Sales Tax Secrets: Bundles of Fun!
- Sales and Use Tax
- August 19, 2013 | Christina Lengyel
Bust out those calculators. We have a sales tax math problem. Let’s say you have a product containing both food and durable elements (box of cookies that comes with a teddy bear, anyone?). In the case of sales tax, this is considered a “bundled item,” a product that is combined with another product. The problem lies when one of these bundled items (in this case the cookies) is exempt from sales tax and the other (the teddy bear) is not. Given that in many states food is not taxable and cookies are often considered food, would this item be taxable? Obviously, it’s superior to err on the side of caution and collect tax on this kind of item, but the matter is far from clear.
Luckily, states participating in the Streamlined Sales and Use Tax Agreement have an agreed on a common definition of bundled transactions that can help you out. New Jersey does an excellent job of explaining the concept here.
So back to the cookies and bear bundle. To paraphrase New Jersey’s explanation, a bundled transaction wherein taxable items make up more than 10% of the value should be taxed. The same may not be the case for other states. For example, in neighboring Pennsylvania, the concept of “predominant value” is used, meaning that non-taxable items only have to make up half of the bundle to move the scale toward exemption. So how much are those cookies worth? Because food is a short-term, perishable product, it doesn’t usually retain as much value as durable items. Those cookies may last a lifetime on your hips, but that bear can last the lifetimes of countless auditors. In this case, the side of caution is also the correct one.