When was a one-time country-club assessment for mortgage debt and improvements exempt from Florida admissions tax?

Subject

Assessment Charged to Country Club Members for Capital Improvements

Plain-English summary

Florida conditionally treated the club's proposed assessment as nontaxable capital, but only the portion genuinely devoted to capital improvements or repayment of related debt qualified. Directly related interest, loan costs, and legal fees counted as part of the capital-improvement cost. Ordinary repairs, maintenance, operating expenses, and other noncapital uses were taxable.

The Department described six ordinary characteristics of a capital assessment:

1. It charges a specified amount, even if payable in installments.
2. It does not itself entitle members to use club facilities or equipment.
3. It is separately stated on member bills.
4. It is separately accounted for in the club's books and records.
5. It funds capital improvements rather than operating costs.
6. It does not reduce or replace membership dues or fees.

The proposed amount and segregation of proceeds appeared to satisfy the first and fourth characteristics, but the request did not provide enough information for the Department to decide whether the second, third, fifth, and sixth were fully met. The ruling therefore made the exemption conditional rather than approving the entire assessment outright.

What this means for you

A one-time label and a separate bank account do not make every dollar of an assessment exempt. Clubs need contemporaneous billing, accounting, budgets, and expenditure records showing which proceeds funded capital work or related debt and which funded current operations.

Common questions

Q: Could members pay a qualifying capital assessment in installments? Yes. The ruling said a specified assessment could be installment-paid.

Q: Were interest and financing expenses taxable operating costs? Not when directly related to the capital improvements; the ruling treated interest, loan costs, and possible legal fees as part of the improvements' total cost.

Q: What happened to the portion used for ordinary repairs and maintenance? It was taxable when the work did not materially add value or appreciably prolong the asset's useful life.

Q: Did the Department approve the whole proposed assessment? No. It lacked enough facts to confirm four of the six characteristics and taxed any noncapital or operating portion.

Citations and references

• Fla. Stat. §§ 212.02(1), 212.04(1) — club dues and fees included in taxable admissions
• Fla. Admin. Code rr. 12A-1.005(5)(d)1., 12A-1.038(1) — club assessments and proof of exemption
• 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 98A-065

Original ruling text

SUMMARY

A Country Club (Club) is a Florida non-profit corporation that owns a golf course and clubhouse and provides social and recreational facilities for its members. The Club seeks advice regarding the taxability of a one-time, lump sum assessment it plans to charge its members to repay mortgage indebtedness and make additional capital improvements to the Club. The Club estimates that 1% of the assessment would be used to cover interest, loan costs, and legal fees directly related to the capital improvement, and 10% would be used for expenditures that would not quality as capital improvement or repayment of indebtedness.

A capital assessment is distinguishable from an admission charge, and would ordinarily have the following characteristics: (1) it would be a charge of a specified amount (which may be paid in installments); (2) it would not entitle the member to use the club's recreational or physical fitness facilities or equipment; (3) it would be separately stated on the billing to the member; (4) when paid, it would be separately accounted for on the club's books and records; (5) it would be used to pay for capital improvements to the club facilities, and not for any operating costs; and (6) it would not result in a decrease of membership dues or fee. If these characteristics are present in the assessment contemplated by the Club, then the assessment will be considered a capital assessment that is exempt from tax.

Interest, loan costs, and legal fees directly related to the capital improvements are considered part of the total cost of the capital improvements. Any portion of the assessment that the Club uses for expenditures that are neither capital improvements nor repayment of indebtedness, including portions of the assessment used to cover operating expenses, will be subject to sales tax.

Aug 21, 1998

Re: Technical Assistance Advisement 98A-065 Sales and Use Tax Assessment Charged to Country Club Members for Capital Improvements Rule 12A-1.005(5)(d)1., F.A.C.

Dear :

This response to your letter of May 20, 1998, constitutes a Technical Assistance Advisement (TAA) issued in accordance with the provisions of Chapter 12-11, Florida Administrative Code (F.A.C.), and pursuant to the authority granted by s. 213.22, Florida Statutes (F.S.).

FACTS

XXX (Country Club) seeks a Technical Assistance Advisement "regarding the application of sales tax on a proposed one[ ]time capital assessment to its members." (TAA Request, p. 1). Country Club sets forth the facts it deems relevant to the capital assessment, as follows:

[Country Club]... is a Florida non-profit corporation. The Club provides social and recreational facilities for its members. The Club owns real property consisting of a golf course and clubhouse. The Club is recognized as an exempt organization under Internal Revenue Code Section 501(c)(7). (TAA Request, p. 1).

The Club has a note payable and first mortgage in favor of a commercial bank. The proceeds of that original indebtedness were used entirely for renovations to the golf course and clubhouse. The Club wishes to repay its indebtedness under the first mortgage and make additional capital improvements at the Club. The Club intends to propose to its membership a one-time lump sum assessment in order to repay the indebtedness and make additional capital improvements. The Club estimates that 10% or less of the

assessment will be used for expenditures that would not be considered capital improvements or repayment of indebtedness. Pursuant to this proposal, the amount assessed against equity and non-equity owner members will be between $4,000 and $5,000. Other classes of membership in the Club will be assessed a smaller amount. The full proceeds of the assessment would be segregated from other funds of the Club and would only be used for the stated purposes. (TAA Request, p. 1).

A subsequent telephone conversation revealed that less than 1% of the assessment proceeds will be used to pay for interest, loan costs, and, possibly, legal fees, directly related to the capital improvements. During this same conversation, it was revealed that the "10% or less of the assessment" proceeds that Taxpayer intends to use "for expenditures that would not be considered capital improvements or repayment of indebtedness" will be used for currently deductible expenses, such as repairs and maintenance, that are related to the capital expenditures.

ISSUE

Is the special assessment, or any portion of the assessment, described above, subject to sales tax?

REQUESTED ADVISEMENT

Country Club wants to know whether the contemplated special assessment is subject to the Florida sales tax.

RELEVANT STATUTORY AND ADMINISTRATIVE AUTHORITY

Section 212.04(1)(a), F.S., sets forth the "legislative intent that every person is exercising a taxable privilege who sells or receives anything of value by way of admissions."

Section 212.04(1)(b), F.S., provides:

(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.... (emphasis supplied).

Section 212.02(1), F.S., provides in pertinent part:

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.... (emphasis supplied).

Rule 12A-1.038(1), F.A.C., provides in part:

(1) It is the specific legislative intent that each and every sale, admission, use, storage, consumption, or rental is taxable under Chapter 212, F.S., unless such sale, admission, use, storage, consumption, or rental is specifically exempt. The exempt status of the transaction must be established by the dealer....

DISCUSSION

According to its TAA Request, Country Club is a Florida non-profit corporation that "owns real property consisting of a golf course and clubhouse" and "provides social and recreational facilities for its members." In addition, Country club "is recognized as an exempt organization under Internal Revenue Code Section 501(c)(7)." Id.

To fund renovations to the golf course and clubhouse, Country Club executed a note payable and first mortgage to a commercial bank. Id. Now Country Club "intends to propose to its members[] a one-time[,] lump sum assessment in order to repay the indebtedness and make additional capital improvements" to the Club. Id. Under Country Club's proposal, "the amount assessed against equity and non-equity owner members will be between $4,000 and $5,000," while "[o]ther classes of membership in the Club will be assessed a smaller amount." Id. Country Club "estimates that 10% or less of the assessment will be used

for expenditures that would not be considered capital improvements or repayment of indebtedness." Id. Furthermore, the "full proceeds of the assessment would be segregated from other funds of the Club," and the proceeds "would only be used for the stated purposes." Id.

Taxpayer will use less than 1% of the assessment proceeds to pay for interest, loan costs, and, possibly, legal fees, that are directly related to the capital improvements. Moreover, the "10% or less of the assessment" proceeds that Taxpayer intends to use "for expenditures that would not be considered capital improvements or repayment of indebtedness" will be used for currently deductible expenses, such as repairs and maintenance, that are related to the capital improvements.

Pursuant to the Florida Statutes, all dues and fees paid for admission to use club facilities are taxable. Sections 212.02(1) and 212.04(1), F.S. As the First District Court of Appeal noted in Dept. of Revenue v. John's Island Club, 680 So. 2d 475, 477 (Fla. 1st DCA 1996), "[t]he terms 'dues' and 'fees' are not defined by statute."

In that case, the court considered whether dues and fees included assessments charged by John's Island Club, a not-forprofit recreational facility, to its members for repair and replacement of the facilities. Id. at 476. Any person joining the club after the imposition of the assessment would be required to pay it. Id. Although members were entitled to the value of their contribution if they resigned from the club, the value of the contribution decreased by 10% each year. Id. Thus, after ten years, the contribution "had no redemptive value." Id.

In determining the meaning of dues and fees under Section 212.02(1), the court adhered to the fundamental principle that statutes should be construed based on the plain and ordinary meaning of the terms adopted by the legislature. Id. at 477; see Parker v. State, 406 So. 2d 1089, 1091 (Fla. 1981)(observing that legislative intent is the "pole star" by which courts are to be guided when interpreting statutory provisions); Aetna Cas.
& Sur. Co. v. Huntington Nat'l Bank, 604 So. 2d 1315 (Fla.

1992)(providing that legislative intent is gleaned from the plain language of the statute). Applying this principle, the court held that "additional paid in capital does not fall within the generally understood definition of dues' andfees' as applied to a club." John's Island Club, 680 So. 2d at 477. Moreover, the court expressly invalidated Rule 12A1.005(5)(d)1.b., F.A.C., which provided that capital assessments were subject to tax. Id. at 477-78. See also Thompson v. Wyandach Club, 127 N.Y.S. 195, 200 (N.Y. 1911); Garden City Golf Club v. Corwin, 57 F.2d 283, 286 (E.D.N.Y. 1932).

After John's Island Club, 680 So. 2d at 477, it is clear that capital assessments are not "dues" or "fees." What constitutes a capital assessment, however, is less certain. In determining what constitutes a capital assessment, the Department must look to the plain and ordinary meaning of the terms.

"Assessment" is defined in Webster's New World Dictionary (1986, p. 82) as "an amount assessed." "Assess," in turn, means "to impose a fine, tax, or special payment on (a person or property)." Id. "Special assessment" is separately defined as "a special tax levied on a property to pay for a local public improvement, as a sewer, that will presumably benefit that property." Id. at 1286.

A capital assessment is distinguishable from an admission charge, and would ordinarily have the following characteristics:

(1) it would be a charge of a specified amount (which may be paid in installments); (2) it would not entitle the member to use the club's recreational or physical fitness facilities or equipment; (3) it would be separately stated on the billing to the member; (4) when paid, it would be separately accounted for on the club's books and records; (5) it would be used to pay for capital improvements to the club facilities, and not for any operating costs; and (6) it would not result in a decrease of membership dues or fees.

According to Country Club, the contemplated assessment will

be a charge of a specified amount (between $4,000 and $5,000 for "equity and nonequity owners" and less for other members) that will be "segregated from other funds of the Club," and used only for "the stated purposes." (TAA Request, p .1) So long as the assessment is separately accounted for on the Country Club's books and records, characteristics 1 and 4, discussed above, are met. Country Club has failed to provide enough information about the assessment for the Department to determine whether characteristics 2, 3, 5, and 6 are satisfied.

To fulfill the second characteristic, Country Club must continue to require its members to pay dues and fees in order to use the club's recreational facilities or equipment. The Department also holds that the special assessment must not be in lieu of a dues increase. Consequently, under characteristic 6, the imposition of the special assessment must not result in a decrease of dues and fees. To meet characteristic 3, Country Club must separately state the assessment on each member's billing statement.

The fifth characteristic, that the assessment must be used to pay for capital improvements to the club facilities, and not for any operating costs, is only partly satisfied by the assessment contemplated here. Country Club states that 10% or less of the assessment "will be used for expenditures that would not be considered capital improvements or repayment of indebtedness." These expenditures include currently deductible expenses for repairs and maintenance. Additionally, Country Club will use less than 1% of the assessment proceeds to pay for interest, loan costs, and, possibly, legal fees incurred for the capital improvements.

The Department takes the position that capital improvements include any amount paid for permanent improvements that increase the value of any property or estate, and any amount paid to restore the property. In addition, capital improvements include repairs to capital assets that arrest deterioration and appreciably prolong the life of the property. Moreover, interest, loan costs, and legal fees directly related to the capital improvements are considered part of the total cost of the capital improvements. Expenditures for repairs and

maintenance that do not materially add to the value of the asset, or appreciably prolong its useful life, on the other hand, are not expenditures for capital improvements. The portion of the assessment that you claim "will be used for expenditures that would not be considered capital improvements or repayment of indebtedness" will be subject to sales tax. Any additional portion of the assessment used to cover operating expenses will likewise be subject to sales tax.

DETERMINATION

So long as the assessments contemplated by Country Club meet the six characteristics set forth above, they would be capital assessments which are exempt from tax. Any portion of the assessment used for expenditures that are not considered capital improvements or repayment of indebtedness is subject to sales tax.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., and 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 from that 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 confidential information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or this response.

Should you have any questions concerning this Advisement, please do not hesitate to contact me.

Sincerely,

Rebecca Newton-Clarke
Attorney

RNC/
Control No. 34413