006.05.06 Ark. Code R. 005-GR-93

Current through Register Vol. 49, No. 9, September, 2024

Rule 006.05.06-005-GR-93 - BUNDLED TRANSACTIONS

A. Except as otherwise provided by this rule, 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.

B. PRODUCTS. For purposes of this rule, products include tangible personal property, services, intangibles, and digital goods. Products do not include real property and services to real property.

Examples: Services to real property include building framing, roofing, plumbing, electrical, painting, janitorial, pest control, and window cleaning.

C. BUNDLED TRANSACTION. A bundled transaction is the retail sale of two (2) or more products where the products are otherwise distinct and identifiable and the products are sold for one non-itemized price.

1. Distinct and Identifiable Products. A bundled transaction is a retail sale of two (2) or more products that are "distinct and identifiable". The following are not distinct and identifiable products.

a. Packaging is not a separate and distinct product when it accompanies the retail sale of a product and is incidental or immaterial to the retail sale thereof.

Examples: Packaging that is incidental or immaterial to the retail sale include grocery sacks, shoeboxes, dry cleaning garment bags, express delivery envelopes and boxes, bottles, or other materials such as wrapping, labels, tags, and instruction guides.

b. A product provided free of charge with the purchase of another product is not a separate and distinct product. A product is considered to be provided free of charge if the sales price of the product purchased does not vary based on the inclusion of the product that was provided free of charge. Such products provided free of charge are considered "promotional products".

Examples: A free car wash with the purchase of gasoline, or free dinnerware with the purchase of groceries.

c. Items included in the definition of "sales price" and "purchase price" are not distinct and identifiable products. (See GR-3 and UT-3.)

2. One Non-itemized Price. If a retail sale of two (2) or more distinct and identifiable products is not made for one non-itemized price, then the retail sale is not a bundled transaction. A retail transaction is not sold for one non-itemized price in the following scenarios:

a. If, by negotiation or otherwise, the sales price varies or is negotiable based on the purchaser's selection of the products being sold;

b. If the purchaser has the option of choosing products or 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;

c. The price is separately identified by product on binding sales or other supporting sales-related documentation, which is made available to the customer in paper or electronic form, such as an invoice, bill of sale, receipt, contract, service agreement, lease agreement, periodic notice of rates and services, rate card, or price list;

d. If a seller bills or invoices one (1) 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 the supporting sales related documentation, such as a catalog, price list, or service agreement; or

e. If the seller bills or invoices one price for a transaction that includes a bundle of products and also includes one (1) or more additional products that are individually priced or itemized in a catalog or price list, the additional products individually priced or itemized will not be considered to be a part of the bundled products sold for one non-itemized price.

f. If a transaction does not qualify as a bundled transaction because of the provisions in GR-93(C)(2)(a)-(C)(2)(e), the transaction will not be classified as 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 will be considered to be allocated pro rata among the otherwise separately itemized products.

D. EXCLUSIONS FROM BUNDLED TRANSACTIONS. A transaction that otherwise meets the definition of a bundled transaction as defined above is not considered a bundled transaction if the transaction falls within one of the following exceptions.

1. True Object Exclusion. This exclusion only applies to transactions that include a service. The exclusion does not apply to transactions that include only tangible personal property.

a. The retail sale of tangible personal property and a service where the true object of the transaction is the service and the tangible personal property is essential to the use of the service, and is provided exclusively in connection with the service. If the transaction is not a bundled transaction as a result of this exception, then the true object of the transaction will be the retail sale of the service and should be taxed accordingly.

Example: Computer programming services where the client is given a back-up disk and instruction manual. The true object of the transaction is the provision of the programming services. The computer programmer is selling nontaxable services and is not making a sale of a bundled transaction. Arkansas sales tax is not due on the programmer's charge for services; sales tax is due on the programmer's purchases of tangible personal property used to fulfill the service.

b. The retail sale of services where one (1) service is provided that is essential to the use or receipt of a second service and the first service is provided exclusively in connection with the second service, and the true object of the transaction is the second service. If the transaction is not a bundled transaction as a result of this exception, then the true object of the transaction will be the retail sale of the second service and should be taxed accordingly.

c. Factors that should be considered to determine the true object of a transaction are the following: the seller's line of business; the purchaser's object of the transaction; whether the tangible personal property or service that is essential to the second service is available for sale separately without the second service; and how the tangible personal property or service is essential to the second service.

d. Sellers of a bundled transaction that includes tangible personal property and a service or a bundled transaction that includes multiple services may use the true object exclusion or the de minimis exclusion.

2. De Minimis Exclusion. This exclusion may be applied to transactions that include all types of products. If the taxable product in a transaction is de minimis, then the transaction is not taxable.

a. "De minimis" means the seller's purchase price or sales price of the taxable product is ten percent (10%) or less of the total purchase price or sales price of the products.

b. A seller may use either the purchase price or the sales price of the products to determine if the price of the taxable products is de minimis. A seller may not use a combination of the purchase price and sales price of the products to determine if the price of the taxable products is de minimis.

c. A seller must use the full term of a service contract to determine if the taxable products in the transaction are de minimis. 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.

3. Food, Drugs, and Medical Items. This exclusion does not apply to transactions that include services. If the nontaxable products in a transaction are the primary products of the transaction (more than fifty percent (50%)), then the transaction is not taxable.

a. For this exclusion to apply, at least one (1) product must be food and food ingredients, drugs, durable medical equipment, mobility enhancing equipment, over-the-counter drugs, a prosthetic device, or disposable medical supplies. (See GR-3, GR-38, and GR-38.2 for definitions of these terms.)

b. A seller may use either the purchase price or the sales price of the products to determine if the taxable tangible personal property is fifty percent (50%) or less of the total purchase price or sales price of the tangible personal property. A seller 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.

Example: A retailer prepares and sells gift boxes that consist of the following items: a mug, a book, and coffee beans. The seller's purchase prices for the items are $3.00, $5.00, and $3.00, respectively; the total purchase price for the items is $11.00. The purchase price of the non-food items, subject to the full state sales tax rate, is $8.00. The purchase price of the coffee, subject to the reduced state sales tax rate on food and food ingredients, is $3.00. The gift box is subject to the full state sales tax rate and any applicable local tax because the percentage for the non-food items is 73% ($8.00/$11.00= .727). (Note: If the percentage for the food and food ingredients in the gift box was more than fifty percent (50%), then the gift box would be subject to the reduced state sales tax rate and any applicable local tax.)

E. RECORDS. In order to show whether a retail sale consisted of one (1) or more distinct and identifiable products and whether the products were sold for one (1) 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.

F. TELECOMMUNICATIONS SERVICES. In the case of a bundled transaction that includes a telecommunication service, ancillary service, internet access, or audio or video programming service the following rules will apply. (See GR-7.)

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 is subject to tax unless the provider can identify, by reasonable and verifiable standards, the portion of the products that are nontaxable from its books and records.

a. The books and records must be kept in the regular course of business, and include books and records used for non-tax purposes.

b. Books and records include, but are not limited to, financial statements, general ledgers, invoicing and billing systems and reports, and reports for regulatory tariffs or other regulatory matters.

2. If the price is attributable to products that are subject to tax at different tax rates, the total price is attributable to the products subject to 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 the lower tax rate from its books and records.

a. The books and records must be kept in the regular course of business, and include books and records used for non-tax purposes.

b. Books and records include, but are not limited to, financial statements, general ledgers, invoicing and billing systems and reports, and reports for regulatory tariffs or other regulatory matters.

3. The provisions of this section shall apply unless superseded by federal law.

006.05.06 Ark. Code R. 005-GR-93

Ark. Code Ann. § 26-52-103