Does a cash-basis landscaping company owe sales tax when it collects a refundable customer deposit, or only later when it invoices completed work?

Plain-English summary

A residential and commercial landscaping company requires customers to pay a deposit against future charges once they approve a landscape/hardscape design. The company doesn't invoice for a task until it actually performs the work, applying each invoice against the customer's deposit balance (and refunding any unused deposit if work is never completed). The company uses cash-basis accounting and asked whether it must collect and remit sales tax on the deposit as soon as it's received, or only later when work is billed.

The Comptroller ruled the company doesn't owe tax at deposit time:

• Under Tax Code § 151.005, a taxable "sale" happens when title/possession of goods transfers or a taxable service is performed for consideration.
• A cash-basis taxpayer recognizes the sale when payment is actually applied as consideration for a completed transaction — not simply when money changes hands in advance.
• Because the deposit is refundable and collected before any task is performed, payment is received before any sale has legally occurred.
• The sale is only complete — and tax only becomes due — when the company later performs the work, invoices the customer, and applies the deposit as payment for that specific completed task.

The ruling contrasts this with an accrual-basis taxpayer, who would recognize the sale (and the tax obligation) at the time the underlying transaction occurs, regardless of when cash changes hands — a materially different timing rule.

What this means for you

Cash-basis sellers who collect deposits or retainers

You don't have to remit sales tax on a customer's refundable advance deposit the moment you receive it. Your tax reporting obligation is tied to when you later apply that deposit against a completed, invoiced sale of taxable goods or services — track your deposit-to-invoice application carefully, since that's the trigger the Comptroller will look for.

Accrual-basis businesses

Don't assume this deposit-timing relief applies to you. Per this ruling, an accrual-basis taxpayer recognizes — and owes tax on — a sale at the time the transaction occurs, which can be earlier than the cash-basis rule described here.

Service contractors billing incrementally against a prepaid balance

Structure your accounting to clearly link each invoice to the specific completed task it covers and to the corresponding draw-down of the customer's deposit — that link is what let this taxpayer defer its reporting obligation task-by-task rather than reporting the whole deposit up front.

Common questions

Q: Does receiving a customer deposit trigger a sales tax reporting obligation right away?
A: Not for a cash-basis seller — per this ruling, tax is due only when the deposit is later applied against a completed, invoiced sale, not when the refundable deposit is first collected.

Q: Does an accrual-basis business get the same deposit-timing treatment?
A: No — per this ruling, an accrual-basis taxpayer recognizes the sale (and the tax) at the time the transaction occurs, a different and generally earlier timing rule than the cash-basis rule described here.

Q: What makes a deposit "not yet a sale" for cash-basis tax reporting purposes?
A: Per this ruling, the deposit must be refundable and collected before any taxable good is delivered or service performed — the sale isn't complete, and tax isn't due, until the seller performs the work and applies the deposit as payment.

Citations and references

Statutes:

• Tex. Tax Code § 151.005 (Sale or purchase defined — occurs when title/possession transfers or a taxable service is performed for consideration)

Cited prior guidance:

• Audit Policy Memorandum 118, published as STAR Accession No. 200805436L (2008) — cash-basis vs. accrual-basis sale-recognition timing
• STAR Accession No. 9009L1045E11 (1990) — refundable deposits collected before a sale occurs

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201705002L

Original ruling text

May 02, 2017

Re: Private Letter Ruling No. 152170201

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters [ENDNOTE 1] in response to your request dated July 30, 2015. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance regarding the taxability of a deposit for the performance of taxable and nontaxable services.

Relevant Facts:

** (TAXPAYER) provides residential and commercial landscaping services. TAXPAYER enters into contracts to design and install landscaping and hardscaping. Once a customer approves a design, TAXPAYER requires the customer to make a deposit against future charges for installation of the landscaping and hardscaping. TAXPAYER does not begin invoicing the customer until it begins performing services. Each invoice contains the charge for each task completed and the sales tax due, if any.

TAXPAYER is on the cash basis accounting system. TAXPAYER does not collect, report, or remit sales tax on customer deposits until it actually completes a task and invoices its customer. TAXPAYER includes sales tax as a line item on invoices that include charges for taxable items. TAXPAYER applies the invoiced amount against the customer’s deposit and continues this practice until the deposit is depleted. Thereafter, TAXPAYER books transactions after the customer has paid the invoiced amount for the task completed.

A contract is completed once all tasks have been delivered or performed and TAXPAYER has received full consideration for its sale. If TAXPAYER never completes the tasks, or only partially completes the tasks, TAXPAYER refunds all of the deposit to the customer or refunds that portion not already invoiced.

Requested Rulings:

The initial private letter ruling request submitted by TAXPAYER did not include a statement of the ruling requested. Based on telephone conversations with TAXPAYER, we understand the ruling request to be as follows:

Does a seller that uses a cash basis of accounting system have to report and remit sales tax on a deposit from a customer that is applied against future charges to that customer for taxable goods and services?

Ruling:

TAXPAYER is not required to report and remit sales tax at the time it receives a customer’s refundable deposit. TAXPAYER must report and remit sales tax during the reporting periods when it invoices its customer and collects payment by making a deduction from the customer’s deposit.

Analysis:

For sales tax purposes, a “sale” or a “purchase” occurs when title or possession of tangible personal property is transferred or when a taxable service is performed for consideration. See Section 151.005. A cash basis taxpayer recognizes the sale when payment is received. See Audit Policy Memorandum 118 (published as STAR Accession No. 200805436L

(May 13, 2008)). In contrast, an accrual basis taxpayer recognizes the sale at the time the transaction occurs. Id.

TAXPAYER is a cash basis taxpayer and requires a refundable deposit prior to beginning any task; therefore, payment is received before the sale has occurred. See Section 151.005. See also Star Accession No. 9009L1045E11 (Sept. 11, 1990). The sale is only complete after TAXPAYER delivers tangible personal property or performs services for the customer and applies the deposit as payment for the completed task.

Therefore, TAXPAYER is not required to report and remit sales tax at the time it receives a customer’s refundable deposit. TAXPAYER is required to report and remit sales tax when it invoices its customer and applies the deposit as payment for a completed task.

If you have questions about this private letter ruling, please email us at the following link, https://www.comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling # 152170201.

Tax Policy Division – Indirect Taxes

State Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references herein to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code. Comptroller’s Decisions and STAR Documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are all accessible from the Comptroller’s website at http://www.comptroller.texas.gov/taxes/.