Is the sale of a discount-membership program (discounts at restaurants, stores, theaters, hotels, etc.) subject to Kansas sales or use tax?

Plain-English summary

A representative sought a ruling on the sales tax treatment of a discount-membership program. The business sells a membership that entitles members to discounts at restaurants, retail stores, sporting events, movie theaters, hotels, and other service providers across the U.S. For the fee, members get the available discounts, access to an "800" phone line for questions, and a members' website with updated information and extra benefits. Members show a membership card to get benefits; the membership is valid for no more than 14 months, and a stolen book/card is replaced free. Participating establishments join to promote themselves and drive traffic, are listed in the directory (and may add a coupon or sample menu), and receive no money from the business and no share of the membership fee.

The Department's answer: the sale of these memberships is not subject to Kansas sales or use tax. (The ruling also notes the requester acknowledged the business is liable for Kansas use tax on the membership books, cards, and all tangible personal property it uses in Kansas to provide the memberships, and that it has long paid Kansas taxes and filed required returns.)

What this means for you

Sellers of discount / membership programs

A membership that provides discounts across many vendors — with support services like a help line and a website — is generally not taxable in Kansas when the establishments get no part of the fee and the program is more than a simple retail-coupon book. The membership fee isn't subject to sales or use tax.

You still owe use tax on your materials

The seller is the consumer of the membership books, cards, and other tangible personal property it uses in Kansas to run the program, and owes Kansas use tax on those items. The nontaxable membership fee doesn't relieve you of use tax on your own inputs.

Compare with a bare coupon book

A product whose only function is to discount retail goods can be treated differently (presumed a taxable sale of tangible personal property). This program avoided that because it does more — multi-category discounts, support services, and no vendor remuneration.

Common questions

Q: Do we charge Kansas sales tax on our discount-membership fees?
A: No. The Department ruled that the sale of the described discount memberships is not subject to Kansas sales or use tax.

Q: Do we owe any Kansas tax at all?
A: Yes — use tax. The business is liable for Kansas use tax on the membership books, cards, and other tangible personal property it uses in Kansas to provide the memberships.

Q: Why isn't the membership fee taxable?
A: The membership is more than a means to discount retail goods — it spans many vendors and includes support services, and participating establishments receive no share of the fee — so the fee itself isn't a taxable sale.

Q: Does this ruling apply to my business?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it illustrates how the Department treats multi-vendor discount memberships.

Citations and references

• Nontaxable membership fee — the Department opined that the sale of the described discount memberships is not subject to Kansas sales or use tax.
• Use tax on inputs — the seller is liable for Kansas use tax on the membership books, cards, and all tangible personal property it uses in Kansas to provide the memberships.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-086

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 16, 2002

XXXX
XXXX
XXXX

Re: Private Letter Ruling Request for XXXX

Dear XXXX:

This letter is in response to your request dated September 20, 2002, on behalf of your client, XXXX, for a private letter ruling on the sales tax treatment of the sale of memberships, which you describe as follows:

My client ("Business") sells a membership program entitling members to receive discounts at restaurants, retail stores, sporting events, movie theaters, hotels and other service providers throughout the United States. In exchange for their membership fee, members receive discounts available, access to an "800" telephone number to answer members' questions, and access to an internet site providing updated information and offering additional benefits. Members must present their membership card to receive their desired benefits. The membership and related discounts are valid for not more than 14 months.
Significantly, if a member's book or card are stolen, Business will provide a replacement book/card at no charge. . . .
In tailoring the discount program to the needs of its Kansas members, Business contacts various Kansas retailers, amusement vendors and service providers in addition to national retailers and service providers. Establishments participate in the program to promote their products and for the increased consumer traffic that participation in the Business program generates. Participating establishments are added to the membership's directory and are permitted to include a coupon, sample menu or other reference in the discount coupon book. The establishments receive no remuneration from Business nor do they receive any portion of the membership fee.

Please be advised that it is the opinion of the department that the sale of memberships described above is not subject to Kansas sales or use tax. You acknowledge that your client is liable for Kansas use tax on the membership book, cards and all tangible personal property it uses in Kansas in providing the memberships, that it has long paid taxes to Kansas and has filed required Kansas returns.

XXXXXX.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling.

Very truly yours,

Richard L. Cram

Date Composed: 10/17/2002 Date Modified: 10/17/2002

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