The holiday shopping season is here! Holiday shoppers are out in force and many retailers are offering big sales through the end of the year. With the influx of holiday shoppers flooding stores, it’s important that retailers understand how to handle sales tax for a number of issues that arise at this time of year.
How exactly does sales tax apply to special items frequently seen during the holiday shopping season such as layaways, gift wrapping, gift cards, and returns? Let’s take a look at each of these items and how they are often treated for sales tax purposes.
The sales tax treatment of layaway sales varies from state to state. Under layaway sales, a customer makes a partial payment on an item to reserve it, then receives or is delivered the item upon making final payment. Some retailers may call the initial payment a down payment while others call it a deposit.
Down payments are often not refundable if the customer cancels the order, whereas deposits often are. In many states, the sale is considered complete when the retailer delivers the property to the customer, and sales tax is reported on the full sales price in the period when the customer takes possession. Sales tax is not due at the time of the deposit or partial payment. Let’s look at some state-specific examples.
In California, unless the parties agree that title will transfer to the customer at an earlier date, the retailer does not report and remit tax on the taxable sales price of a layaway sale until the goods are delivered and the customer assumes possession.
In Arizona, the retailer’s gross receipts from a layaway sale are taxable when title or possession transfers to the customer or at the time receipts from the transaction are determined to be non-refundable (for example, if the sales agreement states that payments are non-refundable if the customer fails to claim their item from layaway after a certain date), whichever occurs first.
With Christmas approaching, many shoppers will be taking advantage of gift wrapping at retail stores. Retailers need to understand the sales tax rules as they apply to not only the gift wrapping charge but also to their purchases of the gift wrapping materials. And this can vary depending on whether there is a charge for the gift wrapping.
Generally, purchases of complimentary gift wrap materials provided to customers qualify for the resale exemption as packaging. Since this gift wrap is included in the cost of the goods sold to the customer and the gift wrapping is for the benefit of the customer, it qualifies for the resale exemption.
In states that tax gift wrapping services such as South Carolina, the purchase of gift wrap materials by the service provider also generally qualifies for the resale exemption since the service is taxable. However there are exceptions, as seen in Texas.
In Texas, sales tax must be paid on the purchase price of gift wrapping by the person who provides the service. Additionally, sales tax must be collected on charges for gift wrapping services if the person who provides the gift wrapping service sold the item that is being wrapped and does not provide the service on a stand-alone basis.
In states that don’t tax gift wrapping services, the resale exemption does not apply since there is no tax charged on the service. The retailer must pay tax on these supplies.
The challenge is when a retailer provides complimentary and for charge gift wrapping services and the gift wrapping service is not taxable. In this case, they must be able to distinguish the materials and supplies in order to correctly claim the resale exemption and remit use tax on the taxable purchases.
During the holiday season, many shoppers forgo gifts altogether and give gift cards instead. Generally, gift cards are considered cash equivalents. Therefore, the purchase of gift cards is generally not a taxable transaction. When gift cards are redeemed, the same laws apply as if the customer is using cash. The act of using a gift card is not taxable itself. Tax is calculated on the total purchase price, and then the gift card is applied as a payment method.
Retailers should note that outstanding unredeemed gift cards may be considered unclaimed property by a state. Tracking gift card sales and redemptions is critical for accurate reporting under these provisions.
During the holiday season, retailers are guaranteed to see gifts being returned. There are a few key items to remember when processing customer returns. When processing the return, a credit memo should be issued to the customer showing the amount of the returned goods as well as the amount of tax refunded on any goods that were originally taxed. It’s important to refund the tax at the rate and jurisdiction which were originally charged when the goods were purchased.
Retailers should retain documentation of the return and refund. You’ll need proof of the refund of tax to the customer before you can get your refund from the state. Given that gifts might be returned after January 1 – which is one of the most frequent tax rate change dates, this can be challenging – particularly if returns are allowed without a receipt. Note that both California and New Jersey are reducing their state sales tax rates on January 1, 2017. In these cases, for returns made after January 1, sales tax should be refunded at the rate that was in effect at the time of the sale and not the lower rate in effect at the time of the return.
Holiday shopping season can be stressful for retailers – hopefully these tips help reduce any sales tax holiday stress!