Sales of Tangible Personal Property and Services

PURPOSE: Section 144.020.1, RSMo provides that sales of tangible personal property and certain enumerated services are subject to tax. Section 144.010.1(3), RSMo defines which charges are subject to tax when included in the sale price of tangible personal property. This rule explains which charges are subject to tax when a transaction involves the sale of a service or both tangible personal property and a nontaxable service. (1) In general, the sale of tangible personal property is subject to tax unless a specific statute exempts it. The sale of a service is not subject to tax unless a specific statute authorizes the taxation of the service. When a sale involves both tangible personal property and a nontaxable service, the sale of the tangible personal property will be subject to tax, and the service will not be subject to tax, if the sale of each is separate. When the sale of tangible personal property and a nontaxable service are not separable, the entire sale price is taxable if the true object of the transaction is the transfer of tangible personal property. None of the sale price is taxable if the true object of the transaction is the sale of the nontaxable service. (2) Definition of Terms. (A) Personal service—service involving either intellectual or manual personal labor of the server rather than a salable product of the server’s skill. (B) Sale price—the consideration paid to the seller for tangible personal property, including any service charges other than charges incident to the extension of credit. (C) True object—the real object the buyer seeks in making the purchase. The essentials of the transaction determine the true object. The true object of the transaction is the tangible personal property if: 1. The purchaser desires and uses the tangible personal property; 2. The tangible medium is not merely a disposable conduit for the service or intangible personal property; 3. The tangible personal property is a finished product; or 4. The tangible personal property is not separable from the service or intangible personal property. (D) The true object of the transaction is the service or intangible personal property if the tangible personal property is merely the medium of transmission for an intangible product and can be discarded after the purchaser has obtained access to the intangible component. (3) Basic Application. (A) Shipping, Handling, Minimums, Gratuities and Similar Charges. 1. If the purchaser is required to pay for the service as part of the sale price of tangible personal property, the entire sale price is subject to tax. 2. If the purchaser is not required to pay the service charge as part of the sale price of tangible personal property, the amount paid for the service is not subject to tax if the charge for such service is separately stated. If the charge for the service is not separately stated, the entire sale price is subject to tax. (B) Repair and Personal Services. 1. If the amount paid for the repair or personal service is separately stated from the tangible personal property used to perform the repair or personal service, the amount paid for the repair or personal service is not subject to tax. 2. If the amount paid for the repair or personal service is not separately stated, the entire sale price is taxable. However, if the retail price of the tangible personal property constitutes less than ten percent (10%) of the total sale price, the department will consider none of the sale price as taxable. The seller must pay tax on the purchase of the tangible personal property. (C) All Other Transactions. 1. If the purchaser obtains a service as part of a transaction in which the true object is the purchase of tangible personal property, the entire sale price is taxable even if the charge for the service is separately stated. 2. If the purchaser obtains tangible personal property as part of a transaction in which the true object of the transaction is the purchase of a service, none of the sale price is taxable unless the charge for the tangible personal property is separately stated. If the charge for the tangible personal property is separately stated only the charge for the tangible personal property is taxable. (D) A person selling tangible personal property to a retailer of a nontaxable service must collect and remit tax on such sales. (E) When a service provider also sells tangible personal property in transactions separate from the provision of services, the sales of tangible personal property are subject to tax. (4) Examples. (A) A steel fabricator enters into an agreement to fabricate steel beams for a building. The fabricator makes a retail sale of the steel beams. Even though the fabrication labor is separately stated on the sales invoice, the total sale price including charges for the fabrication labor is subject to tax. (B) A person purchases a compact disc (CD) through a mail order club. The seller charges a set amount for shipping and handling the CD. Because the buyer is required to pay the shipping and handling charge, the entire amount charged, including the shipping and handling, is subject to tax. (C) A family purchases furniture from an out-of-state seller. The seller gives the buyer a choice of shipping the furniture or the buyer may arrange for the furniture to be delivered to their home. Because the shipping is optional, it is not subject to tax. (D) A person purchases ten (10) yards of concrete from a concrete company. The concrete company separately states the optional delivery charge but has a mandatory minimum service charge of twenty-five dollars ($25) on all orders less than twelve (12) yards. Tax is due on the concrete price and the mandatory service charge, but not on the delivery charge. (E) A car dealer sells an automobile to a buyer, which includes as part of the purchase price an initial warranty for services including parts. Tax is due on the entire sale price. The dealer does not owe tax on parts supplied pursuant to the initial warranty when the manufacturer provides the parts to the dealer free of charge. The car dealer also sells the buyer an optional extended warranty beyond the initial warranty for services only. The sale price for the optional warranty is separately stated. The extended warranty is not subject to tax. If the dealer bills the buyer additional charges for repair parts as needed, the dealer must charge the buyer tax on the repair parts. If the extended warranty includes parts, the dealer is liable for tax on the purchase of the parts used to fulfill the extended warranty contract. (F) Taxpayer sells a typewriter for three hundred dollars ($300) and an optional one (1) year maintenance contract for an additional twenty-five dollars ($25). The maintenance contract is segregated on the billing from the cost of the typewriter. Tax is due on the three hundred dollars ($300) but is not due on the twenty-five dollars ($25) maintenance contract. If the maintenance contract states that the seller provides repair parts, the seller must pay tax on its purchases of repair parts to fulfill the agreement. If the maintenance contract states that the seller bills the customer an additional charge for repair parts, then the seller must collect and remit tax on the amount charged for the parts. (G) An architect prepares original architectural plans for an addition to a home. Because the true object of this transaction is the architectural service, the original plans and copies prepared by the architect are not subject to tax, unless the architect separately states the charge for the copies. If the architect uses the services of another party to create the copies, the third party should charge the architect tax. Copies of the plans purchased by the homeowner from a third party are subject to tax. (H) A tool and die manufacturer designs and builds a custom machine tool for a customer. The tool will be installed on the customer’s existing equipment. The manufacturer purchases from an independent mechanical engineer shop drawings showing how to build the tool and showing precisely how and where the tool should be installed on the customer’s equipment. The manufacturer’s agreement with its customer requires that the drawings be provided to the customer along with the tool. The entire purchase price paid by the manufacturer’s customer, including the cost of the shop drawings (even if separately stated) is subject to tax. The transfer of the drawings is a part of the sale of the tool. (I) A monument seller separately states its charges for headstones and inscription of headstones. The entire sale price, including inscription, is taxable. (J) A person takes her car to a mechanic for new brakes. The mechanic installs new brakes and charges sixty dollars ($60) for the parts and fifty dollars ($50) for labor, which is separately stated on the invoice. Tax is due on the sixty dollars ($60) charge for the brakes. If the mechanic does not separately state the labor, tax should be charged on the total invoice of one hundred ten dollars ($110), because the cost of new brakes exceeds ten percent (10%) of the sale price of the repair. (K) A warehouse stores and ships materials in cardboard boxes. The charge for the boxes is included in the charge for the warehousing service and not separately stated. The charge for the boxes is not subject to tax, and the warehouse must pay tax on its purchases of the boxes. If the charge for the boxes is separately stated, it is subject to tax. (L) A binding company binds materials provided to it by customers and also binds books that it sells to the public. Materials and supplies used by the binding company in binding materials for customers are not subject to tax unless the charges for the materials and supplies are separately stated. The binding company must pay tax on its purchase of such materials and supplies. The binding company may purchase exempt from tax materials and supplies it incorporates in books made for sale to the public. (M) A laundry or dry cleaner provides a nontaxable service and does not collect or remit tax. The laundry or dry cleaner should pay tax on tangible personal property used in performing the service including items such as hangers and plastic bags. If a laundry also sells laundry detergents, sales of the detergents are subject to tax. (N) A man takes his suit to the dry cleaner with a request to clean and press the suit, replace a missing button and sew a split seam. Because the price of the button and thread is less than ten percent (10%) of the total cost the dry cleaner does not collect tax. The dry cleaner should purchase these materials subject to tax. (O) A barbershop that also sells hair care products must collect and remit tax on all sales of such products. AUTHORITY: section 144.270, RSMo 1994.* Original rule filed June 8, 2000, effective Jan. 30, 2001. *Original authority: 144.270, RSMo 1939, amended 1941, 1943, 1945, 1947, 1955, 1961.