Are refundable 'land fund' security deposits that a country club requires as a condition of membership subject to New York's social/athletic club dues tax?

Plain-English summary

The Racquet Club at Old Westbury, a not-for-profit country club offering tennis facilities, requires new members to pay a "land fund" deposit on top of regular dues before they can join. Unlike dues, the land fund money is returned to the member, without interest, if they later resign — the club keeps it in a segregated account, doesn't commingle it with other funds, and doesn't use the principal (though interest earned on the account goes into the club's general fund for expenses like taxes). The club already conceded it's a "social or athletic club" whose dues are taxable, but argued the refundable land fund deposit was different — more like a security deposit or loan than a true membership fee.

The Department disagreed with treating the label as controlling. New York's "initiation fee" definition is deliberately broad: any payment, contribution, or loan required as a condition precedent to membership counts, regardless of what it's called or whether it's evidenced by a certificate of interest. The Department noted the land fund deposits function much like country-club membership deposits that the IRS itself treats as loans for federal income tax purposes — but that federal "loan" characterization doesn't matter for New York sales tax purposes, since a required "loan" condition to membership is explicitly included in the initiation-fee definition. Critically, the fact that the deposit gets refunded later doesn't undo the tax: the taxable transaction is complete the moment the payment is required as a condition of membership, and a later refund of the deposit to a resigning member doesn't retroactively cancel that liability.

What this means for you

Country clubs and social/athletic clubs charging membership deposits

Don't assume a refundable security deposit escapes the dues/initiation-fee tax just because it's returnable, held separately, or structured as a loan rather than a fee. If it's required as a condition of joining the club, it's a taxable initiation fee at the time it's charged — full stop, regardless of its eventual refund.

Clubs restructuring membership fee categories

Renaming or recharacterizing a required membership payment (as a "deposit," "loan," or anything else) doesn't change its tax treatment. The Department looks at the substance — is this payment required to join? — not the label the club puts on it.

Accountants and tax professionals

This closely tracks the Lancaster Country Club precedent (TSB-A-82(4)S) on security deposits as initiation fees, and the Lawrence Wittlin precedent (TSB-H-80(259)S) on the "no undoing" principle: a subsequent refund of a required membership payment doesn't cancel the tax liability that attached when the transaction was completed.

Common questions

Q: Is a refundable membership deposit taxable the same as a non-refundable initiation fee?
A: Yes — any payment, contribution, or loan required as a condition of membership is a taxable initiation fee, regardless of whether it's later refunded.

Q: Does keeping the deposit in a segregated, unused account change the outcome?
A: No — how the club manages the funds internally doesn't affect whether the payment is a required condition of membership, which is what triggers the tax.

Q: Does calling the payment a "loan" instead of a "fee" matter?
A: No — New York's initiation-fee definition specifically includes required loans and contributions, not just outright fees.

Q: If a member resigns and gets the deposit back, can the club get a sales tax refund?
A: No — the tax attached when the payment was required for membership, and a later refund of the deposit doesn't unwind that completed taxable transaction.

Q: Can another club rely on this "land fund" analysis for its own membership deposit program?
A: No. This opinion binds the Department only for this petitioner's specific facts, though the "substance over label" principle applies broadly to similar membership-deposit structures.

Citations and references

Statutes and regulations:

• Tax Law § 1101(d)(6), (7) (dues; initiation fee)
• Tax Law § 1105(f)(2)(i) (club dues/initiation fee tax)
• 20 NYCRR § 527.11(b)(2), (4) (dues; initiation fee)

Prior opinions cited:

• TSB-H-80(259)S, Lawrence Wittlin, Dec. 28, 1980
• TSB-A-82(4)S, Lancaster Country Club, Inc., Feb. 22, 1982

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_4s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(4)S
Sales Tax
April 3, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S010601A

On June 1, 2001, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Racquet Club at Old Westbury, 24 Quail Run, Old Westbury, New York 11568.
Petitioner, Racquet Club at Old Westbury, provided additional information pertaining to the Petition
on June 28, 2001.
The issue raised by Petitioner is whether amounts received for “land fund” deposits that are
a prerequisite to membership in its club are subject to sales tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is a not-for-profit corporation under Section 501(c)(7) of the Internal Revenue
Code. Petitioner operates a country club which provides tennis facilities for its members.
Petitioner’s new members are required to pay, in addition to dues, a “land fund” deposit which is
returnable to the member, without interest, upon resigning from the club. Petitioner acknowledges
for purposes of this Petition that it is a social or athletic club for purposes of Section 1105(f)(2) of
the Tax Law and its dues are subject to sales tax.
Petitioner characterizes the land fund monies as security deposits. The monies are kept in
a segregated account, are not commingled with other funds, and are not used by Petitioner. The
interest earned on this account, however, goes into Petitioner’s general fund and is used for such
purposes as paying taxes.
Applicable Law and Regulations
Section 1101(d) of the Tax Law provides, in part:
When used in this article for purposes of the tax imposed under subdivision
(f) of section eleven hundred five, the following terms shall mean:
*

*

*

(6) Dues. Any dues or membership fee including any assessment,
irrespective of the purpose for which made, and any charges for social or sports
privileges or facilities, except charges for sports privileges or facilities offered to
members’ guests which would otherwise be exempt if paid directly by such guests.

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TSB-A-02(4)S
Sales Tax
April 3, 2002

(7) Initiation fee. Any payment, contribution, or loan, required as a
condition precedent to membership, whether or not such payment, contribution or
loan is evidenced by a certificate of interest or indebtedness or share of stock, and
irrespective of the person or organization to whom paid, contributed or loaned.
(Emphasis added)
Section 1105(f)(2)(i) of the Tax Law imposes sales tax on “the dues paid to any social or
athletic club in this state if the dues of an active annual member, exclusive of the initiation fee, are
in excess of ten dollars per year, and on the initiation fee alone, regardless of the amount of dues,
if such initiation fee is in excess of ten dollars . . . .
Section 527.11 of the Sales and Use Tax Regulations provides, in part:
(a) Imposition. (1) A tax is imposed upon the dues paid to any social or
athletic club in this State if the dues of an active annual member, exclusive of the
initiation fee, are in excess of $10 per year.
*

*

*

(b)(2) Dues. (i) The term dues includes:
(a) any dues or membership fee;
(b) any assessment, irrespective of the purpose for which made; and
(c) any charge for social or sports privileges or facilities.
*

*

*

(4) Initiation fee. Any payment, contribution or loan, required as a condition
precedent to membership, whether or not such payment, contribution or loan is
evidenced by a certificate of interest or indebtedness or share of stock, and
irrespective of the person or organization to whom paid, contributed or loaned.
(Emphasis added)
Opinion
Section 1105(f)(2) of the Tax Law imposes tax on dues and initiation fees paid to a social
or athletic club. In determining whether payments made by club members fall within the definition
of dues or initiation fees, the nature of the payment and not the name by which it is designated is
controlling. The payments made by Petitioner’s members for “land fund” deposits as a condition

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TSB-A-02(4)S
Sales Tax
April 3, 2002

precedent to club membership are similar to country club membership deposits which are
recognized, for federal income tax purposes, as being in the nature of loans in IRS Letter Rulings
9043002, June 21, 1990, and 9735002, May 5, 1997.
Any payment, contribution, or loan required as a condition precedent to club membership
constitutes an initiation fee subject to tax under Section 1105(f)(2) of the Tax Law. See Section
1101(d)(7) of the Tax Law and Section 527.11(b)(4) of the Sales and Use Tax Regulations. See also
Lawrence Wittlin, Adv Op St Tx Comm, December 28, 1980, TSB-H-80(259)S. Moreover, where
payment of a security deposit is required as a condition precedent to membership in a social or
athletic club such charge is subject to the tax imposed under Section 1105(f)(2). See Lancaster
Country Club, Inc., Adv Op St Tx Comm, February 22, 1982, TSB-A-82(4)S.
Accordingly, since the land fund deposits are payments or loans required as a condition
precedent to membership in Petitioner’s club, they are subject to the imposition of sales tax under
Section 1105(f)(2) of the Tax Law. This is so even if a member subsequently resigns from the club
and Petitioner returns the member’s deposit, since the transaction that created the tax liability has
not been set aside or cancelled. See Lawrence Wittlin, supra.

DATED: April 3, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.