Were a retailer's forfeited special-order deposits and layaway cancellation fees subject to Texas sales tax?

Plain-English summary

A retailer kept a 25% deposit when a customer canceled a special order and charged a separate fee when a customer canceled a layaway agreement. The Comptroller held that neither charge was taxable.

Texas defined a sale or purchase as a transfer of title or possession of tangible personal property for consideration. Because the canceling customer received no item in either situation, no taxable sale occurred.

What this means for you

Under the facts in this 1990 letter, a retained payment tied to a canceled transaction was not taxable when no merchandise transferred to the customer.

Common questions

Was the forfeited special-order deposit taxable? No.

Was the layaway cancellation fee taxable? No.

What if the retailer had already collected sales tax? The retailer should refund it to the customer; otherwise, the letter said the tax had to be remitted to the state.

Citations and references

• Texas Tax Code § 151.005, defining a sale or purchase.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9009L1045E11

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

September 11, 1990

Dear ****:

Thank you for your letter dated September 5, 1990, concerning the taxa-
bility of deposits forfeited by customers and layaway cancellation fees.

You indicated that **** requires a 25% deposit on items that
are special ordered for a particular customer: If the customer cancels
the order, the deposit is forfeited. Your company also charges a fee
for cancelling a layaway purchase agreement with a customer.

Neither charge is taxable. "Sale" or "purchase" is defined in Section
151.005 of the sales tax law as a transfer of title or possession of
tangible personal property for a consideration. Because the customer
does not receive the item in either of the situations that you described,
a taxable "sale" has not occurred. Any amount collected as sales tax
from the customer should be refunded to the customer. It not, the tax
must be remitted to the state.

This opinion is based upon the facts you presented. If there are addi-
tional or different facts, this opinion may change.

Please feel free to contact me if you have any additional questions.
You may write me, call toll free 1- 800- 252- 5555 (ext. 3-4685) from
anywhere in the United States or phone 512/463-4685.

Sincerely,
Julie Pesl
Tax Correspondence