Was an equity club's $10,000 member assessment taxable when members received noninterest-bearing bonds?

Subject

Equity Membership

Plain-English summary

The member assessment was subject to Florida sales tax. The club charged $10,000 per member and $5,000 per associate member to reduce and refinance its mortgage, while also planning to lower annual dues.

Although each paying member received a bond, the club credited the amount to additional paid-in capital and recorded no repayment liability. The bond was noninterest-bearing, unsecured, subordinated, and redeemable only from amounts tied to an incoming member, so full face-value repayment was uncertain. It did not meet the ruling's refundable-deposit criteria.

What this means for you

Labeling a payment capital and issuing a bond did not make the club assessment exempt. The Department looked for a real repayment obligation reflected as a liability in the club's books and supported by reliable written terms.

Common questions

Q: Did the club's mortgage-reduction purpose make the assessment exempt? No.

Q: Why did the bond not establish a refundable deposit? The club recorded no liability and the member might receive less than face value.

Q: What accounting treatment did the club use? It debited cash and credited additional paid-in capital.

Citations and references

• Fla. Stat. § 212.02(1) — admissions and club fees
• Fla. Admin. Code r. 12A-1.005(5)(d) — club assessments and refundable deposits
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93A-004

Original ruling text

Title:

Equity Membership

Jan 27, 1993

RE: TAA 93A-004
Sales Tax
Additional paid in capital by members of equity club
Section 212.02(1), F.S.
Rule 12A-1.005, F.A.C.

Dear :

Thank you for your letter dated October 15, 1992, which
requested the issuance of a Technical Assistance Advisement
(TAA) concerning the proper tax treatment on periodic
assessments made to members of an equity club. XXXX
[hereinafter "Club"] is a not-for-profit Florida corporation
which offers its members recreational activities, including but
not limited to, golf and tennis. Your letter does not support
or affirm a position on this issue. Accompanying your request is
a copy of the "Bond" issued to those members paying the
additional $10,000 assessment, a letter dated August 13, 1992,
from the "Club's" president, and the minutes from the Board of
Governor's meeting held on July 14, 1992. Your letter provides
in part:

"... On September 25, 1992, the Board of Directors of the
above named taxpayer assessed each member $10,000. The
assessment will be used to reduce an existing mortgage and
restructure the remaining balance, so as to obtain a more
favorable rate of interest.

"Each member received in exchange for the cash payment, a
$10,000 bond at the time of payment. The taxpayer recorded the
$10,000 assessment in the equity section of the balance sheet as
an additional capital contribution and, therefore, no liability
was recorded for the bonds. The fact that the taxpayer does not
show a liability does not preclude the members from redeeming

the bonds, therefore, there is an underlying obligation owed by
the taxpayer. The bonds have no stated interest rate, maturity
date or liquidation value; that is, they only represent an
additional equity interest in the Club....

"How does the Florida Sales and Use Tax Rule apply to this
capital assessment which is being used to repay the debt on
assets purchased prior to the change in the tax law?"

DETERMINATION

During the Board of Governors meeting on July 14, 1992, a
member of the "Club" proposed that members be assessed $10,000
each ($5,000 per associate member) to reduce the "Club's"
current mortgage. The member further proposed that the annual
dues be reduced from $14,000 to $10,800 in order to attract new
members. The suggestion was approved and was to be enacted on
November 1, 1992. As of the meeting date, the bond redemption
fund had a balance of minus $12,693.

The statutory definition of the term "admissions" is
contained in section 212.02(1), F.S., which provides in part:

"The term 'admissions' means and includes the net sum of
money after deduction of any federal taxes for admitting a
person or vehicle or persons to any place of amusement,
sport, or recreation or for the privilege of entering or
staying in any place of amusement, sport or recreation,
including, but not limited to ... greens fees,
participation fees, entrance fees ... and 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 ..."

Rule 12A-1.005(5)(d)1.b., F.A.C., further provides:

"(d)1. Effective July 1, 1991, the following fees paid to
private clubs or membership clubs as a condition precedent
to, in conjunction with, or for the use of the club's
recreational or physical fitness facilities are subject to
tax....

"b. Any periodic assessments (additional paid in capital)
required to be paid by members of an equity or non equity
club for capital improvements or other operating costs,
unless the periodic assessment meets the criteria of a
refundable deposit as provided in sub-subparagraph 2.e.
below." (Emphasis Supplied)

Rule 12A-1.005(5)(d)2.e., F.A.C., provides:

"e. Refundable deposits advanced to an organization when
the organization is obligated to repay the deposit and the
deposit is reflected as a liability in the organization's
books and records. The organization's obligation to repay
refundable deposits must be evidenced by a promissory note,
a bond, or other written documentation. At the time the
deposit or any portion of it is not shown as a liability in
the organization's books and records, such as a portion of
the deposit being applied against a member's taxable
obligation to the club, that portion is subject to tax."
(Emphasis Supplied)

During our telephone conversation on Friday, November 20,
1992, it was determined that the "Club" accounted for the
additional assessment paid by its members by debiting its cash
account and crediting its additional paid in capital account.
No liability is created on the company's books.

The blank "bond" submitted for review provided in part:

"This is one of a series of Bonds issued and to be issued
by the Club, without limitation as to date or number, not all of
which Bonds are of the same face amount, for certain monies paid
to the Club by such member to be used for capital improvements
or repayment of bonds previously issued. This Bond and all
similar Bonds are and will be non-interest bearing, nonassignable, non-negotiable, unsecured and at all times will be
subordinate to any present or future mortgages, pledges, liens,
loans or any other indebtedness (sic) of the Club, of any
nature. In accepting this Bond, the Member hereby consents to

all such subordinations.

"The Face Amount of this Bond, in whole or in part, as the
case may be, will be paid to the Member or his personal
representative, as the case may be, upon resignation or death of
the Member, but solely from the aggregate of the then Bond, if
any, and the initiation fee received from an incoming Member
joining the Club after such resignation or death; provided,
however, that in the event the aggregate amount of the then
Bond, if any, and the initiation fee then in effect paid by such
incoming Member shall be less than the Face Amount, then the
redemption of the Face Amount shall be reduced to aggregate of
the then Bond, if any, and the initiation fee then in effect
paid by such incoming Member and such reduced amount shall
constitute full and complete payment of this Bond...." (Emphasis
Supplied)

The additional assessments paid by members of "Club" are
subject to Florida's sales tax since the criteria required
pursuant to Rule 12A-1.005(5)(d)2.e., F.A.C., have not been met.
A liability was not created on the company's books at the time
of the transaction and based upon the language contained in the
"bond" issued to each member paying the additional assessment,
it appears questionable whether or not the member will receive
the bond's face value when submitted for payment.

This response constitutes a Technical Assistance Advisement
under s. 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 s. 213.22, F.S. Our response is
predicated on 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 than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to

identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Betsy Turner
Technical Assistant
Statutory Compliance Section

BT/
Enclosure