Bundling Black Friday and Cyber Monday — Wacky Tax Wednesday

The internet has been abuzz with Black Friday and Cyber Monday deals for weeks. By now, savvy consumers should be fine-tuning their shopping strategies, and retailers should be reviewing what to do in the event of best and worst-case scenarios. Getting tax right should be part of the plan.

Holiday deals often include bundled transactions, free promotional products, and similar offers. These can complicate sales and use tax compliance.

Businesses often bundle two or more goods and/or services for sale as a single transaction. Yet when one part of the transaction is taxable and another part is exempt, it can be difficult to keep taxability straight — even when concerted efforts have been made to simplify applicable tax laws.

The Streamlined Sales and Use Tax Agreement (SSUTA), which was created to modernize and simplify tax compliance in its member states, defines a “bundled transaction” as the retail sale of two or more products that are otherwise distinct and identifiable, and sold for one non-itemized price.

A bundled transaction is often taxable even if it includes exempt goods/services, and the higher rate generally applies when a bundled transaction is comprised of products taxed at different rates. Yet, if a seller can reasonably determine the portion of exempt products sold at the time of sale, that portion may be exempt. And in some instances (i.e., transactions that include sales of optional computer software maintenance contract) a bundled transaction can be 20, 30, 40, or 50 percent taxable, or 80, 70, 60, and 50 percent “nontaxable or exempt respectively, as selected by each member state.” The tricky part is knowing how bundled transactions are taxed in states where you do business.

The SSUTA also addresses the taxability of products provided free of charge with the required purchase of another product — a fact worth noting with Black Friday and Cyber Monday deals fast approaching. The 23 states that fully comply with the SSUTA have a choice: They can either exempt or tax “the purchase by a seller of products that will be provided free of charge to a purchaser of another product.”

Unfortunately, it’s up to each business to get tax right. Not knowing how promotional products are taxed can put companies at risk of non-compliance, as this 2013 case illustrates.

The Washington Department of Revenue (DOR) held a wireless phone company liable for use tax on wireless phones it gave to customers in exchange for signing a two-year service agreement. It maintained the company made intervening use of the phones when it used them to draw in customers. Furthermore, the company gave the phones away “primarily to promote the sale of its wireless services.” As the Washington Court of Appeals noted, “In either case, [the company] is liable for use tax.”

The company argued that customers “actually purchased the free cell phones with payments over time,” and therefore the tax collected on the sale of the phone service plan included tax on the sale of the phone. Both the DOR and Court of Appeals disagreed, and the court held there was no evidence to support that claim: “None of the evidence in the record supports a finding that [the company] conducted installment sales for the fully discounted phones it gave to customers.”

The court also dismissed the idea that “customers purchase wireless phones and wireless service as a single purchase.” It conceded that the price of the monthly contract sold in conjunction with the free phone was at “a rate intended to recoup the money it nearly always lost on selling partially or fully discounted wireless phones.” However, it concluded, “[the company’s] customers do not purchase wireless phones and wireless service as a single purchase.” The case is No. 42304—9—II.

As shoppers vie for deals in the coming days, businesses should focus on selling, not sales tax. Sales tax compliance should be effortless. Tax automation software helps make it so.