When did Illinois sales tax apply to layaway and partial payments, and was a nonrefundable layaway fee taxable?

Plain-English summary

A layaway or partial payment entered taxable gross receipts when three things existed: a binding commitment to buy, identified tangible personal property, and a payment on the purchase price. Tax applied to the payment when it was made; the seller did not necessarily wait until final delivery.

The Department also treated the nonrefundable layaway fee as taxable. It was similar to a handling charge—a cost of doing business that the retailer chose to pass to the customer—and could not be deducted from the Retailers' Occupation Tax base.

If the sale later was rescinded and the seller refunded a payment on which tax already had been paid, the seller could take a deduction on the return for the period in which the refund occurred. But the seller could not refund tax previously paid on a fee that remained nonrefundable.

The GIL supplied these general rules rather than separately approving every feature of the retailer's proposed layaway and flexible partial-payment plans.

What this means for you

Retailers should track when an order becomes binding and when the actual item is identified. A flexible deposit that does not yet identify an item may require a different timing analysis from a traditional layaway tied to a specific television. Treat retained service or handling fees as part of taxable gross receipts under the rule described.

Common questions

Q: Was tax postponed until the final layaway payment?
A: Not when the purchase was binding, the property was identified, and earlier payments had been made; each such payment entered gross receipts when made.

Q: Was the nonrefundable layaway fee taxable?
A: Yes. The Department treated it like a nondeductible handling charge.

Q: What happened if the sale was canceled and payments were refunded?
A: The seller could deduct the refunded payment in the refund period, but not tax on a fee that was not refunded.

Subject

Gross Receipts

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0029.pdf

Original ruling text

ST 11-0029-GIL 04/08/2011 GROSS RECEIPTS
This letter discusses whether layaway service charges/handling charges constitute taxable
gross receipts. See 86 Ill. Adm. Code 130.430. (This is a GIL.)

April 8, 2011

Dear Xxxxx:
This letter is in response to your letter dated January 11, 2011, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
COMPANY respectfully request [sic] formal guidance regarding the application of sales
tax to (1) layaway sales and (2) sales made through a partial payment program.
Facts
COMPANY is a retailer of consumer technology and entertainment products. In an
attempt to provide customers with alternatives to traditional cash and credit card
purchases, COMPANY intends on offering their customers with two additional
purchasing options: (1) Layaway (2) Partial Payment.
Layaway
Under the layaway payment option, COMPANY will hold a product in inventory for a
customer until the customer has completed a series of payments that amount to the
total sales price of the product. The benefit to the customer for placing an item on
layaway is that the customer is guaranteed the sales price of the item on the date the
item is placed into layaway, and the customer is afforded additional time in order to
make the full payment on the item. When a customer enters into a layaway agreement,
the customer is required to make an initial 20% down payment on the sales price of the
item, along with a non-refundable 5% layaway fee. The customer will then be required
to make four additional bi-weekly payments that will cover the remaining amount of the

sales price. Both title and possession of the item remain with COMPANY until the
customer has satisfied their payment obligations, at which time the customer will be
entitled to receive possession of the item.
For accounting purposes, COMPANY uses the accrual basis. Therefore, COMPANY
will record the initial down payment and subsequent layaway payments in a deferred
revenue account. COMPANY will not recognize revenue on the sale until the final
layaway payment has been made and the item has been transferred to the customer.
Layaway Example
Upon entering into a layaway agreement for a for [sic] $1,000 television, a customer will
be required to pay a $200 down payment (20% of the $1,000 sale price) and a $50 nonrefundable layaway fee (5% of the $1,000 sale price). It should be noted that the nonrefundable layaway fee will be separately stated on the customer’s layaway agreement
as well as on the customer’s receipt. COMPANY will then clearly identify and hold the
television in inventory as a layaway item for that specific customer. Both possession
and title to the television will remain with COMPANY until the customer has made their
final payment. The customer will then be required to make four additional bi-weekly
payments in the amount of $200. In total, the customer will make five layaway
payments that will be applied to the price of the television. At the time the final payment
is made, COMPANY will transfer possession of the television to the customer.
If the customer fails to make a scheduled bi-weekly payment, the layaway agreement
will be nullified. The customer will be refunded the total amount of the layaway
payments that were previously made. However, COMPANY will retain the 5% nonrefundable layaway fee. In the above example, if the customer failed to make the
second scheduled bi-weekly payment, COMPANY would refund the customer $400 (the
initial layaway payment of $200 plus the first bi-weekly payment of $200). COMPANY
would retain the $50 layaway fee.
Partial Payment
The intent of the partial payment plan is to allow customers who want to purchase
multiple items that are part of a single order set (i.e. kitchen appliances or a home
theater) the flexibility of making payments at their own convenience. Upon setting up a
partial payment plan, the customer will be required to make an initial 20% down
payment on the total sales price of the bundle of goods for which they have placed an
order. After the initial down payment has been made, the customer is free to make
additional payments of any amount at any time. The customer also has the flexibility of
changing the items placed on order at any time. COMPANY will not hold or designate
inventory on behalf of the customer until the time in which the customer schedules the
actual delivery of an item that was placed on order. The customer is not eligible to
schedule an item for delivery until the customer has made enough payments on their
order to cover the sales price of that particular item. It should also be noted that the
sales price of an item in which the customer has placed an order on is not final until the
time in which the actual payment is applied and delivery is scheduled.
From an accounting perspective, COMPANY will record the initial down payment and
any subsequent payments in a deferred revenue account. COMPANY will not
recognize revenue on the sale until the final payment has been made and the item has
been delivered to the customer.

Partial Payment Example
A customer places an order for kitchen appliances on the partial payment plan.
Included in the order are a $1,200 refrigerator, a $600 dishwasher, and a $200
microwave. Upon placing the order in a partial payment plan, the customer is required
to make an initial 20% down payment in the amount of $400 ($2,000 X 20%). Two
weeks after setting up the partial payment plan the customer applies another payment
to the order in the amount of $600. One week later, the customer applies another $500
payment to the order. With total payments of $1,500 ($400 deposit + $600 first partial
payment + $500 second partial payment) placed on the order, the customer decides to
schedule the delivery of the dishwasher. At the time the customer schedules the
delivery of the dishwasher, the dishwasher is on sale for a price of $550. Therefore, the
customer’s order account will be reduced by $550, giving the customer a remaining
balance of $950 ($1,500 total deposit less $550 purchase). COMPANY will then
withdraw the dishwasher from its inventory, or order the unit from a third party, and then
schedule the time and place for the customer delivery.
Layaway Issue(s)
(1)

(2)

(3)

For sales tax purposes, at what point in a layaway sale transaction does the
taxable event occur?
a.

Is COMPANY required to collect sales tax, based on the total purchase
price of the item, at the time the customer makes the initial down
payment?

b.

Is COMPANY required to collect sales tax at the time, and based on the
amount, of each layaway payment?

c.

Is COMPANY required to collect the sales tax, based on the total
purchase price of the item, at the time when the final layaway payment is
made?

Are the non-refundable layaway fees subject to sales tax? If taxable, at what
point in the layaway sale transaction do the non-refundable layaway fees
become subject to tax?
a.

Would the taxable event occur at the time in which the layaway fee is
paid?

b.

Would the taxable event occur at the time in which the final layaway
payment is made?

Would a refundable layaway fee be subject to sales tax (i.e. a fee that would be
refunded to the customer upon cancellation of the layaway transaction)? If
taxable, at what point in the layaway sale transaction would the refundable
layaway fee become subject to tax?
a.

Would the taxable event occur at the time in which the layaway fee is
paid?

b.

Would the taxable event occur at the time in which the final layaway
payment is made?

Partial Payment Issue(s)
(1)

For sales tax purposes, at what point in a partial payment transaction does the
taxable event occur?
a.

Is COMPANY required to collect sales tax, based on the total purchase
price of the initial order, at the time the customer makes the initial down
payment?

b.

Is COMPANY required to collect sales tax at the time, and based on the
amount, of each partial payment?

c.

Is COMPANY required to collect the sales tax, based on the final
purchase price of the item or items, at the time when the payment is
applied to the purchase of the item and delivery is scheduled?

Thank you for your time and consideration with respect to this issue. Please contact me
if you have any questions or need any additional information.

DEPARTMENT’S RESPONSE:
Generally, if a buyer in a sale at retail makes a binding commitment to purchase tangible
personal property and the tangible personal property has been identified, any payment on the
purchase price must, at the time of such payment, be included in the measure of the seller's tax
liability. The giving of a binding purchase order by the purchaser, identification of the tangible
personal property and the making of a payment on the price are sufficient to establish that a sale is
intended for the purpose of determining that the seller has received taxable "gross receipts". 86 Ill.
Adm. Code 130.430(a).
As indicated at 86 Ill. Adm. Code 130.410, service costs are not deductible in computing ones
Retailers' Occupation Tax liability. The non-refundable layaway fee appears to be very similar to a
handling charge. Handling charges are also not deductible when computing one’s Retailers'
Occupation Tax liability. It is nothing more than a cost of doing business which you have chosen to
pass on to your customers.
After the seller has paid Retailers' Occupation Tax on the amount of such payment on the
price, if the transaction is rescinded and the seller refunds such payment to the purchaser, the seller
is in the same position as when he makes a refund on account of the return of merchandise after
having paid Retailers' Occupation Tax on the amount so refunded and so may take a deduction on
his return for the return period in which such a refund is made. 86 Ill. Adm. Code 130.430(b). The
seller would not be allowed to refund the tax previously paid on a non-refundable layaway fee.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Richard S. Wolters
Associate Counsel
RSW:msk