As the holiday season approaches, your retail clients who offer a layaway option must know to accurately apply sales tax rules of their state to layaway purchases.
While these types of sales may be small, they are an important area of compliance. More importantly, layaways are likely ripe for improved process documentation, employee training and accounting system upgrades to promote consistent and accurate treatment of similar transactions.
When a business invests time and energy in making meaningful improvements in tax compliance processes, people and technology, the result is usually more uniform customer service and less confusion for employees, as well as protection from exposure in an audit.
What’s a Layaway, You Say?
A layaway sale is a transaction in which merchandise is set aside for future delivery to a customer who makes a deposit, agrees to pay the balance of the purchase price over a period of time and at the end of the payment period, receives the merchandise. Layaway arrangements are a simple way for consumers to finance purchases of items they don’t need to possess immediately, like holiday gifts.
While these arrangements may have lost some luster over the years as store credit cards have grown in popularity, the Great Recession triggered a renewed interest in layaway purchases. Credit-conscious consumers gain the advantages of short-term, usually interest free financing, while retailers appreciate the opportunity to lock-in consumers on purchases they otherwise couldn’t afford with the cash in their pocket.
Sales Tax on a Layaway
Many states have specific sales tax rules regarding layaway purchases. When a layaway includes taxable items, the extended nature of the transaction presents a question of when to collect and report sales taxes due.
As with many state tax issues, the states are not uniform in their approach. In our nation’s capital, for example, a seller should report and remit sales taxes due on the entire sales amount at the beginning of the layaway. D.C. retailers collect reimbursement for sales taxes on the total sales price at the time the first payment is made by the purchaser (D.C. Mun. Regs. 409).
Pennsylvania rules are similar; in the Keystone State, a seller must collect the full amount of tax, as measured by the full purchase price, at the time the first payment is made or within 30 days after the layaway is arranged, if earlier (Pa. Code 33.4).
On the other hand, Arizona requires retailers to collect tax only when possession transfers to the purchaser or when receipts from the transaction become non-refundable, whichever occurs first (Ariz. Admin. Code R15-5-131). In California, retailers are required to report and remit sales taxes on layaway purchases only after items have been delivered to the purchaser (Cal. Rev. & Tax. Cd. § 6006). South Carolina regulations direct a retailer to collect sales tax incrementally, as payments are made (S.C. Code Regs. 117-318.3).
A Different Type of Holiday
Several states have enacted “sales tax holidays” where certain types of goods are deemed sales tax exempt for a limited period of time. One common variant is a back-to-school sales tax holiday where school supplies or children’s clothes are exempted for a weekend, usually in late summer or early autumn.
Since a sales tax holiday is marked by a beginning and ending point in time, a layaway arrangement where possession of the sold items does not occur until after the final payment is made presents an interesting question: does the sales tax holiday exemption apply to items placed on layaway during the sales tax holiday, but the purchaser takes possession of the items only after the sales tax holiday period has ended?
When it comes to sales taxes, the states are not always uniform in their approach, and this issue is another example of that premise. In Georgia, for example, a layaway sale made during a sales tax holiday but not paid in full until the after the sales tax holiday has ended, is not eligible for the sales tax holiday exemption [Ga. Comp. R. & Regs. §560-12-2-.110(9)(b)].
Moving further south, the Sunshine State takes a different approach. In Florida, items eligible for the sales tax holiday exemption sold as layaway sales qualify for the exemption when a customer puts an eligible item on layaway during the sales tax holiday exemption period, even if final payment is made after the sales tax holiday period (Florida Tax Information Publication, No. 18A01-07, 06/27/2018).
However, when a customer places an item on layaway on a date prior to a sales tax holiday, but makes the final payment and takes possession of the items during the sales tax holiday period, some states include qualifying items in the sales tax holiday exemption.
In Texas, a sale of an eligible item for the sales tax holiday under a layaway plan qualifies for the sales tax holiday exemption if the customer places the item on layaway or makes the final payment during the holiday [Tex. Admin. Code 3.365(i)].
Layaway Take Away
It’s not a surprise to most state and local tax professionals that states vary in their approach to taxing even the simplest of transactions. Being the expert on multistate sales tax rules on layaways is probably not a career goal of most advisors, (and rightly so!), but gaining awareness of the potential hazards of layaway sales can equip an advisor to help retail businesses improve their sales tax compliance.
Encourage retailing clients to develop documented processes to manage layaway sales, and provide information and training to employees and managers who handle the sales transaction, as well as perform tax compliance. Layaway sales present an opportunity for advisors to provide useful guidance resulting in accurate compliance and a consistent, seamless retail experience for customers.
About Shane Ratigan
Shane is a Senior Manager in the State and Local Tax Department at Clark Nuber, P.S. in Bellevue Washington. Shane focuses on state and local indirect tax obligations for companies of all sizes operating across the United States and beyond. He collaborates with companies in developing scalable processes to support effective and dynamic indirect tax calculation and compliance, especially sales and use tax.