Were annual and administrative membership fees taxable when members received professional-service access and some incidental software and reports?

Plain-English summary

A business organization charged a $500 annual membership fee plus a one-time $150 administrative fee for access to accountants, attorneys, consultants, seminars, teleconferences, insurance, discounted services, and other professional resources.

Some members also received canned software that cost the organization $49, plus a business survey, solutions report, expense audit, and quarterly newsletter. The contract did not separately price the software or reduce the fee when it was declined.

California accepted the organization's assertion that members joined for professional services and assumed the physical property had minimal value. On those assumptions, the membership fees were nontaxable and the organization was the consumer of all property supplied to members, owing tax when it acquired that property.

What this means for you

Membership organizations

Service treatment depended on professional access being the real object and property benefits being minor and incidental.

Accountants and tax professionals

Review property value, member choice, separate pricing, affiliate compensation, software delivery, and what marketing materials emphasize.

Common questions

Q: Were the $500 annual and $150 administrative fees taxable?

A: No, under the opinion's assumptions.

Q: Did included canned software make the whole fee taxable?

A: No, because counsel assumed it and the other property were incidental and minimal in value.

Q: Who owed tax on the supplied property?

A: The membership organization, as consumer.

Q: Could different facts change the result?

A: Yes. The opinion expressly said incorrect assumptions would change the conclusion.

Citations and references

• California Revenue and Taxation Code § 6367 (newsletter exemption referenced)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.1182
• Original supporting opinion: 515.1182 PDF

Original ruling text

515.1182

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2608

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

January 27, 1994
REDACTED TEXT

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
BURTON W. OLIVER
Executive Director

Dear REDACTED TEXT,
This is in response to your letter dated December 3, 1993, which is a follow-up to the letter you wrote to us on September 22, 1993 and to which we responded on November 18, 1993. You ask how tax applies to membership fees. You state that REDACTED TEXT provides easy access to a wide range of nontaxable services. It also provides its members canned software. You state the canned software is not provided to each member because it is only beneficial to some of the members. You also state the retail price of the software is $179; you purchase it for $49 and sell it to your members for the same price, included in the membership fee of $650. According to the membership application, the annual membership fee is $500 and the one-time administrative fee is $150. The contract does not separately state a fee for software and does not discount the price by $49 if the member declines the software. In fact, the contract does not give the member that option. You further state that the canned software is not related in any way to the other services. You provide the following list of providers which you make available to your customers: "1) A business Health Index Survey 2) Business Expense Audit 3) Marketing Consultants 4) Accountants 5) Research Directors 6) Computer Technicians 7) Sales Manager 8) Financial Analysts 9) Telecommunications Experts 10) Attorneys 11) Operations Managers 12) Management Consultants 13) Numerous other expert consultants 14) Group Health Insurance 15) Discounted Phone Service 16) Retirement plans 17) Employee Incentives 18) Seminars 19) Teleconferences 20) Workshops." As explained in my previous letter, the question is whether you are providing property incidental to a service (which is not taxable) or whether the membership fees are for the sale of tangible personal property or relate to anticipated retail sales of tangible personal property (which is taxable) . The contract provides that members are entitled to receive, among other things, "specially priced products" from REDACTED TEXT. For purposes of this opinion, I assume that REDACTED TEXT is unrelated to the REDACTED TEXT and that REDACTED TEXT receives no commission or other compensation with respect to sales made by REDACTED TEXT to REDACTED TEXT members.

515.1182

2

January 27, 1994

Although you state that the only tangible personal property provided to your members is the software, the membership application indicates that you also provide a Business Health Index Survey, a Solutions Report, a Business Expense Audit, and a quarterly Newsletter. These all appear to be tangible personal property. There is an exemption application to the newsletter (Rev. and Tax. Code § 6367), but if you are regarded as selling the other items, the sale is subject to tax. You have not described these items but for purposes of this opinion, I assume that their value is minimal, and that, as you assert, your members join REDACTED TEXT for access to professional services. Under the specific facts and assumptions stated herein, we conclude that your membership fees are not taxable and that you are the consumer of all the tangible personal property provided to your members. As such, tax applies to the sale to you of such property. Please note that if my assumptions are incorrect, our opinion would be different. Sincerely, Rachel M. Aragon Staff Counsel RMA:ljt bc: REDACTED TEXT – District Administrator