The issue is whether or not you have access, or as one court has ruled, dominion over the income.
If you have complete use of the money placed on deposit then you must determine that it is constructively received and there for will have to include it as income in the year received.
Since you are on cash accounting, the balance of payments if any, are claimed as income in the year received.
If you then have to refund the deposit, because the terms of the contract are fullfilled or not fullilled (conditional), then you have to account for that as a refund in your schedule C or business expenses, on the date you refund it.
The only way you can avoid paying taxes on the refundable deposit is if the money were held in an escrow account where you did not have access to or dominion over the money, until the escrow officer disbursed the money to you upon terms of contract.
But, this means you do not have the money as part of your business operations.
A good way to test this premise is to ask: is the deposit treated as part of cash flow. Do you use the money to invest, buy product, supplies, etc. AND if not, could you. That is, is it available for you if you needed it.
Thank you for getting back to me. I apologize for taking so long to get back to you.
In Ohio, you pay sales tax on gross receipts.
In the case of refundable deposits, for personal or tangible property, and services.
The sales tax for the entire purchase is collected at the time the contract is consumated. In this instance the contract is the agrement to purchase and it is aconsumated with the payment o fhte deposit.
This means you figure the tax for the total purchase and collect it at the time the refundable deposit is made.
So the question is, what happens if you have to repay the deposit, to actualy refund it.
You would refund the deposit and sales tax. You include this in the sales tax return at the end of the year in which you make the refund. (or appropriate quartely estimated sales tax return).
According to the Ohio department of revenue, if the price of the sale changes, you make the adjustment when the product is delivered.
Take a car sale for example. (this is the most obvious example). A person purchases a car for delivery on a particular date. The sales contract is written up assessing sales tax for the purchase as contracted, regardless of when the car is paid for. A deposit toward the car was made, and the balance would be paid when the loan is approved. Now comes the customer to pick up the vehicle later, and since the orignal contract, has added a stero, undercoating, etc. The dealer then reinvoices the car showing the orignal contract price and sales tax, then he lists the additional add-ons; or he invoces the add on seperately. Which ever method is used, the addons or additional pricing is added, with its concurrent sales tax.
It would be done similarly to your situation. Through the course of creating the product for your customers, they make changes. Those changes will add to the price. When you deliver the product, you would include an invoice that itemizes the deposit, the oringal sales tax, and then the addtional price for modifciations and the additnoal sales tax listed seperately.
That line would be labeled on the invoice as words to the effect;
Art Project Piece 1200.00
Sales tax @ 7% 84.00
Balance Due: 684.00
Changes and modifications 300 dollars
Sales Tax @ 7% 21
Total additional charges 321
Final balance due: 1005.00