Illinois Department of Revenue Explains the Taxability of Layaway Service Fees

Friday, February 10, 2012

The Illinois Department of Revenue (DOR) recently released a General Information Letter explaining the tax treatment of layaway service fees (Ill. Gen. Info. Ltr. ST 12-0007-GIL (Dept. of Revenue Jan. 31, 2012)). The letter addressed two different, but related service fees: a non-refundable layaway service fee charged to a customer by a retailer when the layaway service is initiated, and a layaway cancellation fee that is only charged to a customer when that customer has cancelled the layaway arrangement. The DOR stated that the non-refundable layaway service fee is subject to tax. Illinois views the layaway service fee as a cost of doing business that is subject to tax similar to “handling” charges. In the scenario discussed in the letter, if the customer chooses later to not purchase the item on layaway, all money paid on the item, including tax paid, is refunded (except for the initial non-refundable layaway service fee). At that point, any additional cancellation fee that the retailer charges its customers upon cancellation will not be subject to tax because the fee is only imposed if the sale of tangible personal property is not completed, so it is not a part of the cost of selling tangible personal property.

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