Information Release

ST 2010-02 - Sales and Use Tax: Bundled Transactions – Issued September 2010 

The purpose of this Information Release is to explain the application of Ohio sales and use tax to “bundled transactions” as those are defined in Ohio Revised Code (“R.C.”) section 5739.012.  That section provides:

(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.

For purposes of applying this provision, “products” shall mean all types of products except real property and services to real property.  “Products” includes tangible personal property, services, intangibles, digital goods and all other types of transactions subject to Ohio sales and use tax.  “Services to real property” include, for purposes of example only, such services as building framing, roofing, plumbing, electrical, painting, and janitorial, pest control and window cleaning.

A. Elements of the Definition of a Bundled Transaction

1. Distinct and Identifiable Products.

As defined above, a bundled transaction is a retail sale of two or more products that are distinct and identifiable. Packaging that accompanies the retail sale of a product, products provided free of charge and items included in the definition of “price” in division (H)(1) of R.C. 5739.01 are not distinct and identifiable products.

a. Packaging is not a separate and distinct product when such packaging is the wrapping or packing that accompanies the retail sale of a product(s) and such packaging is incidental or immaterial to the retail sale of the product(s).

b. A product provided free of charge is not a separate and distinct product. A product shall be considered to be provided free of charge in a retail sale if, in order to obtain the product, the purchaser is required to make a purchase of one or more other products and the price of the purchased products does not change based on the seller providing a product free of charge. Such products provided free of charge with the necessary purchase of another product (e.g. a free car wash with the purchase of gas or free dinnerware with the purchase of groceries) shall be considered promotional products.

c. A retail sale is not considered to be for two or more distinct and identifiable products if the items are included in the definition of “price” in R.C. 5739.01(H). For example, a delivery charge, whether separately itemized or not, is included in the definition of “price” in R.C. 5739.01(H)(1)(a)(iv).  Therefore, the retail sale of a product and the delivery of that product for a single price shall not be considered a bundled transaction because the delivery charges are included in the sales price of the product under the statutory definition of “price.”

2. One Non-itemized Price.

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. A transaction shall not be considered to be a bundled transaction if, by negotiation or otherwise, the sales price varies with the purchaser’s selection of the distinct and identifiable products being sold. A retail sale shall not be considered made for one non-itemized price if the purchaser has the option of declining to purchase any of the products being sold and, as a result of the purchaser’s selection of products, the sales price varies or a different price is negotiated.

a. A retail sale shall not be considered a bundled transaction if the price is separately identified by product on binding sales documents or other supporting sales-related documentation made available to the purchaser because the sale is not being made for one non-itemized price. The sales-related documents made available to a purchaser in paper or electronic form shall provide enough information for the purchaser to determine the price(s) of taxable and exempt products.

b. A transaction shall not be considered a bundled transaction if a seller bills or invoices one price for the sale of distinct and separate products but the price invoiced is equal to the total of the individually priced or itemized products contained in supporting sales-related documentation, such as a catalog, price list, or service agreement.

c. If the seller bills or invoices one price for a transaction that includes a bundle of products and also includes one or more additional products that are individually priced or itemized in a catalog or price list, the additional products individually priced or itemized shall not be considered to be a part of the bundled products sold for one non-itemized price.

d. If a transaction does not qualify as a bundled transaction because of the provisions of paragraphs 2.a. - c., above, the transaction shall not be considered a bundled transaction as a result of the seller offering a subsequent discount of the total sales price without itemizing the amount of the discount for each product. In such a situation, if there is no sales-related documentation showing the allocation of the discount, the discount shall be considered to be allocated pro rata among the otherwise separately itemized products.

B. Records Required to be Maintained by the Seller.

In order to show whether a retail sale was for one or more distinct and identifiable products and whether the products were sold for one non-itemized price, a seller shall maintain copies of invoices, service agreements, contracts, catalogs, price lists, rate cards and other sales-related documents given to, or made available to, the purchaser. The Tax Commissioner shall not be restricted in assessing tax because the seller or purchaser failed to provide documentary proof that the price varied based on the purchaser’s selections of products.

C. Exclusions of Transactions that Otherwise Would Qualify as Bundled Transactions.

Division (B) of R.C. 5739.012 contains exclusions for transactions that would otherwise qualify as bundled transactions. For transactions that include tangible personal property and a service, or multiple services, sellers may utilize divisions (B)(1) and (B)(2) of the definition or division (B)(3) of the definition to determine if the transaction qualifies as a bundled transaction. Division (B)(1) does not apply to transactions that include only tangible personal property. Division (B)(2) may be applied to transactions that include all types of products to determine whether the transaction qualifies as a bundled transaction. Division (B)(4) does not apply to transactions that include products that are not tangible personal property.

D. True Object, divisions (B)(1) and (B(2).

“True object,” as the term is used in divisions (B)(1) and (B)(2) of R.C. 5739.012, means the main product or item in the transaction. Division (B)(1) applies to transactions that involve both tangible personal property and a service, and the true object of the transaction is the service.  Division (B)(2) applies only to transactions that include two or more services and no tangible personal property.  If, as a result of applying these provisions, a transaction is not a bundled transaction, then the transaction shall be considered a retail sale of the service that is the true object of the transaction.

a. The true object test found in divisions (B)(1) and (B)(2) of R.C. 5739.012 shall be applied on a case-by-case basis to the particular facts involved in each situation. Some of the factors that might be considered are the business in which the seller is engaged and the purchaser’s object in engaging in the transaction.

b. In transactions where the true object is taxable tangible personal property or a taxable service, the transaction shall be taxable in its entirety.  Transactions where the true object is non-taxable tangible personal property or a non-taxable service, the entire transaction will be non-taxable.  

E. De minimis Test, division (B)(3)

To measure or quantify whether the taxable portion of a transaction is de minimis, within the meaning of Division (B)(3) of R.C. 5739.012, a vendor or seller may use the sales price or the purchase price of each product in the transaction. A seller shall not use the sales price for some products in the transaction and the purchase price for other products in the transaction to measure or quantify whether the taxable product(s) in the transaction are de minimis.

a. If services have been sold under a service contract, the full contract price for the services shall be used to determine whether products in the transaction are de minimis regardless of the time period covered by the service contract. For the purpose of determining whether services in the transaction are de minimis, the price of the services shall not be prorated based on the term of the service contract.

b. When the taxable products in a transaction are determined to be de minimis, the transaction is not a bundled transaction.

c. In any non-itemized transaction where the taxable elements of the transaction are determined to be de minimis, the entire transaction shall be deemed to be non-taxable.

F. Primary Test, Division (B)(4).

In order to measure or quantify whether the taxable products in the transaction are the primary products (more than 50% of the total sales price or purchase price) under division (B)(4) of R.C. 5739.012, a vendor or seller may use the sales price or the purchase price of each product in the transaction. A vendor or seller shall not use the sales price for some of the products in the transaction and the purchase price for other products in the transaction to measure or quantify whether the taxable product(s) in the transaction are the primary products.

a. Division (B)(4) may only be applied to transactions that contain multiple products that are all tangible personal property and one or more of the products are: food, soft drinks, candy or dietary supplements; drugs including over-the-counter and grooming and hygiene products; durable medical equipment; mobility enhancing equipment; prosthetic devices; or medical supplies.

b. When the taxable products in the transaction are not the primary products (more than 50%) within the meaning of division (B)(4), then the transaction is not a “bundled transaction.” In such a case, the transaction shall be non-taxable in its entirety.

G. Application to Transactions Including Telecommunication Service, Ancillary Service, Internet Access and Audio Video Programming Service.

Division (C) of R.C. 5739.012 provides for the application of tax to any bundled transaction in which at least one product is a telecommunication service, ancillary service, internet access, or audio or video programming service.  

1. When applying the provisions of division (C), sales or use tax will be imposed on the total non-itemized price of a bundled transaction where the vendor or seller has failed to maintain books and records identifying through reasonable and verifiable standards that portion of the price attributable to the distinct products.

2. When determining the taxable portion of the non-itemized price of a bundled transaction that is subject to tax under the provisions of division (C), only books and records maintained by the vendor or seller in the regular course of business shall be considered. Books and records shall be considered to be maintained primarily for tax purposes, and not in the regular course of business, when such books and records identify taxable and nontaxable portions of the price, but the seller maintains other books and records that identify different prices attributable to the distinct products included in the same bundled transaction. Generally, books and records kept in the regular course of business and that are acceptable for use in subjecting the taxable portion of a bundled transaction’s non-itemized price to taxation under division (C) include financial statements, general ledgers, invoicing and billing systems and reports, and reports for regulatory tariffs and other regulatory matters; provided, however, that the books and records named herein shall not be considered all inclusive.

H. Application to Transactions Involving Optional Computer Software Maintenance Contracts.

1. As used in paragraph H of this Information Release:

a. “Computer software maintenance contract” means a contract that obligates a vendor or seller of computer software to provide a customer with future updates or upgrades to computer software, support services with respect to computer software or both, and

b. ) “Optional computer software maintenance contract” means a computer software maintenance contract that a customer is not obligated to purchase as a condition to the retail sale of computer software.

2. In any case where an optional computer software maintenance contract for prewritten computer software is sold to an Ohio consumer by a vendor or seller, the following treatment shall apply:

a.  If the optional computer software maintenance contract only obligates the vendor or seller to provide upgrades and updates, the contract will be deemed to be a sale of prewritten computer software, which is defined to be tangible personal property by division (YY) of R.C. 5739.01.   Such a sale will be considered taxable unless the consumer has a claim of exemption.

b. If the optional computer software maintenance contract only obligates the vendor to seller to provide support services, and no upgrades or updates, the transaction will be considered to be the sale of a non-taxable personal or professional service.

c. If the optional computer software maintenance contract includes both taxable and exempt elements that are not itemized separately on the invoice or similar billing document, the contract shall be characterized as a sale of prewritten computer software, which is defined to be tangible personal property by division (YY) of R.C. 5739.01.   Such a sale will be considered taxable unless the consumer has a claim of exemption.

 

If you have any questions regarding this information release, please contact our Taxpayer Service Center at 1-888-405-4039, or e-mail us through our web site: tax.ohio.gov.

 

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