Were a country club's equity memberships, resale commission, and initiation fees taxable?

Subject

Equity Memberships in a Not For Profit Country Club

Plain-English summary

The club's equity membership contributions were not taxable if they were genuine paid-in capital rather than payment for facility use. The amounts had to be separately accounted for, excluded from operating revenue, unused to reduce dues or user fees, and unused for operating expenses. The result also depended on club assets being distributable to members or a tax-exempt organization—a point the Department could not verify from the submitted governing documents.

The club's 20% retention on an equity resale was likewise nontaxable only when recorded as paid-in capital and used for capital expenditures. The entire $14,000 nonrefundable initiation fee was taxable because it was not an equity contribution and part funded operations; no additional use tax was due after that sales tax treatment.

What this means for you

Calling a payment "equity" was not enough. Member rights, dissolution rights, accounting, and actual use of the money distinguished capital from taxable dues or fees.

Common questions

Q: Was the $25,000 equity membership taxable? No, subject to all stated capital and asset-distribution conditions.

Q: Could the club spend its retained resale amount freely? No. It had to remain paid-in capital and fund capital expenditures.

Q: Was the initiation fee taxable? Yes, in full.

Citations and references

• Fla. Stat. § 212.02 — definitions
• Fla. Stat. § 212.03 — transient rentals
• Fla. Stat. § 212.04 — admissions, club dues, and fees
• Florida Department of Revenue v. John's Island Club, Inc., 680 So. 2d 475 (Fla. 1st DCA 1996)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-063

Original ruling text

SUMMARY

QUESTION 1: Are the sales of equity membership certificates
currently stated at $25,000 for a membership subject to
sales tax?

ANSWER - Based on Facts Below: No. Sales of the described
equity memberships are not subject to tax when the payments
are separately accounted for and not recorded in an
operating revenue account by the taxpayer; not paid for the
right to use the taxpayer's recreational, physical fitness
or other facilities or equipment without subsequent
periodic payments; not used to effect a decrease in user
fees or periodic membership dues, and; not used to pay for
the operating expenses of the organization. This applies to
the entire sales price of the equity membership, including
the percentage of the payment not refunded to the previous
member but instead retained by the club, since that
retained percentage becomes paid in capital. This
determination is dependent on the criterion that the assets
of the club be distributed to the members or to a taxexempt organization.

QUESTION 2: Are the 20% equity resale commission proceeds
generated from the sale of the equity membership
certificates subject to sales tax?

ANSWER - Based on Facts Below: Not as long as they are
accounted for as paid in capital, and used for capital
expenditures. This applies to the entire sales price of
the equity membership, including the percentage of the
payment not refunded to the previous member but instead
retained by the club, since that retained percentage
becomes paid in capital. This determination is dependent on
the criterion that the assets of the club be distributed to
the members or to a tax-exempt organization.

QUESTION 3: Can the Club's cash proceeds from the equity
membership commission be expended at the Club's discretion
without risk of triggering sales tax on such proceeds?

ANSWER - Based on Facts Below: No. They must be accounted
for as paid in capital as described, and used for capital
expenditures.

QUESTION 4: Must cash proceeds from the Club's equity
membership resale commission be strictly designated to a
capital asset fund to escape sales tax liability?

ANSWER - Based on Facts Below: Yes.

QUESTION 5: Is any portion of the nonrefundable initiation
fee currently stated at $14,000 subject to sales tax?

ANSWER - Based on Facts Below: Yes. The entire initiation
fee is subject to tax.

QUESTION 6: If the Club utilizes any of the nonrefundable
initiation fees to fund operating activities, should it
then charge itself a use tax on such amounts?

ANSWER - Based on Facts Below: No additional tax is due on
the initiation fee, since the entire amount is subject to
tax.

Nov 07, 2000

Re: Technical Assistance Advisement 00A-063
Equity Memberships in a Not For Profit Country Club
Sections: 212.02, 212.03, 212.04, F.S.
Petitioner: XXX (herein "Club")
FEI: XX

Dear :

This letter is a response to your petition dated October 27,
1999, for the Department's issuance of a Technical Assistance
Advisement ("TAA") concerning the above referenced party and
matter. Your petition has been carefully examined and the

Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. This response to
your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

FACTS

From your letter:

The Club is a member-owned private club that was
incorporated on May 2, 1985 as a Florida not-for-profit
corporation pursuant to Chapter 617, F.S. The Club
facilities include, but are not limited to, main clubhouse
facilities, four championship golf courses, related
practice facilities, golf course maintenance facilities, a
sports complex which includes recreational, acquatics (sic)
and spa facilities, thirty-nine tennis courts, golf and
tennis pro shops and golf cart storage facilities. On
October 26, 1990, the Club was acquired by the equity
members from the original developer,... who retained all
unissued memberships to sell with the remaining undeveloped
lots within the [Community]. The Developer was entitled to
receive 100% of the proceeds collected from the initial
issuance and sale of an Equity Membership as consideration
for the members' purchase price of the Club facilities.

In accordance with the By-Laws of the Club..., there is a
single type of equity voting membership described as the
"[Membership]". The [memberships] are offered only to
current and future owners of the residential units and lots
in the [Community]. Page 24, Article X, Section 10(b.) of
the Club's By-Laws requires that an equity member shall not
sell or otherwise transfer his membership other than to the
Club. The Club acts as the exclusive agent to facilitate
the resale of an equity membership. The total number of
Equity Memberships currently allowed under the By-Laws
shall not [ ] exceed the total number of residential units
constructed and to be constructed in the [Community] which
was estimated to be 3,400. The Club will be obligated to
repurchase an equity membership only if an individual, who
is acceptable to the Club, is willing to acquire the

retiring member's equity membership and has paid the
required membership contribution. The Club, in its sole and
absolute discretion, may, but shall not be required to,
repurchase a membership prior to a subsequent purchaser
acquiring such membership. Each equity member is required
to pay annual dues to use the Club Facilities....

Article X, Section (10)(c), of the By-Laws, provides that if a
"... resignation of any member is not concurrent with the sale
of such member's residential unit or lot in [Community], then
such resigning member shall forfeit... the right to sell his
[Membership] back to the Club." Therefore, a member will only
receive an amount in payment of his membership if he is selling
his residential unit or lot in the community, and the purchaser
of the residential unit or lot is willing to purchase the
membership, and the club finds the purchaser of the residential
unit or lot acceptable for membership.

From your request:

... Currently, new equity memberships sell for $25,000 for
the equity membership certificate plus a $14,000 nonrefundable initiation fee aggregating $39,000 total cost to
join plus applicable membership dues for usage of the Club
facilities. In accordance with Article X, Section 10.b., of
the Club By-Laws, the amount to be paid to a retiring
[Member] of the Club upon payment of the amount then
charged by the Club for a [Membership] in full by the
successor [Member] shall be eighty percent (80%) of the
amount then charged by the Club for a [Membership] (sic).
That is to say that an outgoing (selling) member will
receive net proceeds of 80% of the then going rate charged
to new income equity members after payment to the Club of a
20% commission at the time of the membership resale
transaction.

All [members] who acquire an equity position have the
opportunity to recover 100% of their respective initial
equity membership contribution. As exclusive broker upon
resale of an equity membership, the Club is entitled to
charge a commission to facilitate the equity membership

resale transaction of 20% on memberships acquired. The
equity resale commission is not a cost in addition to the
equity joining contribution but rather designated proceeds
retained by the Club for facilitating the resale of an
equity membership. The Club's policy requirement is to
strictly appropriate the equity resale commission proceeds
to a designated capital asset fund. As such, any and all
equity resale commission proceeds received by the Club are
treated as additional paid-in capital in accordance with
generally accepted accounting principles. Importantly, the
Club does not utilize such proceeds to fund operating costs
or for any manner other than solely to fund fixed asset
(capital) acquisitions.

Pursuant to Article III, Section 8 of the By-Laws, equity
members have voting rights. All members receive one vote.
Article V of the Articles of Incorporation... further
provides that the Club shall have no capital stock and
shall be composed of members rather than shareholders.
Article VI, Section 3 and Article X, Section 9 of the ByLaws further provide[] that the Club will issue such
membership certificates to evidence ownership of a
respective equity membership in the Club....

There is no provision in the Articles of Incorporation or the
By-Laws concerning the dissolution of the Club or the rights of
the members in connection with such event.

REQUESTED ADVISEMENT

Your request memorializes six questions as follows:

1. Are the sales of equity membership certificates
   currently stated at $25,000 for a [Membership] subject to
   sales tax?

2. Are the 20% equity resale commission proceeds generated
   from the sale of the equity membership certificates subject
   to sales tax?

3. Can the Club's cash proceeds from the equity membership

commission be expended at the Club's discretion without
risk of triggering sales tax on such proceeds?

4. Must cash proceeds from the Club's equity membership
   commission be strictly designated to a capital asset fund
   to escape sales tax liability?

5. Is any portion of the nonrefundable initiation fee
   currently stated at $14,000 subject to sales tax?

6. If the Club utilizes any of the nonrefundable initiation
   fees to fund operating activities, should it then charge
   itself a use tax on such amounts?

Discussion, Analysis, and Conclusion of Law

Section 212.04, F.S., provides in part:

(1)(a) It is hereby declared to be the legislative intent
that every person is exercising a taxable privilege who
sells or receives anything of value by way of admissions.

(b) For the exercise of such privilege, a tax is levied at
the rate of 6 percent of sales price, or the actual value
received from such admissions, which 6 percent shall be
added to and collected with all such admissions from the
purchaser thereof, and such tax shall be paid for the
exercise of the privilege as defined in the preceding
paragraph....

The term "admissions" is defined, in part, under s. 212.02(1),
F.S., as follows:

(1) The term "admissions" means and includes... all dues
and fees paid to private clubs and membership clubs
providing recreational or physical fitness facilities,
including, but not limited to, golf, tennis, swimming,
yachting, boating, athletic, exercise, and fitness
facilities, except physical fitness facilities owned or
operated by any hospital licensed under chapter 395.

Section 212.04, F.S., taxes all "dues" and "fees" paid to
private and membership clubs providing recreational or physical
fitness facilities, including, but not limited to golf, tennis,
or swimming, unless specifically exempt.

"Dues" and "fees" are not defined in Chapter 212, F.S.;
therefore, we must look to the ordinary usage of the terms, as
was done in Oklahoma City Golf and Country Club v. Oklahoma Tax
Commission, 825 P.2d 267 (Okl. 1992). In that case, the court
used the definition of "dues" as found in Black's Law Dictionary
450 (5th ed. 1979) ("Black's") and Webster's Third New
International Dictionary 699 (1963) ("Webster's"). Black's
defines "dues," as applied to clubs, as "sums paid toward
support and maintenance of same and as a requisite to retain
membership." "Dues" are defined by Webster's as "the fee or
charge required for membership, affiliation, initiation, use,
subscription."

For the term "fees" it is appropriate to look to the dictionary
definition for the common meaning of the term in the same manner
as the court did in the above cited case. "Fees" are defined in
The American Heritage Dictionary (2nd Collegiate ed. 1991) as "a
fixed charge."

It is a well-established fact that "stock" in a corporation
represents a proportional ownership interest in the corporation.
The characteristics of stock are a right to participate
proportionately in all profits, and in management, and in the
distribution of net assets on liquidation. U.S. v. Evans, 375
F.2d 730, 731 (9th Cir. 1967). In further support of these
characteristics of stock, I.R.S. Revenue Ruling 87-130, 1987 2CB, 69, identifies the critical entitlements as "valuation,
voting, and distribution rights."

It is necessary to distinguish between those amounts that are
paid to Club for taxable dues or fees and those that are paid in
for the non-taxable equitable ownership interest in the Club.
Because each country club has such variable provisions in its
bylaws and membership agreements regarding the rights and
obligations that arise from payment of various portions of the
required membership fee, such determination must be made on a

case by case basis. In making each determination as to the
components of the particular total membership cost that are
taxable under Section 212.04, F.S., the Department will consider
the intent or motive of the parties, as evidenced by the
documents relevant to membership. See Oakland Hills Country Club
v. Commissioner, 74 USTC 35, 39 (1980).

In Florida Department of Revenue v. John's Island Club, Inc.,
680 So.2d 475 (Fla 1st DCA 1996), the subject club filed a
petition challenging the validity of Rule 12A-1.005(5)(d)1.b.,
F.A.C. John's Island Club, Inc., argued that the rule exceeded
the Department's grant of rulemaking authority, and modified,
enlarged, and contravened the law implemented. The court
determined that additional paid in capital does not fall within
the generally understood definition of "dues" or "fees" as
applied to a club, that the terms "dues" and "fees" are not
defined by statute, and the statute did not specifically
authorize an admissions tax on all paid in capital. The court
determined that, in the absence of clearer legislative
consideration of what was meant by the terms "capitalization
fees" and "capital facility fees," the rule was inconsistent
with the provisions of chapter 212, F.S.

"Capital contribution" is defined in Black's Law Dictionary (5th
edition) as, "Cash, property, or services contributed by
partners to partnership. Various means by which a shareholder
makes additional funds available to the corporation (i.e.,
placed at the risk of the business) without the receipt of
additional stock. Such contributions are added to the basis of
the shareholder's existing stock investment and do not generate
income to the corporation." "Contribution to capital" is defined
in Black's Law Dictionary (5th edition) as "[a] fund or property
contributed by shareowners as financial basis for operation of
corporation's business, and signifies resources whose dedication
to users of the corporation is made the foundation for issuance
of capital stock and which became irrevocably devoted to
satisfaction of all obligations of the corporation." Black's Law
Dictionary (5th edition) defines "capital" as "[i]n accounting,
the amount invested in a business." Black's Law Dictionary (5th
edition) defines "capital expenditure" as "[e]xpenditure for
long term betterment or additions. Expenditure in nature of an

investment for the future chargeable to capital asset account.
An expenditure which should be added to the basis of the
property involved."

In the instant situation, the membership plan provides that
membership certificates are issued when membership contributions
are paid by Equity Members. Equity members have voting rights,
so they are able to have input in the management of the club.
Transfer rights are limited in the sense that memberships must
be sold to the Club. However, membership contributions can
appreciate or depreciate in value, depending on future
membership contribution amounts. Equity members are required to
pay dues and, currently, initiation fees in order to use Club
Facilities.

Members that purchase equity in the Club may be able to receive
a partial refund of the equity contribution if the resignation
from the Club is concurrent with the sale of the member's
residential property in the community. The refund amount is
eighty percent (80%) of the current market value of the amount
of the equity membership contribution at resignation from the
Club. The difference between the current market value and the
amount paid to the retiring member is retained by the club.

The Articles of Incorporation and the By-Laws of the Club are
silent as to the distribution of the assets of the Club upon
dissolution of the Club.

Part of the club's non-refundable initiation fee is designated
for operations.
DETERMINATION

Sales of the described equity memberships are not subject to tax
when the payments are separately accounted for and not recorded
in an operating revenue account by the taxpayer; not paid for
the right to use the taxpayer's recreational, physical fitness
or other facilities or equipment without subsequent periodic
payments; not used to effect a decrease in user fees or periodic
membership dues, and; not used to pay for the operating expenses
of the organization. This applies to the entire sales price of
the equity membership, including the percentage of the payment

not refunded to the previous member but instead retained by the
club, since that retained percentage becomes paid in capital.
Please be advised that this determination is dependent on the
criterion that the assets of the club be distributed to the
members or to a tax-exempt organization. Since the distribution
on dissolution is not addressed in the Articles of Incorporation
or the By-Laws, the Department is unable to verify that this
criterion is met to ensure the exempt status of the sales of the
memberships.

Payment of Club's initiation fees is taxable. Its initiation
fees are not equity contributions. Additionally, they are not
transferable to a new member, and at least part of the
initiation fee is used to pay operating expenses of the club,
which indicates that they are used to reduce the annual dues of
the club.

Your questions are restated and the answer is given:

1. Are the sales of equity membership certificates currently
   stated at $25,000 for a [Membership] subject to sales tax? No.
   (Please review caveat stated in the first paragraph of the
   Determination.)

2. Are the 20% equity resale commission proceeds generated from
   the sale of the equity membership certificates subject to sales
   tax? Not as long as they are accounted for as paid in capital,
   and used for capital expenditures. (Please review caveat stated
   in the first paragraph of the Determination.)

3. Can the Club's cash proceeds from the equity membership
   commission be expended at the Club's discretion without risk of
   triggering sales tax on such proceeds? No. They must be
   accounted for as paid in capital, and used for capital
   expenditures.

4. Must cash proceeds from the Club's equity membership
   commission be strictly designated to a capital asset fund to
   escape sales tax liability? Yes.

5. Is any portion of the nonrefundable initiation fee currently

stated at $14,000 subject to sales tax? Yes. The entire
initiation fee is subject to tax.

6. If the Club utilizes any of the nonrefundable initiation fees
   to fund operating activities, should it then charge itself a use
   tax on such amounts? No additional tax is due on the initiation
   fee, since the entire amount is subject to tax.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the department
only under the facts and circumstances described in the request
for this advice, as specified in Section 213.22, F.S. Our
response is predicated upon those facts and the specific
situation summarized above. You are advised that subsequent
statutory or administrative rule changes or judicial
interpretations of the statutes or rules upon which this advice
is based may subject similar future transactions to a different
treatment from that which is expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Sara D. Faulkenberry
Tax Law Specialist
Technical Assistance and Dispute Resolution
850/414-9838

Control #39299