Does a video-rental 'membership fee' that only entitles the customer to discounted rentals count as a taxable prepayment for those rentals?

Plain-English summary

This is a modified advisory opinion (December 3, 1985) that corrects TSB-A-81(20)S, the 1981 opinion issued to Norman Eiger, who rents movies on video cassette. In the original opinion, the Department had held that a "membership fee" — which entitled the payor to rent movies at a discounted rate — was not taxable. This modification reverses that conclusion.

The Department now holds the membership fee is taxable.

• The fee is really a prepayment for rentals. Members pay a lower rental price than non-members, and membership confers no rights or benefits other than reduced rental charges. In substance, the "membership fee" is a prepayment for the rental of movies, not a separate non-taxable charge.
• Consideration includes such fees. A "sale" under § 1101(b)(5) includes a rental for consideration, and 20 NYCRR 526.7(b) defines consideration to include "fees, rentals … or any other charge" a purchaser, lessee or licensee is required to pay. So the fee is taxable in its entirety.
• This follows the Credit Bureau case. In Matter of Credit Bureau of Central New York v. State Tax Commission, 105 A.D.2d 1042 (1984), the court held that membership fees paid to a credit-reporting agency were merely part of the members' cost of the (taxable) credit reports, since the reports were the only thing members received for the fee — so the fees were taxable prepayments. The same logic applies here.
• Prospective only. Under 20 NYCRR 901.4, a modification operates prospectively only. Eiger is not liable for tax on membership fees charged while the original opinion was in effect, but must begin collecting and remitting tax on such fees immediately upon receiving this modified opinion.

What this means for you

A "membership" that only buys discounts on taxable goods is a taxable charge. If the sole benefit of a membership is a lower price on rentals or other taxable sales, the Department treats the fee as a prepayment for those sales and taxes it. Real, separate benefits might change the analysis — but a pure discount club won't.

Substance controls over the label. Calling something a "membership fee" doesn't make it non-taxable. Look at what the customer actually receives. Here, and in the Credit Bureau case, the only thing received was cheaper access to taxable items — so the fee was taxed.

A modified opinion changes the rule going forward, not backward. When the Department modifies an advisory opinion under 20 NYCRR 901.4, it applies prospectively: you're protected for the period you relied on the original opinion, but you must comply with the new position once you receive the modification. If you rely on any advisory opinion, watch for later modifications like this one.

Common questions

Q: What changed from the original opinion?
A: The original TSB-A-81(20)S said the video-rental membership fee wasn't taxable. This modified opinion reverses that: the fee is a taxable prepayment for the rentals under § 1101(b)(5) and 20 NYCRR 526.7(b).

Q: Do I owe back tax for the period before the modification?
A: No. Under 20 NYCRR 901.4 the modification is prospective only. The taxpayer isn't liable for the fees collected while the original opinion was in effect but must collect tax on such fees once the modified opinion is received.

Q: Why is a discount-only membership fee taxable?
A: Because membership provides no benefit other than reduced rental prices, so the fee is in substance a prepayment for taxable rentals — the same reasoning the court applied in Matter of Credit Bureau of Central New York v. State Tax Commission (1984).

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — tax on retail sales; § 1101(b)(5) — definition of "sale," including rentals for consideration
• 20 NYCRR 526.7(b) — consideration includes fees, rentals and like charges; 20 NYCRR 901.4 — modified advisory opinions operate prospectively
• Matter of Credit Bureau of Central New York v. State Tax Commission, 105 A.D.2d 1042 (1984)
• Modifies: TSB-A-81(20)S (Sept. 10, 1981)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_20_1s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(20.1)S
Sales Tax
December 3, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
MODIFIED ADVISORY OPINION

PETITION NO. S810410A

This modifies an Advisory Opinion issued to Norman Eiger, 11 Frankie Lane, Old
Bethpage, New York 11804, dated August 25, 1981 (TSB-A-81(20)S) regarding the sales tax
status of membership fees paid to Petitioner which entitled the payor to rent movies at a
discounted rate.
The purpose of this modification is to correct the original opinion to provide henceforth
that such membership fees are subject to sales tax.
Section 1105(a) of the Tax Law imposes a sales tax on the "...receipts from every retail
sale of tangible personal property...." The term "sale" is defined, in pertinent part, in section
1101(b)(5) of the Tax Law as "[a]ny transfer of title or possession or both, exchange or barter,
rental, lease or license to use... for a consideration...." The Sales and Use Tax Regulations define
the term consideration to include monetary consideration and states that monetary consideration
includes "... fees, rentals... or any other charge that a purchaser, lessee or licensee is required to
pay." 20 NYCRR 526.7(b).
Petitioner is in the business of renting movies in the form of video cassettes. Prices of the
movie rentals differ for so-called "members" and "non-members" with members paying a lower
rental price than non members. Notwithstanding the fact that Petitioner refers to this charge as a
membership fee, the charge is, in substance, a prepayment for the rental of movies since no other
rights or benefits accrue pursuant to membership.
In the Matter of Credit Bureau of Central New York v. State Tax Commission, 105 AD2d
1042 (1984), the court determined that membership fees paid to a credit reporting agency were
merely part of the members' cost of the credit reports since the credit reports were the only things
provided to members by the credit bureau in return for the fee. The court concluded that such fees
are subject to tax since they are, in reality, prepayments which only entitled members to reduced
charges for the credit reports.
Since the membership fee charged by Petitioner entitles members only to a reduced rental
charge and since no other rights or benefits accrue pursuant to membership, the membership fee
charged by Petitioner is subject to tax in its entirety.

2
TSB-A-81(20.1)S
Sales Tax
December 3, 1985

Section 901.4 of Title 20 of the New York Code of Rules and Regulations concerning
advisory opinions states in part that: "... The Tax Commission may modify a previously issued
advisory opinion, but in such instance the modification shall operate prospectively only."
Accordingly, Petitioner is not liable for the collection of sales tax on membership fees charged
while the previously issued opinion was in effect. However, immediately upon Petitioner's receipt
of this modified opinion, sales tax must be collected and remitted on all such membership fees.

DATED: December 3, 1985

s/ANDREW F. MARCHESE
Chief of Advisory Opinions

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.