When a pre-paid funeral contract's guaranteed merchandise goes up in price by the time of death, does the funeral home owe extra Tennessee sales tax on the increase?

Plain-English summary

The taxpayer owns and operates funeral homes in Tennessee and sells pre-need (pre-paid) funeral contracts. A customer meets with a sales agent, picks the merchandise and services they want for an undetermined future date, signs the contract, and either pays in full or on an installment plan. The contract has two parts:

• Part 1 — guaranteed funeral merchandise (caskets, vaults, etc.) at a guaranteed price. The funeral home collects and remits Tennessee sales tax on this taxable merchandise at the time the contract is signed, based on the price as of the contract date.
• Part 2 — non-guaranteed "cash advance items" (things obtained from third parties — death certificates, clergy honoraria, flowers, etc.). Third-party providers remit tax on these when the items are later provided.

When the beneficiary dies, the pre-need contract becomes an "at-need" contract. That can be many years later, and the price of the guaranteed merchandise often rises in the meantime — but the funeral home doesn't charge the customer or next of kin anything extra for that increase. The question: when the price has gone up, must the funeral home collect additional Tennessee sales tax on the difference between the contract price and the current price?

The Department ruled no.

Tax is fixed at the moment of sale. Tennessee imposes sales tax on the sales price of tangible personal property "as of the moment of sale" (§§ 67-6-202(a), 67-6-501(c)). For a pre-need contract, the moment of sale is when the parties enter into the contract — that's when the customer agrees to buy the guaranteed merchandise at the guaranteed price. The funeral home, as the dealer, correctly collects and remits the tax then, calculated on the contract-date price.

Later price increases don't generate more tax. Even though the funeral home may not actually purchase the guaranteed merchandise until years later (when the contract becomes at-need), and even if the cost or retail price has risen, the funeral home buys that merchandise tax-exempt for resale and then provides it at the previously agreed price. In effect it delivers the merchandise at or below cost under the contract terms. Because the merchandise is sold for the price that was already taxed at signing, no additional sales tax is due on the increase.

What this means for you

Funeral homes selling pre-need contracts in Tennessee

Collect and remit Tennessee sales tax on the taxable guaranteed merchandise at the time you sign the pre-need contract, based on the price as of that date. When the contract later becomes at-need — even years later and even if prices have climbed — do not collect additional sales tax from the family on the price increase. The tax obligation was satisfied at the contract date.

Buy the guaranteed merchandise for resale

Because you're reselling the merchandise to the customer under the contract, purchase it tax-exempt for resale when you acquire it (even later). You've already collected the customer's tax up front; paying tax again on your purchase would double-tax the same item.

Distinguish guaranteed merchandise from cash advance items

The up-front, contract-date tax treatment here applies to the guaranteed merchandise (Part 1). Cash advance items obtained from third parties (Part 2) are handled separately — tax is remitted when those items are provided. Keep the two parts of the contract clearly separated on your books.

Accountants and tax professionals

Tax is on the sales price of tangible personal property sold at retail (§ 67-6-202(a)), imposed on the retail sales price "as of the moment of sale" (§ 67-6-501(c)), with the dealer collecting and remitting (§ 67-6-501(b)). "Sales price" § 67-6-102(79)(A); "retail sale" § 67-6-102(76); "sale" § 67-6-102(78)(A); "tangible personal property" § 67-6-102(89)(A). Pre-need funeral contracts are defined and governed by Tenn. Code Ann. § 62-5-401 et seq. (definition at § 62-5-403(13); "cash advance item" at § 62-5-403(1); "pre-need sales agent" at § 62-5-403(9)(A)). The key principle: the taxable event and tax base are fixed at the moment the pre-need contract is entered into.

Common questions

Q: We pre-sold a casket years ago; its price has gone up. Do we charge the family more sales tax now?
A: No. You collected and remitted sales tax on the guaranteed merchandise at the contract-date price when the pre-need contract was signed. A later price increase doesn't create additional sales tax.

Q: When exactly is the tax due on a pre-need contract?
A: At the moment of sale, which is when the parties enter into the contract — not when the merchandise is eventually delivered at need.

Q: How should we buy the merchandise we'll deliver later?
A: Tax-exempt for resale. You're reselling it to the customer under the contract, and the customer's tax was already collected up front.

Q: What about flowers, death certificates, clergy fees, and similar items?
A: Those are non-guaranteed "cash advance items" obtained from third parties (Part 2 of the contract). Tax on them is handled separately — remitted when the items are provided — not fixed at the pre-need contract date.

Q: Can I rely on this ruling?
A: Not directly. A Tennessee letter ruling binds the Department only as to the taxpayer and exact facts it addressed and cannot be relied on by anyone else. Confirm your own facts with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.):
- § 67-6-202(a) (tax on the sales price of tangible personal property sold at retail); § 67-6-501(c) (tax imposed on the retail sales price as of the moment of sale); § 67-6-501(b) (dealer collects and remits)
- § 67-6-102(79)(A) ("sales price"); § 67-6-102(76) ("retail sale"); § 67-6-102(78)(A) ("sale"); § 67-6-102(89)(A) ("tangible personal property")
- § 62-5-401 et seq. (pre-need funeral contracts); § 62-5-403(13) (definition of "pre-need funeral contract"); § 62-5-403(1) (definition of "cash advance item"); § 62-5-403(9)(A) (definition of "pre-need sales agent")

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/20-10.pdf

Original ruling text

Letter rulings are binding on the Department only with respect to the individual taxpayer being
addressed in the ruling. This ruling is based on the particular facts and circumstances
presented and is an interpretation of the law at a specific point in time. The law may have
changed since this ruling was issued, possibly rendering it obsolete. The presentation of this
ruling in a redacted form is provided solely for informational purposes and is not intended as
a statement of Departmental policy. Taxpayers should consult with a tax professional before
relying on any aspect of this ruling.

The application of the Tennessee sales and use tax to pre-need funeral contracts.

This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon the
Department and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which case the
revocation shall be prospective only:
(A)

The taxpayer must not have misstated or omitted material facts involved in the
transaction;

(B)

Facts that develop later must not be materially different from the facts upon
which the ruling was based;

(C)

The applicable law must not have been changed or amended;

(D)

The ruling must have been issued originally with respect to a prospective or
proposed transaction; and

(E)

The taxpayer directly involved must have acted in good faith in relying upon the
ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.

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[TAXPAYER] (the “Taxpayer”) is a [REDACTED] company that owns and operates funeral homes,
[REDACTED]. The Taxpayer has [NUMBER] locations in Tennessee.1
One of the Taxpayer’s offerings is a Preneed Funeral Service Contract (the “pre-need contract”).2 A
customer interested in purchasing a pre-need contract, meets with a pre-need sales agent3 and selects
the merchandise and services they want to purchase that will be provided at an undetermined future
date. The customer then signs the pre-need contract and either pays the total amount due or enters
into an installment payment agreement with the Taxpayer.
The Taxpayer’s pre-need contracts consist of [NUMBER] parts. Part 1 of the Taxpayer’s pre-need
contract [ADDRESSES GUARANTEED FUNERAL MERCHANDISE].”4 Part 2 of the Taxpayer’s pre-need
contract [ADDRESSES NON-GUARANTEED CASH ADVANCE ITEMS].5 The Taxpayer collects sales tax on
all taxable guaranteed merchandise listed in part 1 of its pre-need contracts and remits this sales tax
to the state of Tennessee at the time the pre-need contract is entered into. Tax is calculated on the
sales price of the merchandise as of the contract date. Third-party providers remit sales tax on nonguaranteed cash advance items when those items are provided at a later date.
At the time of death of the contract beneficiary, the pre-need contract becomes an at-need contract.
This may happen in a short period of time or could happen many years later. It is not uncommon for
the price of guaranteed merchandise to increase between the time the pre-need contract is entered
into and the time it becomes an at-need contract, especially if there are number of years between the
two. The Taxpayer does not charge its customer or customer’s next of kin any additional amount for
any price increase that occurs during this time period.

1

[REDACTED]

“’Pre-need funeral contract’ means any agreement, contract or plan requiring the payment of money in advance, whether in
a lump sum or installments and whether funded by a pre-need funeral trust or prearrangement insurance policy or
combination of a pre-need funeral trust and a prearrangement insurance policy, that is made or entered into with any person,
association, partnership, firm or corporation for the final disposition of a dead human body, for funeral or burial services or for
the furnishing of personal property or funeral or burial merchandise, wherein the use of the personal property or the funeral
or burial merchandise or the furnishing of professional services by a funeral director or embalmer is not immediately required.”
TENN. CODE ANN. § 62-5-403(13) (2019).
2

“’Pre-need sales agent’ means an individual who has applied for and has been granted, or who engages in conduct requiring,
registration to sell pre-need funeral contracts on behalf of a pre-need seller pursuant to this part.” TENN. CODE ANN. § 62-5403(9)(A) (2019).
3

4

Pre-need funeral contracts are governed by TENN. CODE ANN. § 62-5-401, et seq.

“Cash advance item” means any item obtained from a third party and paid for by the funeral provider on the purchaser’s
behalf. Cash advance items may include, but are not limited to, sales tax, certified copies of death certificates, clergy honoraria,
flowers, musicians or singers, obituary notices and gratuities. TENN. CODE ANN. § 62-5-403(1) (2019).
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2

When the Taxpayer’s pre-need contract becomes an at-need contract, if there is a price increase for
the guaranteed merchandise previously sold to the customer, should the Taxpayer collect Tennessee
sales tax from the customer or customer’s next of kin on the difference between the price stated on
the pre-need contract and the current selling price of the guaranteed merchandise?
Ruling: No. The Taxpayer should not collect additional sales tax from the customer or the
customer’s next of kin if there is a price increase at the time the pre-need contract becomes
an at-need contract because the Taxpayer collected and remitted sales tax on the sales price
of the guaranteed merchandise at the time the parties entered into the pre-need contract.

Under the Retailers’ Sales Tax Act, the retail sale in Tennessee of tangible personal property and
specifically enumerated services are subject to sales and use tax, unless an exemption applies. 6 “Retail
sale” is defined as “any sale, lease, or rental for any purpose other than for resale, sublease, or
subrent.”7
TENN. CODE ANN. § 67-6-102(78)(A) (Supp. 2019) defines “sale,” in pertinent part, to mean “any transfer
of title or possession, or both . . . of tangible personal property for a consideration.” “Tangible personal
property” includes “property that can be seen, weighed, measured, felt, or touched, or that is in any
other manner perceptible to the senses.”8
TENN. CODE ANN. § 67-6-202(a) (Supp. 2019) imposes a tax on the sales price of “each item or article of
tangible personal property when sold at retail in this state.” “Sales price” is defined as “the total
amount of consideration, including cash, credit, property, and services, for which personal property
or services are sold, leased, or rented.” 9
TENN. CODE ANN. § 67-6-501 (2018) places the duty for collecting and remitting sales and use tax on the
dealer as defined in TENN. CODE ANN. § 67-6-102.10 Tax is imposed on the retail sales price, as of the
moment of sale, or of the purchase price, as of the moment of purchase. 11
The Taxpayer sells taxable merchandise at a guaranteed price under Part 1 of its pre-need contracts.
Consistent with the authority above, tax is properly due at the moment of sale, which is at the time
the parties enter into the contract. The Taxpayer, therefore, correctly collects and remits tax at the
time of the sale of the pre-need contract.
Tennessee Retailers’ Sales Tax Act, Ch. 3, §§ 1-18, 1947 Tenn. Pub. Acts Ch. 22, §§ 2254 (codified as amended at TENN. CODE
ANN. §§ 67-6-101 to -907 (2018 & Supp. 2019)).
6

7

TENN. CODE ANN. § 67-6-102(76) (Supp. 2019).

8

TENN. CODE ANN. § 67-6-102(89)(A).

9

TENN. CODE ANN. § 67-6-102(79)(A).

10

TENN. CODE ANN. § 67-6-501(b) (2018).

11

TENN. CODE ANN. § 67-6-501(c).

3

Even if the Taxpayer does not purchase the guaranteed merchandise until several years later when
the pre-need contract becomes an at-need contract, and the cost and/or sales price of the guaranteed
merchandise increases during that time, the Taxpayer still purchases the merchandise tax exempt for
resale. Therefore, when the Taxpayer provides the guaranteed merchandise at the later date, the
Taxpayer essentially provides the guaranteed merchandise at or below cost under the terms agreed
to in the pre-need contract. Consequently, the guaranteed merchandise is sold for the previously
agreed upon price and no additional tax is due.

APPROVED:

David Gerregano
Commissioner of Revenue

DATE:

11/2/2020

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