The Colorado Department of Revenue recently issued guidance regarding the taxability of layaway service and cancellation fees. Colo. Gen. Info. Ltr. No. GIL-12-3 (Dept. of Revenue Feb. 29, 2012).
In this guidance, the DOR considered the following scenario: A Colorado retailer offers a layaway program to its customers. As part of the layaway program, customers are charged an initial service fee and must pay 10% down on their total purchase at the start of the program. In the event that the customer cancels their layaway purchase, the retailer will return the down payment plus any additional payments made towards the purchase to the customer. The retailer does not return the initial service fee and charges the customer an additional cancellation fee.
Colorado imposes sales tax on the sale of tangible personal property and certain taxable services. Colo. Rev. Stat. sec. 39-26-104. Sales tax does not generally apply to most services or finance fees. 1 Colo. Code Regs. 201-4:39-26-102.7(a)(4). Finance fees do not represent a sale and transfer of tangible personal property. Therefore, the initial layaway service fee will not be subject to tax. Similarly, a cancellation fee is not taxable because a transfer of taxable tangible personal property has not taken place. The cancellation fee is imposed only if a sale of tangible personal property is not completed between the customer and the retailer.