03/17/2006

CLARIFICATION ON SALES TAX OF PRENEED CONTRACTS

By: T. Scott Gilligan, OFDA General Counsel

The March, 2006 OFDA Newsletter contained an article on sales tax compliance by Ohio funeral homes. The issues discussed in the article generated quite a few calls to OFDA concerning when sales tax should be paid on insurance-funded preneed contracts. Additionally, since the time the article was published, the Ohio Sales Tax Division, at the request of the Ohio Board of Embalmers and Funeral Directors, has issued a clarification on the sales tax imposed on limousines. We address each of these clarifications below.

Insurance-Funded Preneed Contracts. The March, 2006 article explained that when a funeral home enters into a preneed funeral contract, it must list on the contract the sales tax liability arising from the sale of funeral goods and limousine services. Moreover, it directed that the sales tax should not be trusted, but instead should be submitted to the Ohio Department of Taxation when the preneed contract is entered into.

The article did not, however, address the scenario when the preneed funeral contract is funded by the purchase or assignment of an insurance policy. To determine whether the payment of the sales tax would be handled in a different method, we contacted the Ohio Department of Taxation. The representative from the Sales Tax Division confirmed that sales tax would not be due upon the execution of the preneed funeral contract if the contract is funded by insurance. Rather, sales tax would not be due under that contract until the insured consumer died and the insurance policy proceeds were utilized to purchase funeral goods. At the point that the insurance policy proceeds are received by the funeral home, the sales tax liability would arise.

Limousines. On the issue of sales tax being imposed on limousine transportation, Ohio funeral directors are aware that a change in the sales tax law back on August 1, 2003 made sales of intrastate limousine service subject to sales tax. (If the limousine travels over state borders at any time during the transportation, it is not subject to Ohio sales tax.) Although the law took effect three years ago, the Ohio Department of Taxation did not update its regulations on the sale of funeral merchandise and services. Therefore, in the March, 2006 Newsletter, we reported that according to the regulations of the Ohio Department of Taxation, the first two limousines in a package were exempt from sales tax.

Since the publication of that article, the Ohio Sales Tax Division has realized that its regulations on funeral goods and services were never updated after the 2003 sales tax change. In a letter sent to the Ohio Board of Embalmers and Funeral Directors, the Ohio Department of Taxation acknowledged that there is now a conflict between the sales tax statute and the Department's sales tax regulations. Moreover, it explained that because of the conflict, it would not challenge any Ohio funeral home on the past collection of sales tax for limousine services. In other words, regardless of how the funeral home has collected sales tax for limousine service since 2003, the Sales Tax Division will not pursue a claim against the funeral home.

The Department will be updating its regulations on sales tax and limousines shortly. Until that time, funeral homes can continue to charge and collect sales tax on limousine service as they have since 2003. Once the regulations are updated, OFDA will alert the membership.
OFDA members with questions regarding this matter should contact Scott Gilligan at (513) 871-6332.