Does California sales tax apply to the full price of layaway merchandise when the customer forfeits the deposit and never receives the goods?

Plain-English summary

A department store took deposits under a layaway plan, recorded the full price and sales-tax reimbursement in its books, and kept the deposit if a customer failed to finish paying. During 1958, customers forfeited $458.87 of deposits on merchandise with total prices of $2,663.68.

The Board concluded that the full prices of those abandoned layaway items were not taxable gross receipts. Under the customary arrangement, the initial payment was a deposit, more payments were required before delivery, and the parties intended a sale at a future date—not an immediate completed sale.

The memorandum states the practical rule: a layaway sale generally does not become taxable until the full purchase price is paid, unless the parties agree that title passes earlier.

The store's bookkeeping suggested immediate sales, but that did not outweigh the parties' arrangement and trade custom. The memorandum also superseded an older 1951 annotation statement that treated a transaction as a sale at inception merely because the full price was entered as an account receivable and the deposit was booked as a down payment.

What this means for you

Retailers offering layaway

Your contract terms and actual practice should make clear whether the first payment is only a deposit and whether title and delivery wait until full payment.

Accounting and point-of-sale teams

Book entries are evidence of intent, but they are not always conclusive. Align accounting treatment with the legal terms and real operation of the layaway program.

Accountants and tax professionals

Analyze party intent using contract language, books and records, title terms, delivery timing, and trade custom. Do not rely on the superseded 1951 statement.

Common questions

Q: Was the full price taxable when the customer abandoned the layaway?
A: No. Because no sale had yet occurred, the full price was not includable in gross receipts.

Q: Did the store's bookkeeping make it an immediate sale?
A: No. Although the books pointed that way, the memorandum relied on the customary understanding that the deposit preceded a future sale and delivery.

Q: When would tax apply earlier than full payment?
A: If the parties agreed that title passed at an earlier date.

Q: What happened to the prior annotation?
A: The memorandum said the 1951 annotation was superseded to the extent it treated bookkeeping alone as creating a sale at inception.

Citations and references

• Earlier Sales and Use Tax Annotation dated March 8, 1951 (expressly superseded to the extent inconsistent)
• Santa Rosa Auditing's April 13 memorandum — year and separate memorandum not supplied in the official PDF
• Taxpayer's sales tags, accounts-receivable cards, credit memoranda, and books and records — process described; documents not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 200.0160
• Original supporting opinion: 200.0160 PDF

Original ruling text

State of California

Board of Equalization

200.0160

Memorandum
To:

Santa Rosa – Auditing (ARD)

From:

Headquarters – Sales Tax Counsel (GAT)

Subject:

REDACTED TEXT

Date:

May 27, 1959

This is in reply to your memo of April 13 regarding application of tax to lay-away sales. It is our understanding from your letter that taxpayer, a department store, takes deposits on items under a lay-away plan. A sales tag is prepared, and the store's sales account is credited with the total sales price plus sales tax reimbursement. An accounts receivable card is prepared for the customer, and the account is charged with the total sales price and credited with the deposit. If the customer fails to pay the balance, a credit memo is prepared debiting sales and crediting the customer's account, and the deposit is forfeited. During 1958, lay-away deposits totaling $458.87 were forfeited. The total sales price of the goods was $2,663.68, and taxpayer subtracted this amount from his taxable gross receipts. Taxpayer asserts that in these cases sales were not completed, inasmuch as neither title nor possession were ever transferred. It is your position that the method of handling these transactions in the books and records indicates that taxpayer intended to regard them as completed sales. The application of tax to lay-away sales depends on whether a present sale is intended when the deposit is made, or whether a sale is intended to be made when the full purchase price is paid and the customer picks up the merchandise. The intent of the parties can be determined from several factors; how the initial transaction is handled as indicated by the seller's books and records, and also by the customs of the trade. Inasmuch as, according to the custom of the trade, the initial payment is considered as a deposit, and it is understood between the parties that further payments must be made prior to delivery, the transaction should be considered as a contract to sell at a future date. Therefore, the full sales price of the items on which deposits have been forfeited are not properly includable in taxpayer's gross receipts. Although the manner in which taxpayer kept his books seemed to indicate that present sales were made. it is our opinion that, in such "lay-away" transactions, there is no taxable sale until the full purchase price is paid, unless the parties agree that title will pass at an earlier date.

Santa Rosa - Auditing
Re: Account REDACTED TEXT

2

May 27, 1959
200.0160

We have noted that the Annotation on "lay-away" sales, dated March 8, 1951, states (at page 440), "If full sales price is entered as an account receivable and the initial deposit is treated as a down payment, the transaction will be treated as a sale at its inception." To the extent that this statement does not conform to the views expressed herein, it is superseded. The Annotations will be revised accordingly. George Trigueros GAT"o'b