If I bill taxable and exempt goods together as a single bundled charge, can I tax only the taxable portion or treat it as an exempt service?

Plain-English summary

The Petitioner is a nationwide manufacturer and distributor of medical supplies and equipment (over 100,000 products, some taxable, some exempt). Normally it bills customers with a line-item invoice that prices each product and computes the right tax. Some customers asked instead for a single bundled "flat per-day" charge -- a contracted price based on their expected buying needs, billed as one consolidated line item that does not show the actual products or quantities. The Petitioner asked three questions about this billing change.

The Office of Counsel held that the entire bundled charge is taxable:

• Q1 -- Is the bundled charge taxable? Yes. When taxable and exempt tangible personal property are sold as a single unit, tax is collected on the total price (20 NYCRR 527.1(b), 532.1(b)). So if any product in the bundle is taxable, the whole per-day charge is taxable.
• Q2 -- Does single-line billing turn this into an exempt "inventory replenishment" service? No. Using one combined charge instead of itemized prices does not change the nature of the transaction -- it is still a sale of tangible personal property, not a service.
• Q3 -- Can the seller "look through" and prorate the charge by the taxability of the underlying products? No. The Tax Law does not allow prorating a single invoice charge or allocating tax from books and records when the invoice fails to separately state the taxable charges (Tax Law 1132(a); Dynamic Telephone Answering Sys.; The Plant Place; Lake Grove Entertainment).

What this means for you

Sellers of mixed taxable/exempt goods

If you combine taxable and exempt items into one charge, you must collect tax on the entire charge. The way to tax only the exempt-eligible portion is to separately state the exempt items from the taxable ones on the invoice. Bundling is convenient for budgeting, but it makes the full price taxable.

You can't fix it after the fact

Once you issue a bundled invoice that doesn't break out the taxable items, you cannot go back to your books to carve out the exempt share. Separate statement has to be on the invoice itself.

Renaming the bill doesn't change the tax

Calling a sale of goods an "inventory replenishment service" (or any service) does not make it a service. New York looks at what is actually being sold -- here, tangible personal property.

Common questions

Q: We bundle taxable and exempt supplies into one per-day price. Do we tax all of it? A: Yes. If any item in the bundle is taxable, the entire bundled charge is taxable.

Q: Can we just calculate the taxable percentage from our records? A: No. You may not prorate or "look through" a single bundled charge. To tax only the taxable items, separately state them on the invoice.

Q: Does billing it as a flat monthly/per-day "service" make it exempt? A: No. It is still a sale of tangible personal property regardless of how the charge is labeled or structured.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1132(a) (separately stating taxable charges; collection of tax)
• 20 NYCRR section 527.1(b) (taxable and exempt property sold as a single unit)
• 20 NYCRR section 532.1(b) (collection of tax on total price)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-14(30)S
Sales Tax
August 22, 2014

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S110518B

The Department of Taxation and Finance received a Petition for Advisory Opinion from REDACTED. Petitioner asks whether a single bundled charge for taxable and exempt tangible personal property it sells to its customers is subject to sales tax. Petitioner also asks if its billing method may be viewed as an exempt “inventory replenishment service” or if it may “look through” its own bundled charge to determine the taxable percentage of a particular transaction. We conclude that, when Petitioner sells both taxable and exempt tangible personal property and issues an invoice to its customer that has a single bundled charge for all the items sold, that charge will be subject to sales tax. Facts Petitioner is a manufacturer and distributor of medical supplies and equipment operating in every state within the United States. Petitioner bills its customers through its own invoicing system, providing a line-item, detailed description of each product and calculating sales tax in all applicable states based upon a matrix that is driven by this lineitem detail. Some of Petitioner’s customers have requested that they be charged on a bundled basis for their purchases of medical supplies and equipment. Using the bundled invoice option, a contracted flat per-day price, established by analyzing a customer's buying requirements over the course of time, would replace invoices that state the actual quantity of products purchased at specific product prices. The subsequent monthly customer billing is determined based on the number of days per month for a particular individual covered by the contract multiplied by the flat per-day rate. This flat fee system provides the health care provider with more predictable budgetary information it requires for business operations. However, this flat rate monthly invoice is not tied directly to the actual quantity of products used, because the actual quantity of products used depends on the individual caregiver and the specific care requirements of each individual covered by the contract. In addition, the invoice bundles items that were individually described and combines them into one consolidated line-item description. This billing method essentially bundles taxable and non-taxable transactions into a single line-item on the customer’s invoice.

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TSB-A-14(30)S
Sales Tax
August 22, 2014

The single line-item charge on the invoice does not provide detail of the actual description or quantity of the product or products being purchased by the customer. In fact, it is possible that any of Petitioner’s 100,000 products could be sold through the program, depending on the customer's contract with Petitioner. However, once a customer's contract is established, the product mix for that customer does not change during the period of the agreement. Analysis Petitioner asks three questions concerning the change in its billing practices. Q. 1. Is the bundled charge subject to tax? A. The entire bundled charge is subject to sales tax if any of the products included in the bundled charge are taxable. Petitioner offers both taxable and non-taxable products for sale. Petitioner’s customers have the option to select a product mix from any of the products sold by Petitioner as part of their contracts with the Petitioner. Petitioner bills each customer a single per-day charge, as agreed upon in the contract between Petitioner and its customer. When taxable and exempt items of tangible personal property are sold as a single unit, the tax shall be collected on the total price. See 20 NYCRR §§ 527.1(b) & 532.1(b). Thus, when this charge includes the sale of a taxable item, Petitioner must collect tax on the entire per-day charge. Q. 2. Has Petitioner’s single line-item charge on an invoice “transformed” purchases by its customers that were previously considered purchases of tangible personal property into the purchase of an “inventory replenishment” service? A. Petitioner’s use of a single charge for billing purposes, rather than separate itemized charges for each item sold, does not transform the sale from a sale of tangible personal property to a sale of an “inventory replenishment” service. Petitioner’s transaction with its customers continues to be the sale of tangible personal property. Q. 3. Would it be possible for the Petitioner to consider the underlying products included in the single line-item charge? In other words, if the single line-item charge on the invoice is for a mix of items, some of which are subject to State and local sales tax and others of which are exempt, could the tax be prorated based upon the taxability of the underlying products? A. Petitioner may not consider the underlying mix of nontaxable and taxable products when using the single line-item charge to determine the amount of the receipts that are subject to sales tax. The Tax Law does not provide for the prorating of a single charge on an invoice or allow a vendor to allocate tax based on its books and records when it has issued an invoice that fails to separately state charges for tangible personal property subject to tax. See Tax Law § 1132(a); Dynamic Telephone Answering Sys., Inc. v. New York State Tax Commission, 135 AD2d 978 (3rd Dept 1987) lv. denied, 71 NY2d 801 (1988); See also The Plant Place, Tax Appeals Tribunal (March 20, 1997); Lake Grove

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TSB-A-14(30)S
Sales Tax
August 22, 2014

Entertainment, LLC v. Megna, DTA No. 821297 (Tax Appeals Tribunal, July 27, 2009), aff’d 81 AD3d 1191 (3rd Dep’t 2011).

DATED: August 22, 2014

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.