Texas Letter Ruling 9211L1202G12: Layaway Sales — Tax Increase Or Tax Rate Change Before Customer Obtains Possession Of Tpp

Plain-English summary

A Texas retailer using the cash basis of accounting asked the Comptroller's office which sales tax rate applies to layaway sales when a local (city) tax rate increases between the time the customer signs the layaway contract and the time the customer finishes paying and takes the goods home.

The retailer had signed layaway agreements before October 1, 1992, kept possession of the goods until the customer paid the balance in full, and was located in a city whose local tax rate increased by 1/2% (from 7.25% to 7.75% total) effective October 1, 1992.

The Comptroller's office ruled that the retailer must collect the tax rate that was in effect when the layaway contract was executed — not the rate in effect when the balance is finally paid off. So a layaway contract signed before October 1, 1992 is taxed at 7.25%, even if the customer doesn't finish paying and pick up the merchandise until after the rate rose to 7.75%.

The letter also explains how to report sales made at two different tax rates on the same sales tax return: total the sales taxed at the old (7.25%) rate, multiply by 7.25%, then divide by the new rate (7.75%) to get an "adjusted taxable sales" figure for the old-rate sales. Add that adjusted figure to the taxable sales made at the new rate, and report the combined total on line 4 of the sales tax return.

What this means for you

Retailers who sell on layaway

Lock in the tax rate as of the date the customer signs the layaway agreement, not the date the customer finally pays off the balance and takes the merchandise. This matters most when a local city, county, or special-purpose tax rate change takes effect while layaway balances are still outstanding.

Bookkeepers and accountants preparing sales tax returns

When a rate change happens mid-period and some layaway sales were locked in at the old rate, you can't just report everything at the new rate. Use the adjustment method described in the ruling: convert the old-rate sales to a "taxable sales" equivalent at the new rate (old-rate sales × old rate ÷ new rate) so the combined total on line 4 correctly reflects the mixed rates.

Businesses anticipating a local tax rate change

If you expect a city or local tax rate increase, review any outstanding layaway contracts signed before the effective date — those should continue to be taxed at the rate in effect on the contract date, not the new higher rate.

Common questions

Q: If a customer signed a layaway contract before a local tax rate increase but doesn't pick up the item until after the increase, which rate applies?
A: The rate in effect on the date the layaway contract was executed. In this ruling, that meant the old 7.25% rate continued to apply even though the balance was paid after the rate rose to 7.75%.

Q: How does a retailer report sales taxed at two different rates on one sales tax return?
A: Total the sales made at the old rate, multiply that total by the old rate, and divide by the new rate to get an adjusted taxable sales figure. Add this to the taxable sales made at the new rate and report the combined total on line 4 of the sales tax return.

Q: Does this ruling apply beyond layaway sales?
A: The ruling addresses layaway sales specifically, where the retailer retains possession of the goods until the balance is paid in full. It does not address other types of installment or deferred-payment sales.

Q: Can I rely on this letter for my own business?
A: Under the Comptroller's STAR system rules, a letter ruling can only be relied on by the taxpayer to whom it was directly issued, and it may no longer reflect current policy. Consult a licensed Texas tax professional about your specific situation.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9211L1202G12

Original ruling text

November 3, 1992

Dear ***:

Thank You for your letter of October 8, 1992, concerning the tax rate to charge
on layaways when there is a tax increase before the customer obtains possession
of the goods.

As I understand it, your retail store is using the cash basis of accounting.
You have entered into layaway agreements before October 1, 1992, and these
accounts have balances due. You stated that you retain possession of the goods
until the balance is paid in full. Your store is in the city limits of
*** and the city tax rate increased 1/2% effective October 1, 1992. You
question what tax rate applies - the rate in effect when the layaway was agreed
to or whether the additional 1/2% city tax should be collected.

You should collect the tax rate in effect when the layaway contract was
executed. For example, prior to October 1, 1992, the tax rate in *** was
7.25%. If you executed a layaway contract prior to October 1, 1992, you are
required to collect the 7.25% tax rate even though the balance will not be paid
until after October 1, 1992.

You may adjust your taxable sales figure on your sales tax report to reflect
sales made at two different-tax rates. To calculate the adjusted taxable
sales, total all sales subject to the 7.25% tax rate. Multiply this total
times the old tax rate of 7.25% and divide the product by the new tax rate of
7.75% to adjust your taxable sales made at the old rate. Add the adjusted
taxable sales from the old rate to the taxable sales made at the new tax rate
and enter this figure on line 4 of your sales tax return. Please refer to the
sample calculation included with this letter.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

If you have any questions or need additional information, you may call toll
free 1-800-252-5555, ext. 50037 or the regular Austin number is 512-475-0037.
You also may write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division