Is a Virginia retailer's layaway cancellation fee taxable when the order is cancelled, payments are refunded, and title never transfers?

Subject

Layaway cancellation fee was not subject to sales tax

Plain-English summary

Virginia ruled that the $10 layaway cancellation fee was not subject to sales tax. A cancelled layaway transferred neither title nor possession, and the retailer refunded the customer's remaining purchase balance.

Virginia sales tax applies to a retail sale of tangible personal property. Because the planned merchandise sale never occurred, the cancellation fee was not part of a taxable sales price.

Result: no Virginia retail sales tax applied to the fee on the stated facts.

What this means for you

• Separate cancellation fees from merchandise payments in your records.
• Confirm that title and possession never transferred.
• Refund the remaining purchase balance as described by the layaway terms.
• Revisit the analysis if any merchandise is delivered or payment is retained as sales consideration.

Common questions

Q: Did the customer receive any property?

A: No. That absence of title or possession was central to the ruling.

Q: Are all cancellation fees exempt?

A: The ruling addressed this layaway structure. A fee connected with a completed taxable sale may require a different analysis.

Citations and references

• Va. Code §§ 58.1-603(1) and 58.1-602.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-137

Original ruling text

June 30, 2015

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in reply to your letter in which you request a ruling on behalf of * (the "Taxpayer") regarding the application of Virginia's retail sales tax to layaway cancellation fees.

FACTS

The Taxpayer offers a layaway service that requires no initial set up fee. If an order is cancelled, the customer is charged a $10 cancellation fee and refunded the remaining balance paid towards the purchase. Title never transfers to the items unless the customer completes all payments. You ask if the $10 cancellation fee is subject to the retail sales tax.

RULING

Pursuant to Va. Code § 58.1-603 1, the Virginia sales tax is imposed on the gross sales price of each item of tangible personal property when sold at retail or distributed in Virginia. The term "retail sale" is defined in Va. Code § 58.1-602 as "a sale to any person for any purpose other than for resale in the form of tangible personal property or services taxable under this chapter ...." That same section defines "sale" as any transfer of title or possession, or both, of tangible personal property for a consideration.

The facts presented indicate there is no, transfer of tangible personal property in a cancelled layaway transaction. The customer cancels the order and title never transfers. Any amount paid towards the purchase is refunded to the customer. Based on the information provided, a sale as defined under Va. Code § 58.1-602 never occurs.

Accordingly, the layaway cancellation fee is not subject to sales tax.

In Public Document 10-3 (01/13/2000), the Department found that a nominal room cancellation fee charged by a hotel room renter was not subject to tax as part of the room rental when the customer was never charged for the room and had no right to possess the room. The layaway cancellation fee in this case is similar in that a sale of tangible personal property does not occur because title and possession is not transferred and the balance paid towards the purchase is refunded to the customer.

This ruling is based on the facts provided as summarized above. Any change in facts or the introduction of new facts could lead to a different result.

The Code of Virginia sections and public document cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6020301576