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Ohio's True Object Test and Bundled Transactions Explained

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An unnumbered paragraph in R.C. 5739.01 and Ohio’s bundled transaction statute, R.C. 5739.012, represent Ohio’s attempt to explain what happens when you combine a taxable product with a nontaxable product or service and sell it for one fixed price—is the transaction taxable or not?

This unnumbered paragraph, appearing immediately after R.C. 5739.01(B)(12), codifies the “true object test,” a judge-made rule that determines whether tax should be charged when a nontaxable service results in a good and the charge for the service and good aren’t separately stated. The paragraph says if the good is an “inconsequential element” of the service, then no sale has occurred (i.e., the transaction isn’t taxable).

(It seems a bit dramatic to declare that no sale has occurred, but that might have been intended to foreclose any sale-for-resale arguments. Not sure.)

To determine whether the good is an “inconsequential element” of the service, the true object test says figure out what the purchaser was really trying to purchase—was it the service provider’s intellectual or manual personal effort (i.e., the service) or the product of the service provider’s skill (i.e., the good)? If it’s the service, then the good is an “inconsequential element” of the service, and the transaction is not taxable.

While the true object test looks good on paper, it doesn’t work so well in practice. Here’s an example: wills and photographs. According to the Ohio Supreme Court, when a dying man hires an attorney to draft his will, the man seeks more than a piece of paper with magic legal words. He seeks the distribution of his life’s accumulation upon his demise. And only an attorney with the attorney’s special intellect, creativity, and knowledge of the law is capable of producing the language that will effect this dying man’s last desires (even though you can buy perfectly legal fill-in-the-blank wills at Staples). Thus, when the dying man hires the attorney, the man seeks a service, not a good. But, when someone hires a photographer, all they want is “a picture to depict something.” So, the lawyer sells a service, but the photographer, a measley good.

Personally, I can’t tell the difference between the two. Both are useless if they’re not in a perceptible form, both represent more than the words or imagines on them, and both can be created with no skill or intellect or tons of it. So, whatyagonnado? Idunno. Good luck with that.

So, in summary, if you’re selling a service and a good for a single, fixed price, figure out what the customer’s really buying and go with that.

Next we talk about Ohio’s bundled transactions statute—R.C. 5739.012. And here we go.

You have to get to the final sentence of R.C. 5739.012, division (D), to read the general rule—and guess what—it’s the true object test! Or at least it appears to be. The statute doesn’t actually say “true object test.” Nor does the statute reference the unnumbered paragraph after R.C. 5739.01(B)(12) or the case law underlying it. And it talks about goods and services being combined, so you’re kinda left wondering which code section you should be looking at, the unnumbered one or this one—and then you begin to wonder whether there's any difference between the two. Fine, whatever.

Under R.C. 5739.012(D), the taxability of a bundled transaction depends on what the customer truly intended to buy: the taxable part or the nontaxable part. Other divisions in the section purport to provide exceptions but either (1) don’t actually say anything, (2) simply restate the true object test, or (3) do both. Por ejemplo …

Division (B)(1) says a bundled transaction is not actually a bundled transaction if the customer intends to buy a service and is provided a good necessary for the use of that service. When this happens, the Revised Code says to … to … . Unfortunately, it doesn’t say what to do. It just says it’s not a bundled transaction.

I imagine what it was trying to say was “if the good is necessary to the use of the service, then ignore the fact that a good was provided, and just focus on the service.” If that’s correct, then there was no need to say it, because the general rule says the taxability of the transaction depends on what the customer truly intended to buy, and earlier in the division it said the customer intended to by the service. Hmm.

Division (B)(2) says the same thing but substitutes a second service for the good. Again, it doesn’t tell you what the result should be. It just says it’s not a bundled transaction. As before, I imagine it was trying to say “if the second services was essential to the first service, just focus on the first service,” which we were going to do anyway because the general rule says to look at what the customer really intended to buy, and earlier the division said the customer intended to buy the first service. Again, hmm.

Division (B)(3) says when goods are bundled, and one of them is taxable but represents 10% or less of the retail price or seller’s cost of the bundle, then ... again nothing. It just says it’s not a bundle. Again, I imagine it was trying to say “ignore the taxable product,” which in effect restates the general rule because the customer probably didn’t care about the least significant item in the bundle.

Moving on…

In Division (B)(4) we get into fruit basket, drugs, and medical stuff territory. Division (B)(4) says when you have bundles including food, drugs, or medical thingies, some taxable, some not, and the taxable stuff comprises 50% or less of the retail price or seller’s cost of the bundled items, then … you know … silence. What it meant to say probably was ignore the taxable stuff. So, if you’re selling gift baskets with fruits, cheeses, sausage, wine, opioids, and a prosthetic limb, and the wine, basket, and fake grass comprise 50% or less of the retail price or your cost of the bundle, then you don’t need to charge tax.

So there you have it. I'm not going to address division (C), which deals with telecommunications stuff. It places the burden of proving nontaxability on the telecommunications provider. Just trust that your telephone company’s lawyers know what they're doing.

In grand conclusion, if you’re selling something taxable and something nontaxable for a single, fixed price, figure out what the customer’s really buying and go with that, unless the bundle involves only goods, or food, drugs, or medical stuff, in which case you should apply the percentages.

About the Author: Steve’s Ohio tax experience began in 2006 at the Ohio General Assembly where he drafted the State’s tax legislation. Steve quickly became a expert on Ohio’s manufacturing, restaurant, oil and gas, R&D, and other sales tax exemptions and on the taxability of data processing, cloud computing, employment, and other services. In 2011, Steve joined Big 4 firm pwc and gained experience on a national level. Steve also worked for a global software development company where he was responsible for sales, use & other tax compliance.
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