Is the fee for a video club membership that gets me cheaper movie rentals subject to sales tax?

Plain-English summary

Douglas J. Fideor, doing business as Village Mall Video, sells one-year video club memberships. A membership generally lets the buyer rent movies at a lower rate than a non-member. He asked whether the membership charge is subject to sales tax.

The Department said yes — the membership fee is taxable.

• Rentals are taxable sales. Section 1105(a) taxes the receipts from every retail sale of tangible personal property, and § 1101(b)(5) defines "sale" to include a rental, lease or license to use property for consideration.
• Consideration is broad. "Consideration" includes fees, rentals, "or any other charge that a purchaser, lessee or licensee is required to pay" (20 NYCRR 526.7(b)).
• Substance over label. Even though Fideor calls it a "membership," the substance of the charge is a prepayment for the rental of movies. So the membership fee — no matter what period it covers — is part of the taxable receipt (citing the Norman Eiger modified advisory opinion).

What this means for you

Calling a charge a "membership" doesn't make it tax-free. New York looks at what the payment actually buys. If a membership's real function is to secure or discount the rental of taxable property, the Department treats the fee as part of the taxable rental receipt.

Prepaid and bundled rental charges are taxable too. A lump-sum fee that entitles a customer to rent movies is a prepayment for a taxable rental, whether it is collected up front or per rental. Collect tax on the membership fee as well as on the individual rentals.

Know the difference for genuinely separate benefits. The result turns on the charge being tied to renting taxable property. A fee for something truly distinct and non-taxable could be treated differently — but a discount-rental "club" fee is taxable here.

Common questions

Q: The fee is for a membership, not a movie. Why is it taxed?
A: Because its substance is a prepayment for renting movies. New York taxes the receipts from taxable rentals, and the Department looks past the "membership" label to what the charge actually secures.

Q: Does it matter that the membership lasts a year?
A: No. The membership fee is part of the taxable receipt regardless of the period it covers.

Q: Do I also charge tax on each individual rental?
A: Yes. The individual movie rentals are taxable, and the membership fee that discounts or enables them is also part of the taxable receipt.

Citations and references

Statute:

• Tax Law § 1105(a) — taxes receipts from every retail sale of tangible personal property
• Tax Law § 1101(b)(5) — defines "sale" to include a rental, lease or license for consideration

Regulation:

• 20 NYCRR 526.7(b) — "consideration" includes fees, rentals and any other charge a purchaser, lessee or licensee must pay

Prior determination cited:

• Norman Eiger, State Tax Commission Modified Advisory Opinion (Dec. 3, 1985)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_1s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-86(1)S
Sales Tax
December 12, 1985

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

PETITION NO. S850131B

On January 31, 1985 a Petition for Advisory Opinion was received from Douglas J. Fideor,
DBA/Village Mall Video, 75 West Main Street, Webster, New York 14580.
The issue raised is whether the charge for a one year video club membership is subject to
sales tax.
Video club memberships generally enable a person who purchases such a membership to rent
movies at a lower rate than a person who does not purchase a membership. While not so stated in
the Petition, it is presumed that this type of membership is the subject of Petitioner's inquiry.
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."
Notwithstanding the fact that Petitioner characterizes the charge as being for a "membership",
the substance of the charge is that of a prepayment for the rental of a movie. The membership
charge, regardless of the period covered, is therefore part of the receipt subject to tax within the
meaning and intent of Tax Law 1101(b)(5) and 1105(a) as well as 20 NYCRR 526.7(b). See
Norman Eiger, State Tax Commission Modified Advisory Opinion, December 3, 1985.

DATED: December 12, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)