Are paid 'discount memberships' that let customers buy at a discount subject to New York sales tax, and what happens when an exempt organization buys one?

Plain-English summary

An arts-and-crafts retail chain sells an annual membership for $39.95 that gives the customer a percentage discount on every item they buy, plus the ability to apply for rebates (up to $25 per quarter) on classes and family entertainment. The retailer already understood that these membership fees are generally taxable, and asked a narrower question: what happens when the buyer is a tax-exempt organization? The Department concluded that sales of these memberships to qualifying exempt organizations are not subject to sales tax.

The starting point: a membership fee that entitles the holder to buy tangible personal property or services at a discount is itself taxable, because the Department treats it as a prepayment for the discounted property or services (TSB-A-92(66)S; TSB-A-81(20.1)S). So in the ordinary case — a regular retail customer buying the membership — the $39.95 fee carries sales tax.

The exception is the buyer's status. Purchases by the organizations described in Tax Law § 1116(a) (qualifying exempt organizations — e.g., certain nonprofits, governments) are exempt from State and local sales tax. So a membership sold to a § 1116(a) exempt organization is not taxed — provided the exempt organization is the direct purchaser and payor of record and gives the retailer a properly completed exempt-organization certificate (20 NYCRR 529.7(h)(2)). The retailer must keep that documentation (20 NYCRR 533.2(d); TB-ST-770). The "direct purchaser and payor of record" condition matters: an individual member can't buy with their own funds and claim the organization's exemption.

What this means for you

Retailers selling paid discount memberships, club cards, or VIP programs

Treat the fee as taxable by default — the Department views a membership that unlocks discounts as a prepayment for discounted goods/services. Charge sales tax on the membership fee to ordinary customers. You only skip the tax when the buyer qualifies for an exemption and documents it.

Selling to exempt organizations

A § 1116(a) exempt organization can buy the membership tax-free, but only if it is the direct purchaser and the payor of record and gives you a properly completed exempt-organization certificate (typically Form ST-119.1). If an employee or member pays personally and seeks reimbursement, the exemption generally doesn't apply. Retain the certificate and your records (20 NYCRR 533.2(d); TB-ST-770).

Where this can get tricky

Watch for fees that are not prepayments for discounted purchases — e.g., a flat fee solely for access to a place of amusement, or dues with no discount/purchase entitlement — which can be analyzed differently. Here the entitlement was a discount on future purchases, which is what made it a taxable prepayment.

Accountants and tax professionals

The holding pairs the prepayment-for-discount doctrine (TSB-A-92(66)S; TSB-A-81(20.1)S) with the § 1116(a) organizational exemption and the § 529.7(h)(2) "direct purchaser and payor of record" requirement. The exemption is about who buys and how it's paid and documented, not about the nature of the membership.

Common questions

Q: Are paid discount memberships taxable in New York?
A: Generally yes. A membership that entitles the holder to buy goods or services at a discount is treated as a prepayment for those discounted purchases and is subject to sales tax.

Q: What if a nonprofit or government buys the membership?
A: Sales to a qualifying exempt organization under Tax Law § 1116(a) aren't taxed, provided the organization is the direct purchaser and payor of record and gives the retailer a properly completed exempt-organization certificate (20 NYCRR 529.7(h)(2)).

Q: Can an employee of an exempt organization buy it personally and claim the exemption?
A: No. The exempt organization must be the direct purchaser and the payor of record. Personal purchases with later reimbursement generally don't qualify.

Q: What does the retailer need to keep?
A: The exempt-organization certificate and supporting records (20 NYCRR 533.2(d); TB-ST-770).

Q: Can I rely on this opinion?
A: No. An Advisory Opinion binds the Department only as to the petitioner and the facts presented. It illustrates the Department's reasoning but cannot be relied on by another taxpayer.

Citations and references

Statutes and regulations:
- Tax Law § 1116(a) (purchases by qualifying exempt organizations are not subject to sales tax)
- 20 NYCRR 529.7(h)(2) (exempt organization must be the direct purchaser and payor of record; certificate required)
- 20 NYCRR 533.2(d) (recordkeeping for exemption documentation)

Authority and forms referenced: TSB-A-92(66)S; TSB-A-81(20.1)S (discount memberships as taxable prepayments); Form ST-119.1 (Exempt Organization Exempt Purchase Certificate); TB-ST-770 (Recordkeeping Requirements for Sales Tax Vendors).

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao.htm
• Opinion: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales/24-38s.htm
• Printer-friendly PDF: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a24-38s.pdf

Original ruling text

Sales Tax
August 20, 2024
Office of Counsel

The Department of Taxation and Finance received a Petition for Advisory Opinion from [ redacted ] (“Petitioner”). Petitioner asks whether the sale of the memberships that allow purchasers to make discounted purchases would be subject to New York State and local sales taxes if the memberships are sold to tax exempt organizations. We conclude that sales of such memberships to exempt organizations are not subject to sales tax.

Facts

The Petitioner is an arts and crafts store with numerous locations throughout the United States. Petitioner sells annual memberships to customers for $39.95 a year. The annual membership fee entitles the customer to a percentage discount on each item purchased from Petitioner. Members also can apply for rebates (up to $25.00 per quarter) for classes and family entertainment.

Analysis

Membership fees that entitle the member to purchase tangible personal property or services at a discount are subject to sales tax because they are considered to be a prepayment for discounted property or services. See TSB-A-92(66)S; TSB-A-81(20.1)S.

Petitioner correctly acknowledges that its sales of annual memberships generally would be subject to sales tax. However, purchases by the entities described in Tax Law § 1116(a) are exempt from State and local sales taxes. Accordingly, sales of Petitioner’s annual memberships to customers that qualify as exempt organizations under Tax Law § 1116(a) would not be subject to sales tax, provided that the exempt organization is the direct purchaser and payor of record, and the organization provides Petitioner with a properly completed exempt organization certificate. See 20 NYCRR 529.7(h)(2). Petitioner must retain documentation of that exemption. See 20 NYCRR 533.2(d); TB-ST-770 – Recordkeeping Requirements for Sales Tax Vendors.

DATED: August 20, 2024

Mary Ellen Ladouceur
Principal Attorney

Note: An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.