Are a layaway service fee and a layaway cancellation fee subject to Kansas sales tax?

Plain-English summary

A general-merchandise retailer planned to offer layaway: the customer starts a layaway with a 10% down payment and pays a layaway service fee. If the customer cancels, the retailer refunds the down payment and any later payments but keeps the service fee and charges an additional layaway cancellation fee. The retailer asked whether the layaway service fee or the cancellation fee is subject to Kansas sales tax.

The Department ruled that neither fee is taxable, because no retail sale has occurred. On a layaway, Kansas sales tax on the item is due only when the buyer makes the final payment and the seller delivers the item. Payments the buyer makes along the way aren't taxed until delivery, and if the buyer cancels, the refunded payments aren't taxable either. Because a non-refundable fee the seller retains — whether called a layaway service fee or a cancellation fee — is not tied to a completed retail sale, it is not subject to Kansas sales tax.

What this means for you

Retailers offering layaway

Charge and remit sales tax on the item only when the layaway is completed (final payment and delivery). A non-refundable layaway service fee or cancellation fee you keep when a sale never closes is not itself subject to sales tax, because there has been no retail sale.

Shoppers using layaway

You aren't charged sales tax on your interim layaway payments; tax is calculated when you make the final payment and take the item. If you cancel, a service or cancellation fee the store keeps is not a taxable charge.

Common questions

Q: Is a layaway service fee subject to Kansas sales tax?
A: No. The Department ruled a non-refundable layaway service fee is not taxable because no retail sale has been made.

Q: What about a layaway cancellation fee?
A: Also not taxable, for the same reason — the customer never completed a retail purchase.

Q: When is sales tax due on a layaway purchase?
A: When the buyer makes the final payment and the seller delivers the item. Interim payments aren't taxed before delivery.

Q: If I cancel and get my payments back, is anything taxed?
A: No. Refunded payments are not taxable, and the non-refundable fee the retailer keeps is not subject to sales tax.

Citations and references

• The ruling does not cite a specific statute section. The Department applied the general Kansas rule that sales tax on a layaway is due only when the final payment is made and the item is delivered — so a non-refundable layaway service fee or cancellation fee the seller retains is not subject to sales tax because no retail sale has occurred.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2011-008

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 22, 2011

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Dear XXXXXXXXXX:

We wish to acknowledge receipt of your recent inquiry regarding the application of Kansas Retailers’ Sales tax. You inquired regarding customer layaway service for general merchandise. XXXXXX will be collecting a $XX layaway service fee when the layaway is initiated with a 10% down payment. Should a customer cancel the layaway fee the customer will be returned the down payment and any subsequent payments made. However, XXXXXX will retain the layaway fee and charge the customer a $XX layaway cancellation fee. You ask if either the layaway service fee or layaway cancellation fee are subject to Kansas sales tax.

The retailer is required to collect and remit sales tax on the receipts only after the selling price for the item and associated sales tax is deducted from the total receipts that the customer paid over time. Tax is not owed on the payments the buyer makes to the seller until the seller delivers an item to the buyer. If the buyer chooses to discontinue making periodic payments, any payment proceeds that are returned to the buyer by the seller are not taxable. As with layaway sales, a non-refundable fee retained by the seller is not subject to Kansas sales tax.

Therefore a non-refundable layaway fee or a layaway cancellation fee is not subject to Kansas sales tax because a retail sale has not been made. Since tax is due on a layaway when the final payment is made, the retailer would not have reported tax on its earlier layaway receipts. Tax would not be due on the non-refundable charge or cancellation fee retained by the retailer since there has not been a retail sale.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Jack Smith
Policy and Research
Kansas Department of Revenue

Date Composed: 09/30/2011 Date Modified: 09/30/2011

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