What Are Bundled Transactions and How Does California Sales Tax Apply to Them
For some businesses, California sales tax is simple. You sell goods or services that are either taxable or exempt, depending on the rules of the state, and report accordingly. But when a business does both, it is known as a bundled transaction and can lead to a variety of sales tax problems. You risk underreporting on the sale of taxable property or, even worse, paying sales tax on your nontaxable services. Below, you’ll learn how California sales tax for bundled transactions works and the important steps to take when managing them during a sales tax audit or assessment.
What Are Bundled Transactions in Sales Tax and Common Examples
A bundled transaction is one where the seller provides taxable tangible personal property while simultaneously providing nontaxable services or intangible property. The taxable and nontaxable elements of the bundled transaction are inseparable, which makes it difficult to know what amount of the purchase price, if any, is subject to California sales tax. Common examples of industries where bundled transactions are popular include:
- Repair services
- Wedding and event planning
- Entertainment and experiential services
- Consulting and professional services
- Educational programs
- Computer software and SaaS
The 3 Possible Sales Tax Outcomes for Bundled Transactions Under the True Object Test
California outlines three possible sales tax outcomes for bundled transactions under its True Object Test, which seeks to find the primary objective of the buyer in the transaction. Is their goal to acquire taxable property or is it to benefit from nontaxable services? Under the True Object Test, the gross receipts from the property and services you sell in a transaction will have one of the following California sales tax outcomes:
- Wholly Nontaxable: The true object is the service, and the transfer of taxable property is incidental.
- Wholly Taxable: The true object is the tangible property, and the provision of services is incidental.
- Mixed Transaction: The property and services are each a true object of the transaction and readily separable, in which case, only the tangible property is taxable.
For more details and information on California’s True Object Test see R&TC § 1501 and Dell v. Superior Court (2008).
Recent California Office of Tax Appeal Cases Involving Bundled Transactions
Two recent cases with the California Office of Tax Appeals (OTA) highlights the potential for mixed results when challenging a sales tax audit or assessment for bundled transactions.
In the Matter of Appeal of Zeitgeist Events, LLC
This case involved an event planning company that provided nontaxable design services for events along with taxable rentals of tangible personal property. Sometimes, customers bought these items separately and other times, as part of a bundled transaction. The taxpayer had multiple contract and invoicing methods, including distinct service and rental agreements along with flat-fee and hourly rates.
The OTA granted a partial reduction of $340,000 from the taxpayer’s $1.8 million assessment for the taxpayer’s mixed transactions. However, the administrative judge found some of the bundled transactions to be wholly taxable as the sale of tangible property. Specifically, those where the invoice included amounts for hourly completion fees that exceeded the flat-fee portion of the contract meant for the nontaxable design services. The OTA reasoned these hourly fees were part of providing the final event concept and inextricably linked to the rental of tangible property.
In the Matter of Appeal of TrueBallot, Inc.
Here, the OTA had to determine the tax treatment of the taxpayer’s “TrueBallot Fee”, which included professional ballot design services as well as the printed election materials. The OTA concluded the gross receipts from the TrueBallot Fee were at least partially taxable as the sale of tangible personal property. As a result, the CDTFA’s applied ratio of the separately stated charges for printed materials as a portion of the total TrueBallot Fee was an appropriate method for calculating the taxable amount.
Steps for Handling a California Sales Tax Audit over Bundled Transactions
If you have concerns about an audit with the CDTFA over your bundled transactions, or recently received notice, consider the following steps:
- Gather records that will be relevant to the audit (e.g., contracts, invoices, receipts, costs of materials, etc.).
- Meet with our California sales tax professional to guide you through the audit process.
- Determine your potential California sales tax liability.
- Challenge the auditor findings where possible.
- Review the cost/benefit analysis of pursuing appeal or settlement options after the notice of assessment.
If you already received an assessment from the CDTFA, you have a limited amount of time to appeal (generally 30 days), either through a petition for reassessment or reconsideration with the CDTFA Appeals bureau. Check out our California Sales Tax Audit Guide for more information.
Get California Sales Tax Help for Assessments of Nontaxable Services
The biggest concern for businesses with bundled transaction models is the risk of an assessment on your nontaxable services during an audit. For business owners, this is a problem because the transactions are already complete, which means the sales tax liability comes directly out of their revenue. Don’t let an overassessment in California sales tax impact you or your client’s business. Meet with one of our California sales tax professionals today for guidance at every step of the process. We are a cost-effective solution with the experience and skill to give you the information necessary to reach resolution on your most pressing sales tax problems.