On a layaway or partial-payment plan, when is Colorado sales tax due — as each installment is paid, or only when the customer finishes paying and takes the item?

Plain-English summary

A retailer asked the Department how Colorado sales tax applies to its layaway and partial-payment plans. Although this is a non-binding General Information Letter, it gives an unusually clear answer: sales tax is due only at the final payment, when title or possession of the goods actually passes to the customer. The installment payments made along the way are not taxable.

The two plans:

• Layaway. The store holds a specific item in inventory for the customer, who locks in the price with a 20% down payment plus a non-refundable 5% layaway fee, then makes several bi-weekly payments. The store keeps both title and possession until the customer pays in full. (If the customer misses a payment, the deal is cancelled, prior payments are refunded, and the store keeps the 5% fee.)
• Partial payment. The customer orders a bundle of items (say, kitchen appliances), pays 20% down on the total, then pays any amount at any time and can even change the items. The store doesn't set anything aside until the customer has paid enough to cover a particular item and schedules its delivery.

The reasoning: Colorado taxes the "sale" of tangible personal property (§ 39-26-104), and a "sale" is a transaction that transfers title or possession to the buyer (Reg. 39-26-102.10). On both plans, nothing transfers until the final payment — so that's when tax is due, on the full price.

The Department addressed a potential trap. Two statutes — § 39-26-102(10) (installment, credit, and conditional sales) and § 39-26-111 (tax due on installment payments under credit sales) — could be misread to tax each installment before any goods change hands. The Department explained those provisions apply only where the retailer has already delivered the property (or given the buyer the right to possess and control it) — a present transfer of "some significant right of dominion and control." A layaway or partial-payment plan is just an agreement to sell at a future date (a "contract to sell"), not a present "sale." Setting an item aside in inventory for a customer doesn't hand over enough control to trigger tax.

What this means for you

Retailers offering layaway or installment-style plans

If you keep title and possession of the goods until the customer finishes paying, don't collect sales tax on the down payment or interim installments — charge tax on the full price at the final payment when you release the item. Holding or tagging the item in inventory for the customer doesn't, by itself, create a taxable sale.

Credit sellers (for contrast)

The rule flips when you actually deliver the goods (or give the buyer possession/control) up front and let them pay over time — that's a credit/installment sale, and tax is due on the installment payments under § 39-26-111. The dividing line is whether the customer has taken dominion and control of the property.

Accountants and tax professionals

The timing turns on transfer of title/possession (Reg. 39-26-102.10), not on accounting recognition or contract labels. The Department's "contract to sell" vs. "contract for sale" distinction (an agreement for a future sale vs. a present transfer) is the analytical key, and it cabins § 39-26-102(10)/§ 39-26-111 to fact patterns where goods have been delivered.

Common questions

Q: Do I charge sales tax on layaway down payments and installments? A: No — not while you still hold title and possession. Tax is due on the full price at the final payment, when the customer takes the item.

Q: What about a partial-payment plan where the customer can change the order? A: Same answer. Because no item transfers until enough is paid and delivery is scheduled, the earlier payments aren't taxable; tax applies when the item is delivered.

Q: Don't Colorado's installment/credit-sale statutes tax each payment? A: Only when the goods have actually been delivered to the buyer (or the buyer has the right to possess and control them). Those statutes don't reach layaway or partial-payment plans where the store keeps the goods until full payment.

Q: Can I rely on this letter?
A: It's a General Information Letter — non-binding general guidance, not a ruling. It's a clear statement of the Department's view, but for a binding answer on your facts you'd request a private letter ruling.

Citations and references

Statutes and rules:

• § 39-26-104, C.R.S. (sales tax on the "sale" of TPP)
• Reg. 39-26-102.10 (a "sale" transfers ownership or possession)
• § 39-26-102(10), C.R.S. (installment/credit/conditional sales)
• § 39-26-111, C.R.S. (tax on installment payments under credit sales/contracts for sale)

Related rulings

• [[plr-11-005-private-letter-ruling-re-local-sales-tax]] — timing of tax; sale as a transactional event
• [[gil-12-012-non-resident-leases-of-passenger-cars]] — when tax attaches on multi-payment arrangements

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-11-001.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-11-001
February 22, 2011
XXXXXXXXXXXX
Attn: XXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
Re: Layaway and Partial Payments Plans / Sales tax
Dear Mr. XXXXX,
You submitted on behalf of XXXXXX (“Company”) a request for guidance on the application of sales tax to certain layaway and partial payment plans. The department issues general information letters and private letter rulings. A generalinformation letter provides a general overview of the relevant tax issues and is not binding on the department. A private letter ruling provides a specific determination for a specific set of facts, is binding on the department but not the taxpayer, and requires payment of a fee. For more information about general information letters and private letter rulings, please see Department regulation 24-35103.5 at www.taxcolorado.org > FYI/Publication > Rulings. The department initially treats your request as one for a general information letter. If you would like the department to issue a private letter ruling on the issues you raise, you can resubmit a request and fee in compliance with regulation 24-35-103.5. Background Layaway Plan Company offers a layaway payment plan in which Company holds 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 benefit to the customer for placing an item in layaway is that the customer is guaranteed the sale price of the item on the date the item is placed into layaway, and the customer is afforded additional time in order to make the full payment on the item. The customer is required to make an initial 20% down payment, together with a nonrefundable 5% layaway fee. The customer is required to make four additional bi-weekly payments that cover the remaining amount of the sales price. Both title and possession of the product remains with Company until the customer has satisfied their payment obligations, at which time the customer is entitled to receive possession and title of the product.

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For accounting purposes, Company uses the accrual basis. Therefore, Company records the initial down payment and subsequent layaway payments in a deferred revenue account. Company does not recognize revenue on the sale until the final layaway payment has been made and the title has been transferred to thecustomer. For example, a customer entering into a layaway agreement for a $1,000 TV must pay a $200 down payment (20% of the $1,000 sales price) and a $50 non-refundable layaway fee (5% of the $1,000 sale price). The non-refundable layaway fee is separately stated on the customer’s layaway agreement as well as on the customer’s receipt. Company clearly identifies and holds the TV in inventory as a layaway item for that specific customer. The customer must make four additional bi-weekly payments in the amount of the $200. In total, the customer makes five layaway payments that will be applied to the price of the TV. At the time the final payment is made, Company transfers possession and title of the TV to thecustomer. If the customer fails to make a scheduled bi-weekly payment, the layaway agreement is nullified. The customer is refunded the total amount of layaway payments that were previously made. However, Company retains the 5% non-refundable layaway fee. In the example above, if the customer failed to make the second scheduled bi-weekly payment, Company would refund the customer $400 (the initial payment of $200 plus the first bi-weekly payment of $200) and retain the $50 layaway fee. Partial Payments Plan The intent of the partial payment plan is to allow customers who want to purchase multiple items that are part of a single order set (i.e., kitchen appliances or a home theater) the flexibility of making payments at their own convenience. The customer is required to make an initial 20% down payment on the total sales price of the bundle of products they have placed an order. After the initial down payment has been made, the customer is free to make additional payments in any amount at any time. The customer also has the flexibility of changing the items placed on order at any time. Company does not hold or designate any product in its inventory on behalf of the customer until the customer schedules the delivery of an item that was place on order. The customer is not eligible to schedule an item for deliver until the customer has made enough payments to cover the sale price of that particular item. The sale price of an item on which the customer has placed an order is not final until the time when the actual payment is applied and delivery is scheduled. From an accounting perspective, Company records the initial down payment and any subsequent payments in a deferred revenue account. Company does 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 the 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 must make an initial 20% down payment of $400. Two weeks later, the customer

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makes another payment of $600. One week later, the customer makes another $500 payment. Customer then decides to schedule delivery of the dishwasher and the dishwasher is on sale for $550. Customer’s account is reduced by $550, giving the customer a balance of
$950 ($400+$600+500-$500). Company withdraws the item from inventory or orders the unit from a third party and then schedule the delivery. Discussion Colorado imposes sales tax on the “sale” of tangible personal property. §39-26-104, C.R.S. A “sale” is a transaction in which the retailer transfers title or possession of taxable goods to the buyer. See, Department regulation 39-26-102.10 (“a transaction shall be considered a sale if it transfers from a seller to a buyer the ownership or possession of tangible personal property or specified services.”). In the two scenarios outlined above, Company does not transfer title or possession until the final payment. Therefore, sales tax is due upon final payment. We note in passing that Colorado law imposes sales tax on, installment and credit sales, and the exchange of property as well as the sale thereof for money; every such transaction, conditional or otherwise, for a consideration, constituting a sale…
§39-26-102(10), C.R.S. Credit sales are also addressed in §39-26-111, C.R.S., which states that tax is due on installment payments due pursuant to credit sales and contracts for sale, regardless of whether retailer has transferred title to the buyer. Read in isolation, these provisions might be misconstrued to apply sales tax on installment payments made pursuant to a lay-a-way plan or partial payment plan before the retailer transfers title or possession to the buyer. We believe that the installment sale, credit sale, contract for sale, and conditional sale referred to in these statutes apply to transactions where the retailer has delivered property to the buyer (or the right to possession and control to the buyer or buyer’s agent). That is, there is a present transfer of some significant right of dominion and control of the goods from the seller to buyer. The creation of a lay-a-way or partial payment plan does not constitute a “sale” for tax purposes, but only an agreement to sell at a future date. For example, a “contract for sale, “ which is used in §39-26-111 (sales tax on installment payments made on credit sales) is generally defined as an agreement for the “present” transfer of property, whereas a “contract to sell” is an agreement to enter into a sale at a future date. See, Black’s Law Dictionary, Eighth Edition, pg. 343 (“contract for sale” sections 1 and 2). That is, parties can take a series of steps that eventually lead to a taxable sale, but these initial steps, themselves, do not constitute a sale. Therefore, installment payments are not taxable if the retailer does not transfer title or possession until the buyer makes the final payment. Moreover, a retailer that designates an item in inventory has not transferred to buyer sufficient dominion or control to trigger a sales tax liability.

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Miscellaneous
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter will be made public within 60 days of the date of this letter. Please let me know in writing within that 60 day period whether you have any suggestions or concerns about this redacted letter.

Sincerely,

Office of Tax Policy

Colorado Department of Revenue

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