Were monthly membership and overdue fees taxable for an automated video library offering unlimited cassette borrowing?

Plain-English summary

Residents paid $14.95 month to month for unlimited borrowing from an automated video-cassette library. Each time a member took a cassette, the Board treated the transaction as a lease, making that month's membership fee taxable rental consideration.

If a member borrowed no cassette during a month, the membership charge was not taxable because no lease of tangible personal property actually occurred. Overdue penalties were taxable because the lease agreement required them and they directly related to the cassette lease.

Citations and references

• California Revenue and Taxation Code sections 6006(g)(7) and 6010(e)(7), cited for treating the described video-cassette lease as a sale and purchase (as cited)
• California Sales and Use Tax Regulation 1660(c), described as imposing use tax on lease rentals for collection and payment by the lessor (as cited) — enclosed copy not reproduced in the official PDF
• May 25, 1990 representative letter describing an apartment-complex machine library, a flat $14.95 monthly fee for unlimited borrowing whether 1, 10, or 15 movies were borrowed, and overdue penalties — request, program and lease agreements, enrollment terms, machine records, borrowing logs, overdue policy, invoices, and payment records not reproduced in the official PDF
• Tax counsel's express assumption that membership was month to month and one month created no obligation for later months — no enrollment agreement supplied
• July 9, 1990 Tax Counsel David H. Levine response, Regulation 1660 enclosure, and blind copy to the Oakland District Administrator — no enclosure, operator reply, implemented collection, return, audit, assessment, refund claim, appeal, or later outcome supplied
• Official Annotation 295.1590's lease, membership-rental, zero-borrow exception, penalty-fee, and July 9, 1990 rules — annotation presents the month-to-month structure as fact although counsel labeled it an assumption; it omits the $14.95 and 1/10/15 examples, statutes and regulation, absent request, records and enclosure, copied administrator, later outcome, and reliance status and supplies no additional proceeding record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-1590.pdf

Original ruling text

295.1590

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

(916) 445-5550

July 9, 1990

Re:
Dear
This is in response to your letter dated May 25, 1990 regarding the application of tax to charges for rentals of video cassettes. You explain: “ --- is machine based video library program implemented at large residential apartment complexes. Residents pay our client $14.95 per month to be a member of the library. For this monthly membership fee they receive unlimited borrowing privileges from the --- library. Irrespective of whether they borrow 1, 10, or 15 movies in a month, they pay the same flat charge. There is no limit on the number of movies they may borrow. To prevent hoarding of cassettes, there is a penalty fee imposed on overdue items." You ask whether the membership fees or the penalty fees are taxable. I assume that the customer joins this program on a month-to-month basis and may become a member for one month without being required to be a member for additional months. Whenever a member acquires a video cassette from the machine, the member is leasing that video cassette. That is, this program is an arrangement to lease video cassettes. The lease of video cassettes under these circumstances is a sale and purchase under the Sales and Use Tax Law. (Rev. & Tax. Code §§ 6006(g) (7), 6010(e) (7).) The rentals payable from that lease are subject to use tax on the lessee which the lessor must collect and pay to this state. (Subdv. (c) of Reg. 1660, a copy of which is enclosed.) The membership fees are rentals payable from the lease of the video cassettes. Therefore, the membership fees are subject to use tax. The only exception to this is when a member actually borrows no cassettes for the month to which the membership fee relates. The reason for this is that there was actually no lease of tangible personal property during that month since, although the member had a right to borrow the video cassettes, the member never actually did so. Penalty fees are amounts required to be paid by the lease agreement

and directly relate to the lease of the video cassettes. Those penalty fees are rentals payable and are subject to use tax. If you have further questions, please feel free to write again.

Sincerely yours,

David H. Levine
Tax Counsel

DHL:wak 2297C
Enclosure
bc: Oakland District Administrator