Department of Finance Post Office Box 1272, Room and Administration Phone: (501) REVENUE LEGAL COUNSEL.

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1 STATE OF ARKANSAS REVENUE LEGAL COUNSEL Department of Finance Post Office Box 1272, Room 2380 Little Rock, Arkansas and Administration Phone: (501) Fax: (501) Nina Carter, Attorney at Law June 27, 2016 RE: Taxability of Casket Rental by Funeral Establishments Opinion Number Dear : Your letter dated April 6, 2016, to the Department of Finance and Administration ( DFA ), requesting an opinion has been referred to me for a response. You requested clarification on the application of Arkansas gross receipts or sales tax on funeral home rental or display caskets. In your letter, you provided this information: These are special order caskets that are used repeatedly for families who wish to have a viewing of their deceased family members prior to cremation. The casket is specially built to meet health and regulatory codes regarding the display of the deceased. These caskets are constructed for the inserting and removal of a special cremation container and then lined with an appropriate liner for cremation. Most funeral homes only have one of these and use it only when the family has a need to see their deceased loved one prior to cremation. This casket is offered as a part of a funeral home s general services. It is our belief that the use of these caskets should not be subject to additional rental or use tax as they are simply a funeral home fixture used to serve families as needed, just as other items, such as televisions, etc. are used routinely to serve families depending on their specific needs. Please advise as to how the Department of Finance and Administration plans to treat these caskets and their use in funeral homes. We will share your response with our members to ensure all 400 Arkansas funeral homes understand how to properly handle this important tax issue.

2 RESPONSE I. BASIC SALES TAX FOR THE FUNERAL BUSINESS The Arkansas Gross Receipts tax, commonly referred to as sales tax, generally applies to all sales of tangible personal property and certain enumerated services. See Ark. Code Ann (Repl. 2014). A sale is defined as any transaction resulting in the transfer of either the title or possession, for a valuable consideration, of tangible personal property or taxable services regardless of the manner, method, instrumentality, or device by which such transfer is accomplished. See Ark. Code Ann (19)(B) (Repl. 2014) and Arkansas Gross Receipts Tax Rule GR-3(M) 1. The lease or rental of tangible personal property is included in the definition of a sale under Arkansas law. Id. All sales, including leases or rentals, of tangible personal property are taxed unless an exemption applies while services are only taxed if specifically enumerated. See Ark. Code Ann (1) (Repl. 2014). Tangible personal property is any personal property that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses. Ark. Code Ann (21)(A) (Repl. 2014) and GR-3(Q). Funeral merchandise and goods are considered tangible personal property. Arkansas Gross Receipts Tax Regulation GR-22 addresses tax issues specific to the funeral business. Arkansas Gross Receipts Tax Regulation GR-22 provides that: A. GENERALLY. Funeral homes or funeral directors must collect and pay the tax upon the gross receipts or gross proceeds of all sales of tangible personal property sold by them in connection with the services they offer. B. INVOICING. Where the funeral home or funeral director separately states the charges for items of tangible personal property on his bill or invoice, then the tax should be collected and remitted on the gross receipts or gross proceeds derived from the sale of the items of tangible personal property. C. SHIPMENT. Where a corpse is shipped by one funeral home located in Arkansas to another funeral home located in Arkansas the tax must be collected and remitted on the gross receipts or gross proceeds derived from the sale of the casket, shipping case, shipping box and freight, by the selling funeral home. If, however, the body is shipped outside the State of Arkansas, then see Regulation GR-5 for applicable rules. D. CONSUMERS. Funeral homes and funeral directors are considered the consumers of preparation room supplies and equipment, display room equipment, chapel furnishings and equipment, and cemetery equipment, and must pay the tax to the suppliers of these goods at the time of purchase. 1 The Arkansas Gross Receipts Tax Rules are available online at 2

3 In a follow-up telephone conversation with me, you clarified that your use of the term display casket did not mean the type of floor-model casket used in a display room. Your use of the term display means that the casket is only to be used during the viewing and service as opposed to a burial casket. Another term used in the funeral industry is ceremonial casket. II. IS THE FUNERAL HOME A RETAILER OR A CONSUMER? Funeral homes and funeral directors have two different roles for tax purposes. Under GR- 22(A), funeral homes are retailers when they must collect tax on all sales of tangible personal property sold in connection with their services such as caskets, vaults, urns, cards or other funeral goods. Then GR-22(D) establishes that funeral homes and funeral directors are consumers of certain supplies and equipment which are furnished by them in connection with the funeral services unless a separate charge is made for such goods. It is important to note that in the consumer role, the funeral home must pay tax when they purchase these goods. Similarly, there are two different ways that a rental casket may be treated. If a casket is provided for a funeral service that the customer is not allowed to keep after the service and that does not remain with the deceased after the service, you are not selling the casket to your customer. You are either using the casket in conjunction with providing your services or you are renting the casket to your customer. The transaction will be considered a rental if the contract specifies that you are renting the casket to the customer and/or the contract itemizes a specific amount payable by your customer for the casket. When renting the casket to the customer, the funeral home is a GR-22(A) retailer and must charge sales tax and collect that sales tax from the customer. It should also be noted that since the rental of the casket is typically for only one or two days it is considered a short-term rental of tangible personal property and an additional tax is added. Where the lease is for less than thirty (30) days, there is an additional tax of one (1) percent for the short term rental regardless of whether the sales tax was paid by the lessor on the original purchase. See Ark. Code Ann (b) (Repl. 2014) and GR-20(E). Although GR-22(A) requires a funeral home to collect the tax on its rentals of caskets, if the funeral home is registered with the State of Arkansas to collect sales tax, it may purchase these rental caskets free from sales tax as a sale for resale. The funeral home must, however, satisfy all the requirements of GR-53 in order to claim the exemption. Unless they do so, the funeral home will still responsible for paying taxes on the purchase of rental caskets. Regardless of whether the funeral home pays tax on the casket purchase, they are still obligated to collect tax when they rent the casket. See Ark. Code Ann (19)(D)(i) (Repl. 2014) and GR- 20(A). With respect to a casket provided in conjunction with the funeral services, the casket will be considered GR-22(D) funeral home equipment that is ancillary or incidental to the nontaxable funeral services and not taxable if the bill states that use of a display or ceremonial is included with the service and/or the customer is billed one non-itemized price for the funeral. The funeral home, as the consumer of that display or ceremonial casket must have paid the 3

4 sales tax when they purchased the casket. Also, in this circumstance, the short-term rental tax should not be collected and remitted. III. PACKAGE DEALS AND ITEMIZATION OF THE CONTRACT Some funeral homes offer what may be called Cremation Packages or a similar term, which include an option of having a traditional funeral service with visitation utilizing a rental or display casket prior to cremation. It is important for funeral homes to consider the sales tax obligations in providing this service in a package. If the various services and products being provided are not billed separately they are considered to be a bundled transaction. Except as otherwise provided in GR-93, sales tax must be collected on the total sales price of a bundled transaction if any product included in the bundled transaction would be taxable if charged separately. See GR-93(A). The True Object Exclusion to bundled transactions applies when one service is provided that is essential to the use of a second service and the first service is provided exclusively in connection with the second service, and the true object of the transaction is the second service. See GR-93(D)(1). Thus, the exclusion would apply when the use of a casket is provided in conjunction with the funeral service as the use of the casket is essential to and provided exclusively in connection with the funeral home services. The following factors are considered to determine the true object of the transaction: the seller s line of business; the purchaser s object of the transaction; whether the service that is essential to the second service is available for sale separately; and how the service is essential to the second service. See GR-93(D)(1)(c). The provision of a casket is also not taxable under GR-93(C)(1) because the casket use is not a separate and distinct rental of a product when it accompanies the sale of the funeral service and the free use of the casket is incidental or immaterial to the sale of the funeral service. The tax treatment of the funeral service packages depends on whether the use of the casket is transferred incidentally with the funeral services furnished or whether the use of the casket is a rental of funeral goods with a separate itemized fee. If the customer does not have the option to (1) rent the casket for a separate fee, or (2) not use the casket and pay a lesser amount, the funeral home is transferring the use of the casket incidentally with the service and the package price for the funeral is not taxable. However, if the cost for the funeral service is itemized, and clearly lists a separate price for the rental of a casket, sales tax will only be due on that rental price. Example 1: Funeral Home A offers a Cremation Package (Package A). The price list and billing invoice state that the price for Package A includes basic services of the director and staff, use of facilities and staff for visitation, and use of facilities and staff for funeral service, including the use of a ceremonial casket. Package A is one set price. The charge for Package A is not taxable as the billing invoice clearly states that the casket is provided in conjunction with the nontaxable funeral services. Funeral Home A is the consumer of all equipment and furnishings, with sales tax paid at the time of purchase. 4

5 Example 2: Funeral Home B offers a Cremation Package (Package B). Pricing for Package B states that it includes basic services of the director and staff, use of facilities and staff for visitation, use of facilities and staff for funeral service. The price list notes that Package B requires a casket for viewing and that a rental casket is available for an additional fee. Package B is one set price but requires the rental of a casket for a separately billed fee. The charge for Package B funeral service is not taxable to the customer. However, the additional charge by Funeral Home B to the customer for the use of the casket is a rental and sales tax plus the additional 1% short-term rental tax must be added to the rental fee. The funeral home may purchase the casket as a sale for resale, if qualified. IV. CASKET LINERS ARE TAXABLE The use of a casket as an included funeral home fixture or as a rental both require the use of a removable casket liner for sanitary purposes. A new casket liner, or rental insert, is required for each use. The liner or insert will always be treated as a sale to the customer and the funeral home is required to collect sales tax on the sale. CONCLUSION Accordingly, funeral homes that offer a funeral service prior to cremation must decide how they will treat the casket used for those types of funeral services. The funeral home may decide to purchase a reusable casket as part of the funeral home furnishings and equipment included with funeral services, as described in your opinion request letter. The sales tax obligation would be paid by the funeral home at the time of purchase and the funeral package charge to the customer would be nontaxable. The funeral home could also choose to purchase a reusable casket, or several with varying features, and offer casket rental as an itemized cost subject to sales tax. This opinion is based upon my understanding of the facts as set out in your inquiry and as current Arkansas laws and rules govern those facts. Any change in the facts or law could result in a different opinion. Please be advised that this opinion may only be binding upon DFA for three (3) years from the date of issuance. See GR-75. The Gross Receipts Rules cited in this opinion may be viewed on DFA s website at Sincerely, Nina Samuel Carter Office of Revenue Legal Counsel 5