Were real estate association and multiple-listing-service membership fees taxable because members could buy products or receive discounts?

Plain-English summary

CAR supplied facts about membership fees paid to local real estate associations and multiple listing services. The organizations primarily provided lobbying, public relations, education, professional standards, arbitration, databases, lockboxes, marketing sessions, and other services, so counsel concluded that the true object of membership was service rather than buying merchandise and the fees were not taxable.

Some association stores sold forms, signs, or other property only to members or at member discounts. MLS organizations also sold separately charged listing books. The opinion treated those opportunities as nominal, incidental membership benefits. The retail merchandise itself remained taxable, and MLS books were taxable when no newspaper or periodical exemption applied, but those sales did not make the membership fee taxable.

Citations and references

• California Revenue and Taxation Code section 6051, cited for taxing California retail sales of tangible personal property measured by gross receipts unless specifically exempt by statute — as cited; no subdivision, version, or quoted text supplied
• California Sales and Use Tax Regulation 1584(a)(1)(A), described as including a more-than-nominal membership fee in taxable gross receipts when a retailer sells products only to members — as cited from the regulation adopted January 10, 1996; complete hearing record, final filed text, effective date, and later history not reproduced in the official PDF
• California Sales and Use Tax Regulation 1584(a)(1)(B), described as including a membership fee regardless of amount when members receive lower product prices than nonmembers — as cited from the regulation adopted January 10, 1996; complete hearing record, final filed text, effective date, and later history not reproduced in the official PDF
• California Sales and Use Tax Regulation 1584(a)(2), described as excluding fees unrelated to anticipated retail transactions and treating primarily service organizations' incidental property sales accordingly — as cited from the regulation adopted January 10, 1996; complete hearing record, final filed text, effective date, and later history not reproduced in the official PDF
• January 9, 1996 CAR letter submitted at the Board's January 10 public hearing and supplying the factual background about local associations and multiple listing services — request, letter, hearing notice, staff materials, transcript, exhibits, motion, vote, regulation text, membership agreements, fee schedules, service records, store sales and prices, MLS-book sales, and copies not reproduced in the official PDF
• January 25, 1996 Assistant Chief Counsel Gary J. Jugum response concluding that local-association and MLS membership fees were for primarily service organizations and not anticipated retail sales, while separately charged MLS books remained taxable when no newspaper or periodical exemption applied — no correspondent reply, audit, return, assessment, refund claim, appeal, Board application, or later outcome supplied; copies sent to Glenn A. Bystrom and Dennis Fox
• Official Annotation 295.1663's association-services, store-access and pricing, service-organization, Regulation 1584(a)(2), true-object, and January 25, 1996 rules — annotation omits the MLS analysis and separately charged books, section 6051 and other Regulation 1584 subdivisions, public-hearing and CAR-letter provenance, supplied-facts posture, absent records, copied officials, 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/295-1663.pdf

Original ruling text

295.1663

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 445-3723
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

January 25, 1996

KATHLEEN CONNELL
Controller, Sacramento
────────

Mr. A--- E. C--C--- A--- of R--XXX --- Street, Suite XXXX
---, California XXXXX-XXXX

BURTON W. OLIVER
Executive Director

Dear Mr. C---:
On January 10, 1996, the State Board of Equalization held a public hearing and adopted Sales and Use Tax Regulation 1584, Membership Fees. At that public hearing, the C--- A--- of R--- (“CAR”) submitted a letter dated January 9, 1996, to the members of the Board regarding the application of Regulation 1584 to membership fees for r--- e--- trade associations and --- ----- (“MLS”). A copy of that letter furnished to Mr. Burton W. Oliver, Executive Director, has been referred to me for response. As you know, the retail sale of tangible personal property in California is subject to sales tax, measured by the gross receipts, unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) Regulation 1584, subdivision (a)(1) provides that membership fees related to the anticipated retail sale of tangible personal property are includable in taxable gross receipts when either: (A) the retailer sells its products only to members and the membership fee exceeds a nominal amount, or (B) regardless of the amount of the membership fee, the retailer sells its products for a lower price to a person who has paid the membership fee than to a person who has not paid the fee. Subdivision (a)(2) of Regulation 1584 further provides that charges for membership fees not related to anticipated retail transactions are not subject to tax. Social organizations such as country clubs and other similar organizations are recognized as being essentially service organizations. Membership fees for service organizations are not related to anticipated retail transactions even though such organizations may incidentally sell tangible personal property. At the January 10, 1996, public hearing, the Board agreed with its staff that membership fees for trade associations, such as CAR and MLS, which are primarily service organizations, are not subject to tax. The following factual background has been provided to the Board by CAR. CAR represents approximately 100,000 --- --- licensees, who are involved in approximately 85 percent of the resale transactions in California. By joining a l--- a--- of r--- (“LAR”), a --- --- licensee is automatically a member of both CAR and the N--- A--- of R--- (“NAR”). A --- --- licensee who

Mr. A--- E. C---

-2-

January 25, 1996
295.1663

is interested in joining the trade association pays one membership fee. That membership fee is then divided among the three organizations, the LAR, CAR and NAR, the largest portion of which is paid to the LAR. Members of a LAR are entitled to avail themselves to many benefits provided by the organization. First, in order to be designated as a “R---,” a --- --- licensee must be a member of a LAR. The term “R---” is a trademark. In addition to the privilege of being designated as a R---, the LAR provides its members with a variety of services. These services include local lobbying and public relations, business network meetings, local magazine or newsletter, information and education, adherence to codes of ethics, enforcement of professional standards, and arbitration of disputes between buyers and sellers and between brokers and agents. Additionally, the LAR may operate a --- --- store which sells standard --- --- forms, signs, and other tangible personal property related to the --- --- business. In some locations, the stores are open to the members of the public, while other locations open the stores only to members of the LAR. Moreover, in some locations where the stores are open to the public, a person who is not a member of the LAR may pay a higher price for the merchandise sold than a person who is a member of the LAR. It is undisputed that sales of tangible personal property by the LARs operated stores are subject to sales tax. The only question is whether LAR membership fees are subject to tax. Based on the extensive services provided by the LARs, our conclusion is that charges for the membership fees are not related to anticipated retail transactions. Therefore, under subdivision (a)(2) of Regulation 1584, charges for LAR membership fees are not subject to tax. Because LARs are essentially service organizations, subdivision (a)(1)(B) of Regulation 1584 is inapplicable. The true object of the LAR memberships is that the members are entitled to avail themselves to the services provided by the LARs. Thus, the fact that the members of a LAR may be entitled to purchase certain products, or that certain products are sold at a discount, is a nominal benefit and is immaterial to the determination that the membership fees should not be included in the measure of tax. With respect to the MLS membership fees, a majority of the members of LARs are also members of MLS. However, not all --- --- licensees who are members of MLS are R---, that is, members of LARs. A MLS is provided, depending on the particular region of California, as part of the LAR, as a wholly owned subsidiary of the LAR, or as a separate entity that is totally independent of the LAR. MLS members receive a variety of services, including, access to the computer database, a lockbox system, the right to show --- through caravans (broker tours of ---), marketing sessions for property, notices of new listings, commission sharing agreements, code of ethics, arbitration standards, business network meetings, and other related services that vary from MLS to MLS. In addition to the services provided by the MLS, the MLS sells MLS books to their members. In order to purchase the MLS books, an individual must also be a member of a LAR.

Mr. A--- E. C---

-3-

January 25, 1996
295.1663

The charge for such MLS books is separate from both the membership fee for the MLS and the LAR. When the newspaper and periodical exemption does not apply, the retail sale of the MLS books is subject to tax. In view of the extensive services provided to their members, it is evident that MLSs, like LARs, are essentially service organizations. Therefore, our conclusion is that under subdivision (a)(2) of Regulation 1584, charges for MLS membership fees are not subject to tax. The true object of a MLS membership is that the members benefit from the services provided by the MLS which are unrelated to anticipated retail transactions. In summary, the primary purpose of trade associations such as MLS and LAR is the provision of services to their members. Individual members join such organizations for various reasons, among which are the promotion of collective education, action, and policy formation. The availability of certain products and discounts is only a nominal and incidental benefit. Therefore, because membership fees for trade associations such as MLS and LAR are not related to anticipated retail sales of tangible personal property, they should not be included in taxable gross receipts.

Sincerely,

Gary J. Jugum
Assistant Chief Counsel
GJJ:SHC:rz
cc:

Mr. Glenn A. Bystrom - MIC: 43
Mr. Dennis Fox - MIC: 92