When is South Carolina sales tax due on layaway and partial-payment sales, and is a layaway fee taxable?

Plain-English summary

The South Carolina Department of Revenue ruled that a retailer's layaway and partial-payment plans are taxed when title or possession of the merchandise transfers to the customer, not as deposits and installment payments are received. Under the described plans, the retailer kept both title and possession until delivery, so it reported the tax for the month of delivery.

A layaway fee was part of taxable "gross proceeds of sales" when the layaway ended in an actual retail sale. If the customer defaulted and the agreement was canceled before any transfer of title or possession, neither the retained nonrefundable fee nor the refunded layaway payments were subject to sales tax because no sale occurred.

For the ruling's $1,000 television example, the taxable measure was $1,050: the merchandise price plus the $50 layaway fee. The entire amount became taxable when the television transferred, not when the down payment, fee, or later installments were collected.

What this means for you

Retailers offering layaway

Document exactly when title and possession transfer. In this ruling, both remained with the retailer until the customer completed payment and received the item. That fact kept the earlier payments outside the tax base until delivery.

Retailers offering flexible partial-payment accounts

Unapplied customer funds were not taxed when received. When the customer selected an item for delivery, the amount applied to that item became taxable when the item transferred. The ruling's appliance example taxed the $550 dishwasher in the February return because it was delivered February 1, while the remaining $950 stayed as unused payments.

Accountants and tax professionals

The Department distinguished this plan from the layaway arrangement addressed by S.C. Regulation 117-318.3. That regulation applies where title has transferred while the seller holds the property; here, title and possession both stayed with the seller until delivery.

Common questions

Q: Is a separately stated layaway fee taxable?
A: Yes, if the layaway results in a sale. The fee is part of gross proceeds because it is earned in making the layaway sale.

Q: What if the customer defaults and the retailer keeps the fee?
A: Under these facts, the retained fee was not taxable when the agreement was canceled before title or possession transferred, because no retail sale occurred.

Q: When should the retailer report tax on advance payments?
A: When title or possession of the item transfers. The deposits themselves were not taxed in the months received under the plans described.

Q: Would a refundable layaway fee be treated differently?
A: No. The ruling says the same sale-based rule applies: taxable if the merchandise transfer occurs, and not taxable if no sale occurs.

Citations and references

• S.C. Code § 12-36-90 (gross proceeds of sales)
• S.C. Code § 12-36-100 (sale includes a transfer of title or possession)
• S.C. Code §§ 12-36-910 and 12-36-1110 (sales-tax imposition and additional rate)
• S.C. Regulation 117-318.3 (payments on certain property held by the seller)
• Meyers Arnold v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920 (1985)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR11-4.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #11-4

SUBJECT:

Layaway Sales, Layaway Fees and Partial Payment Sales
(Sales Tax)

REFERENCES: S. C. Code Ann. Section 12-36-910 (2000; Supp. 2010)
S. C. Code Ann. Section 12-36-1110 (Supp. 2010)
S. C. Code Ann. Section 12-36-90 (2000; Supp. 2010)
S. C. Code Ann. Section 12-36-100 (2000)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2008)
SC Revenue Procedure #09-3

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific
set of facts or a particular tax situation. It is the Department’s
opinion limited to the specific facts set forth, and is binding on
agency personnel only with respect to the person to whom it was
issued and only until superseded or modified by a change in statute,
regulation, court decision, or another Departmental advisory
opinion, providing the representations made in the request reflect an
accurate statement of the material facts and the transaction was
carried out as proposed.

Questions:

1. Is the non-refundable layaway fee charged by XYZ with respect to a layaway sale, as
   described in the facts, subject to the sales tax?
2. Is XYZ required to remit the sales tax on its layaway sales, as described in the facts,
   with the return for the month in which a payment was received or with the return for the
   month in which the tangible personal property was transferred to the customer?
3. Is XYZ required to remit the sales tax on its partial payment sales, as described in the
   facts, with the return for the month in which a payment was received or with the return for
   the month the tangible personal property was transferred to the customer?

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Conclusions:

1. The non-refundable layaway fee charged by XYZ with respect to a layaway sale, as
   described in the facts, is a part of the “gross proceeds of sale” of the layaway sale and is
   subject to the sales tax.
   The non-refundable layaway fee is only subject to the sales tax if there has been a layaway
   sale – a transfer of title or possession of the tangible personal property to the customer. If
   the layaway agreement is nullified because the customer failed to make a required payment
   and therefore no layaway sale occurs (no transfer of title or possession of tangible personal
   property occurs), then the non-refundable layaway fee and any layaway payments received
   are not subject to the sales tax.
   Note: If the layaway fee were refundable (i.e., the layaway fee is returned to the customer
   if the layaway sale does not occur), the application of the sales tax to the layaway fee
   would be the same as described in the above conclusion. In other words, if a layaway sale
   occurs (transfer of title or possession of tangible personal property occurs), then the
   layaway fee and the layaway payments received would be subject to the sales tax. If no
   layaway sale occurs (no transfer of title or possession of tangible personal property
   occurs), then the refundable layaway fee and any layaway payments received would not be
   subject to the sales tax.
2. XYZ is required to remit the sales tax on its layaway sales, as described in the facts,
   with the return for the month in which the tangible personal property was transferred to the
   customer. The sales tax is applicable when the sale (transfer of title or possession) at retail
   of the tangible personal property has taken place.
   For example:
   On February 14th, Customer A enters into a layaway agreement with XYZ for a
   $1,000 television and pays a $200 down payment (20% of the $1,000 sales price)
   and a $50 non-refundable layaway fee (5% of the $1,000 sales price). Customer A
   is now required to make four additional bi-weekly payments of $200 each on
   February 28th, March 14th, March 28th and April 11th. If all payments are made in
   accordance with the agreement, title and possession of the television will be
   transferred from XYZ to Customer A in April after the last payment is made.
   The $200 down payment, the $50 non-refundable layaway fee and each of the $200
   bi-weekly payments are not subject to the sales and use tax as the payments are
   received. The entire $1,050 is only subject to the sales and use tax when XYZ
   transfers title or possession of the television to the customer. If all payments are
   made in accordance with the agreement, XYZ is required to remit the sales and use
   tax due on the $1,050 with its April sales and use tax return since XYZ will transfer
   title and possession of the television to Customer A in April.

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Note: The provisions of SC Regulation 117-318.3 are not applicable to the layaway plan of
XYZ as described in the facts. For more information, see the “Discussion” portion of this
advisory opinion.

3. XYZ is required to remit the sales tax on its partial payment sales, as described in the
   facts, with the return for the month in which the tangible personal property was transferred
   to the customer. The sales tax is applicable when the sale (transfer of title or possession) at
   retail of the tangible personal property has taken place.
   For example:
   On January 3rd, Customer B places an order for kitchen appliances on a 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, Customer
   B makes an initial 20% down payment in the amount of $400 ($2,000 X 20%). On
   January 17th, Customer B makes another payment in the amount of $600. One
   week later, on January 24th, Customer B makes a $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, Customer B decides to schedule delivery of
   the dishwasher. At the time Customer B schedules the delivery of the dishwasher,
   the dishwasher is on sale for a price of $550. Therefore, the customer’s account of
   payments made will be reduced by the $550 paid for the dishwasher, giving the
   customer a remaining balance of unused payments of $950 ($1,500 total amount
   paid to date less the $550 purchase). XYZ delivers (transfers title and possession)
   the dishwasher to Customer B on February 1st.
   The $400 down payment, the $600 payment, and the $500 payment are not subject
   to the sales and use tax as the payments are received. The $550 paid for the
   dishwasher is subject to the sales and use tax when XYZ transfers title or
   possession of the dishwasher to the customer. XYZ is required to remit the sales
   and use tax due on the $550 with its February sales and use tax return since XYZ
   transferred title and possession of the dishwasher to Customer B in February.
   Facts:
   XYZ Co., Inc. is a national retailer of consumer technology and entertainment products. In
   an attempt to provide customers with alternatives to traditional cash and credit card
   purchases, XYZ intends on offering their customers two additional purchasing options –
   layaway and partial payment.
   Layaway Fees and Sales
   Under the layaway payment option, XYZ 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 benefits to the customer for placing an item on layaway is that the
   customer is guaranteed the sales price on the item on the date the item is placed into
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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 XYZ until the customer has satisfied
their payment obligations, at which time the customer will be entitled to receive possession
of the item. In addition, the specific item of merchandise is set aside and marked as a
layaway item. A record of the customer’s information is also maintained and the item is
stored in a secured area.
For accounting purposes, XYZ uses the accrual basis. Therefore, XYZ will record the
initial down payment and subsequent layaway payment in a deferred revenue account.
XYZ will not recognize revenue on the sale until the final layaway payment has been made
and the item has been transferred to the customer. The sale does not take place until the
final payment has been made and the item has been delivered to the customer.
For example, upon entering into a layaway agreement for a $1,000 television, a customer
will be required to pay a $200 down payment (20% of the $1,000 sales price) and a $50
non-refundable layaway fee (5% of the $1,000 sales price). The non-refundable layaway
fee will be separately stated on the customer’s layaway agreement as well as on the
customer’s receipt. XYZ will identify and hold the television in inventory as a layaway
item for that specific customer and both possession and title to the television will remain
with XYZ until the customer has made the 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 as well as the layaway fee. At the time the final payment is made, XYZ 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 and the customer will be refunded the total amount of the layaway payments
that were previously made. However, XYZ will retain the 5% non-refundable layaway fee.
In the example, if the customer failed to make the second scheduled bi-weekly payment,
XYZ would refund the customer $400 (the initial layaway payment of $200 and the first
bi-weekly payment of $200). XYZ would retain the $50 layaway fee. The item is removed
from the secured area and brought back into the general store inventory.
Partial Payment Sales
The intent of the partial payment plan is to allow customers who want to purchase multiple
items that are a 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 payments in any amount
at any time. The customer also has the flexibility of changing the items placed on order at
any time. XYZ will not hold or designate inventory on behalf of the customer until the
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time in which the customer actually schedules the actual delivery on an item that was
placed on order. The customer is not eligible to schedule an item for delivery until the
customer has made enough payment on the order to cover the sales price of that particular
item. It should be noted that the sales price of an item for which the customer has placed an
order is not final until the time in which the actual payment is applied and delivery is
scheduled.
From an accounting perspective, XYZ will record the initial down payment and any
subsequent payments in a deferred revenue account. XYZ will not recognize revenue on
the sale until the final payment has been made and the item has been delivered to the
customer.
For example, a customer places an order for kitchen appliances on a 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 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 account of payments
made will be reduced by the $550 paid for the dishwasher, giving the customer a
remaining balance of unused payments of $950 ($1,500 total amount paid to date less the
$550 purchase). XYZ will obtain the dishwasher from its inventory, or order the unit from
a third party, and then schedule the time and place for the customer’s delivery.
With respect to these plans, XYZ has questions as to when the sales tax is due on these
transactions and the basis upon which the tax will be calculated on the layaway sales.
Discussion:
Code Section 12-36-910(A) imposes “a sales tax, equal to [six] 1 percent of gross proceeds
of sales, upon every person engaged ... within this State in the business of selling tangible
personal property at retail.”
Code Section 12-36-90 defines the term “gross proceeds of sales” and reads, in part:
Gross proceeds of sales, or any similar term, means the value proceeding or
accruing from the sale, lease, or rental of tangible personal property.
(1) The term includes:

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Code Section 12-36-1110 increased the general sales and use tax rate by 1% from 5% to 6%.

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(b) the proceeds from the sale of tangible personal property without any
deduction for:
(i)

the cost of goods sold;

(ii)

the cost of materials, labor, or service;

(iii) interest paid;
(iv) losses;
(v)

transportation costs;

(vi) manufacturers or importers excise taxes imposed by the United
States; or
(vii) any other expenses.
In Meyers Arnold v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E. 2d. 920
(1985), the Court of Appeals, in interpreting the definition of “gross proceeds of sales”
with respect to lay away fees paid in conjunction with lay away sales, held:
Section 12-35-30 [now Section 12-36-90] defines gross proceeds of sales as
“the value proceeding or accruing from the sale of tangible personal property
... without any deduction for service costs.” But for the lay away sales, Meyers
Arnold would not receive the lay away fees. The fees are obviously rendered
in making lay away sales. For these reasons, this court holds the lay away
fees are part of the gross proceeds of sales and subject to the sales tax.
Based on the above, a layaway fee, as described in the facts, is a part of the measure of the
sales tax – “gross proceeds of sales” – and is subject to the sales tax. In addition, it must
be noted that there must be a “sale” of tangible personal property at retail in order for the
layaway fee to be a part of “gross proceeds of sales.”
Next, it must be determined when a layaway sale or a partial payment sale, as described in
the facts, are subject to the tax.
As noted above, the sales tax applies to the “gross proceeds of sales” of every person
engaged in the business of selling tangible personal property at retail and “gross proceeds
of sales” is the value proceeding or accruing from the sale of tangible personal property at
retail.
Code Section 12-36-100 defines the term “sales” to mean:
any transfer, exchange, or barter, conditional or otherwise, of tangible personal
property for a consideration including:

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(1) a transaction in which possession of tangible personal property is
transferred but the seller retains title as security for payment, including
installment and credit sales;
(2) a rental, lease, or other form of agreement;
(3) a license to use or consume; and
(4) a transfer of title or possession, or both.
However, SC Regulation 117-318.3 concerns certain layaway sales and states:
Amounts received in payment of the sales price of property held by the
seller until the total amount of the sales price is paid to him are taxable in
the month during which such amounts are received by the seller. In the
event of the failure of the buyer to complete is [sic] payments, no refund of
taxes paid on the amounts received by the seller will be made except where
the seller refunds all amounts paid to him by the purchaser.
The regulation states that “no refund of taxes paid on the amounts received by the seller
will be made except where the seller refunds all amounts paid to him by the purchaser.”
This is a reference to the provision in the definition of “gross proceeds of sales” in Code
Section 12-36-90(2)(b) that states that “gross proceeds of sales” does not include “property
returned by the customer when the full sales price is refunded in cash or by credit.” In
other words, since “gross proceeds of sales” is the value proceeding or accruing from the
sale of tangible personal property at retail and a sale requires the transfer of title or
possession, SC Regulation 117-318.3 is only applicable to layaway sales where title has
been transferred to the property being held by the seller for the purchaser (e.g., as security)
until all payments are made.
Therefore, SC Regulation 117-318.3 is not applicable to the layaway plan of XYZ as
described in the facts since both title and possession of the item remain with XYZ until the
customer has satisfied their payment obligations and since title and possession do not
transfer until XYZ delivers the item to the purchaser.
Based on the above, the layaway sales and partial payment sales of XYZ, as described in
the facts, are subject to the sales tax when a transfer of title or possession of the tangible
personal property occurs.
Therefore, the payments received by XYZ on layaway sales and the partial payment sales
are not subject to the tax until XYZ transfers title or possession of the tangible personal
property to the customer. XYZ is required to remit the sales tax on its layaway sales and
partial payment sales, as described in the facts, with the return for the month in which the
title and possession of the tangible personal property was transferred to the customer.
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For example:
Layaway Example: On February 14th, Customer A enters into a layaway
agreement with XYZ for a $1,000 television and pays a $200 down payment (20%
of the $1,000 sales price) and a $50 non-refundable layaway fee (5% of the $1,000
sales price). Customer A is now required to make four additional bi-weekly
payments of $200 each on February 28th, March 14th, March 28th and April 11th. If
all payments are made in accordance with the agreement, title and possession of the
television will be transferred from XYZ to Customer A in April after the last
payment is made.
The $200 down payment, the $50 non-refundable layaway fee and each of the $200
bi-weekly payments are not subject to the sales and use tax as the payments are
received. The entire $1,050 is only subject to the sales and use tax when XYZ
transfers title or possession of the television to the customer. If all payments are
made in accordance with the agreement, XYZ is required to remit the sales and use
tax due on the $1,050 with its April sales and use tax return since XYZ will transfer
title and possession of the television to Customer A in April.
Partial Payment Example: On January 3rd, Customer B places an order for
kitchen appliances on a 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, Customer B makes an initial 20% down payment in the
amount of $400 ($2,000 X 20%). On January 17th, Customer B makes another
payment in the amount of $600. One week later, on January 24th, Customer B
makes a $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,
Customer B decides to schedule delivery of the dishwasher. At the time Customer
B schedules the delivery of the dishwasher, the dishwasher is on sale for a price of
$550. Therefore, the customer’s account of payments made will be reduced by the
$550 paid for the dishwasher, giving the customer a remaining balance of unused
payments of $950 ($1,500 total amount paid to date less the $550 purchase). XYZ
delivers the dishwasher to Customer B on February 1st.
The $400 down payment, the $600 payment, and the $500 payment are not subject
to the sales and use tax as the payments are received. The $550 paid for the
dishwasher is subject to the sales and use tax when XYZ transfers title or
possession of the dishwasher to the customer. XYZ is required to remit the sales
and use tax due on the $550 with its February sales and use tax return since XYZ
transferred title and possession of the dishwasher to Customer B in February.
In addition, if the layaway fee is nullified, the layaway fee is not subject to the tax since the
sale of tangible personal property did not take place.

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Note: If the layaway fee were refundable, the application of the sales tax to the layaway fee
would be the same as described in the above conclusion. In other words, if a layaway sale
occurs (transfer of title or possession of tangible personal property occurs), then the
layaway fee and the layaway payments received would be subject to the sales tax. If no
layaway sale occurs (no transfer of title or possession of tangible personal property
occurs), then the refundable layaway fee and any layaway payments received would not be
subject to the sales tax.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/James F. Etter
James F. Etter, Director
July 22
, 2011
Columbia, South Carolina

CAVEAT: This advisory opinion is issued to the taxpayer requesting it on the assumption
that the taxpayer’s facts and circumstances, as stated, are correct. If the facts and
circumstances given are not correct, or if they change, then the taxpayer requesting the
advisory opinion may not rely on it. If the taxpayer relies on this advisory opinion, and the
Department discovers, upon examination, that the facts and circumstances are different in
any material respect from the facts and circumstances given in this advisory opinion, then
the advisory opinion will not afford the taxpayer any protection. It should be noted that
subsequent to the publication of this advisory opinion, changes in a statute, a regulation, or
case law could void the advisory opinion.

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