(B) A transaction that otherwise meets the definition of a bundled transaction is not a bundled transaction if it is any of the following:

(1) A retail sale of tangible personal property and a service where the tangible personal property is essential to the use of the service, and is provided exclusively in connection with the service, and the true object of the transaction is the service;
(2) A retail sale of services where one service is provided that is essential to the use or receipt of a second service, the first service is provided exclusively in connection with the second service, and the true object of the transaction is the second service;
(3) A transaction that includes taxable products and nontaxable products, and the purchase price or sales price of the taxable products is de minimis;
(4) A retail sale of exempt tangible personal property and taxable tangible personal property where the transaction includes food and food ingredients, drugs, durable medical equipment, mobility enhancing equipment, over-the-counter drugs, prosthetic devices, or medical supplies, and the vendor's or seller's purchase price or sales price of the taxable tangible personal property is fifty per cent or less of the total purchase price or sales price of the bundled tangible personal property. Vendors and sellers may not use a combination of the purchase price and sales price of the tangible personal property when making the fifty per cent determination for a transaction.

(C) In the case of a bundled transaction that includes telecommunications service, ancillary service, internet access, or audio or video programming service:

(1) If the price is attributable to products that are taxable and products that are nontaxable, the portion of the price attributable to the nontaxable products shall be subject to tax unless the provider, by reasonable and verifiable standards, can identify the portion from its books and records that are kept in the regular course of business for other purposes, including, but not limited to, non-tax purposes.
(2) If the price is attributable to products that are subject to tax at different tax rates, the total price shall be treated as attributable to the products subject to tax at the highest tax rate unless the provider can identify by reasonable and verifiable standards the portion of the price attributable to the products subject to tax at the lower rate from its books and records that are kept in the regular course of business for other purposes, including, but not limited to, non-tax purposes.

(D) In all other cases of bundled transactions, the taxability of the transaction shall be determined by the true object of the consumer entering into the transaction.

Ohio Supreme Court Case, Genuine Parts Company v. Limbach, Ohio Supreme Court No. 90-2353, 579 N.E. 2d 486 , 62 Ohio St. 3d 93, CCH-STATE-CASE-HIGH-CT, OH-TAXRPTR, ¶ 401-118, (November 6, 1991). Retail automotive parts stores contracted with Genuine Automotive Management Services (AMS) to provide bookkeeping and accounting services. AMS charges the jobbers a percentage of gross sales as its fee for performing the services. It does not detail the charges on its billings. The auditor assessed all of charges as taxable computer services because the components were not separately stated. The Supreme Court held that the true object of these transactions is the receipt of personal and professional services to which automatic data processing or computer services are merely incidental or supplemental.

Tennessee

Tennessee Code Annotated § 67-6-539, amended by Ch. 499 (S.B. 2310 and H.B. 2317), Laws 2005, is effective June 22, 2005.

(a) For purposes of this section, a "bundled transaction" means the retail sale of otherwise distinct and identifiable products for one non-itemized price that does not vary and is not negotiable based on the selection of the products made by the purchaser.
(b) In the case of a bundled transaction of telecommunications services, ancillary services or Internet access, if the price is attributable to services that are taxable and services that are nontaxable, the portion of the price attributable to the nontaxable services shall be subject to tax unless the provider can reasonably identify such portion from its books and records kept in the regular course of business for purposes other than sales taxes.
(c) In the case of a bundled transaction of telecommunications services or ancillary services, if the price is attributable to services that are subject to tax at different rates, the total price shall be treated as attributable to the services subject to tax at the higher combined state and local tax rate unless the provider can reasonably identify the portion of the price attributable to the services subject to tax at the lower rate from its books and records kept in the regular course of business for purposes other than sales taxes.
(d) For purposes of this section, if the taxes that would have otherwise been collected on the distinct and identifiable services would have been designated to different funds or purposes, such designation shall be based on the same allocation utilized in (b) or (c). However, if the total of the bundled transaction was subjected to tax or subjected to tax at the higher combined state and local rate a reasonable allocation method approved by the commissioner shall be made for designation of the taxes to the different funds or purposes.
(e) The provisions of this section shall apply to bills submitted to customers that are dated on or after July 1, 2004.

Texas

Texas Tax Code § 151.025(d) [Added by H.B. 2425, Laws 2003, effective July 1, 2003]. If any nontaxable charges are combined with and not separately stated from taxable telecommunications service charges on the customer bill or invoice of a provider of telecommunications services, the combined charge is subject to tax unless the provider can identify the portion of the charges that are nontaxable through the provider's books and records kept in the regular course of business. If the nontaxable charges cannot reasonably be identified, the charges from the sale of both nontaxable services and taxable telecommunications services are attributable to taxable telecommunications services. The provider of telecommunications services has the burden of proving nontaxable charges.

Texas Tax Code § 151.325. Basic fee for internet access service.

(a) The sale, use, or other consumption in this state of Internet access service is exempted from the taxes imposed by this chapter in an amount not to exceed the first $25 of a monthly charge.
(b) The exemption provided by this section applies without regard to:

(1) whether the Internet access service is bundled with another service, including any other taxable service listed in Section 151.0101(a); or
(2) the billing period used by the service provider.

(c) The exemption in this section applies to the total sales price the service provider charges for Internet access to a purchaser, without regard to whether the service provider charges one lump-sum amount or separately bills the purchaser for each user.

Outside USA policies on Bundling for tax purposes

Canada

British Columbia Ministry of Small Business and Revenue, Social Service Tax (Provincial Sales Tax), Bulletin SST 119, "Bundled Sales: Taxable and Non-Taxable Goods or Services Sold Together for a Single Price", (issued February 2005, revised March 2006), http://www.sbr.gov.bc.ca/ctb/publications/bulletins/sst_119.pdf
Canada Revenue Agency, Transfer Pricing Memo TPM-06, Bundled Transactions, (May 16, 2005), http://www.cra-arc.gc.ca/tax/nonresidents/common/trans/bundled-e.html