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