Are receipts from renting movies taxable, and is a membership fee that only buys the right to rent at a discount subject to sales tax?

Plain-English summary

Norman Eiger planned to open a retail store renting movies. Customers who paid a membership fee would be able to rent movies at a lower price than non-members. He asked whether sales tax was due on (1) the movie-rental receipts and (2) the membership fee.

The Department's 1981 answers were: rentals taxable, membership fee not — but the second answer was later reversed.

• Movie rentals are taxable. A "sale" under § 1101(b)(5) includes a rental, so receipts from renting movies are subject to sales tax under § 1105(a).
• The membership fee (as decided in 1981) was not taxable. The Department treated the fee not as a receipt from a sale of tangible personal property, but as a payment for the right to make certain purchases at a discount — and therefore not subject to tax.
• That membership-fee holding was later reversed. In TSB-A-81(20.1)S (December 3, 1985), the Department modified this opinion and held that such a membership fee is in substance a prepayment for the movie rentals — because membership confers no benefit other than reduced rental prices — and is taxable in its entirety. The modification operates prospectively only.

What this means for you

Renting out goods is a taxable sale. Whether it's movies, tools or equipment, a rental is a "sale" under § 1101(b)(5), and the rental receipts are taxable. Don't treat rental income as untaxed just because you keep ownership of the item.

Be careful relying on the "membership fee" part of this opinion — it no longer holds. In 1981 the Department said a discount-club fee wasn't taxable. It changed course in 1985: if the only thing a "membership" buys is cheaper rentals, the fee is a taxable prepayment for those rentals. A charge that looks like a fee but functions as prepayment for taxable goods or rentals is generally taxable.

Substance beats labels. Calling a charge a "membership fee" doesn't decide its tax treatment. The question is what the customer actually gets for it. If they get nothing but a discount on taxable rentals, expect the fee to be taxable too — see the companion modified opinion, TSB-A-81(20.1)S.

Common questions

Q: Are my movie (or other goods) rental receipts taxable?
A: Yes. A rental is a "sale" under § 1101(b)(5), so the rental receipts are subject to sales tax.

Q: Is a membership fee that only gets customers a rental discount taxable?
A: Under this 1981 opinion, it was not — but the Department reversed that in TSB-A-81(20.1)S (1985), holding the fee is a taxable prepayment for the rentals. Follow the later, modified opinion going forward.

Q: Which opinion controls now?
A: For the membership-fee question, the modified opinion TSB-A-81(20.1)S controls (prospectively). This original opinion still correctly states that the movie-rental receipts themselves are taxable.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1101(b)(5) — definition of "sale," including rentals
• Related: TSB-A-81(20.1)S (Dec. 3, 1985) — modified opinion reversing the membership-fee holding (prospectively)

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_20s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-81 (20) S
Sales Tax
September 10, 1981

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810410A

On April 10, 1981, a Petition for Advisory Opinion was received from Norman Eiger, 11
Frankie Lane, Old Bethpage, New York 11804.
The issues raised by Petitioner are whether sales tax is due on (1) receipts from the rental of
movies, and (2) a membership fee which entitles the payor to rent movies at a discounted rate.
Petitioner states that he intends to open a retail store dealing in the rentals of movies.
Petitioner will set up a "membership list" of customers who, upon payment of a membership fee, will
be permitted to rent movies at a lower price than that available to non-members.
Section 1105(a) of the Tax Law imposes the State sales tax on the ". . .receipts from every
retail sale of tangible personal property . . . . " The term "sale" is defined, in Section 1101(b)(5) of
the Tax Law, to include rentals. Accordingly, Petitioner's receipts from the rental of movies are
subject to sales tax.
The membership fee is not a receipt from a sale of tangible personal property. It is, rather,
a payment for the right to make certain purchases at a discount. Such membership fee is, accordingly,
not subject to tax.

DATED: August 25, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR