Is the sales tax on club initiation fees due when a golf club sells founding memberships before the golf course and clubhouse are even built?

Subject

, is whether the sales tax on dues paid to any social or athletic club imposed by Section 1105(f)(2) of the Tax Law becomes due on membership subscriptions currently being raised by Petitioner.

What this means for you

Hudson National Golf Club was a not-for-profit corporation raising roughly $26.3 million to buy land, design, and build an 18-hole golf club in Westchester County -- but at the time of this opinion, the club didn't exist yet: no golf course, no clubhouse, no athletic or dining facilities of any kind, with completion expected around 1996. To fund construction, the club planned two rounds of "General Membership" sales -- first 40-65 memberships at $75,000 each, later another 185-220 at $100,000+ each -- with buyers gaining full use rights to the club's facilities once built, and future membership only opening up through vacancies.

New York taxes club "dues" over $10/year and separately taxes any club "initiation fee" over $10, defined broadly as any payment required as a condition of membership, regardless of who it's paid to or how it's structured (loan, stock, bond, etc.). The Department found that these pre-construction membership payments squarely fit the initiation-fee definition -- they're required before anyone can become a General Member -- and that nothing in the law requires the club's physical facilities to already exist for a payment to count as an initiation fee. So Hudson National's founding-membership sales, made years before the course opened, were subject to sales tax as initiation fees at the time of sale.

Q&A

Q: We're selling founding/charter memberships in a club or facility that hasn't been built yet -- are those payments taxable?
A: Per this opinion, yes -- an initiation fee is taxable as soon as it's required as a condition of membership, with no requirement that the club's facilities already be operational or even exist.

Q: Does it matter that our membership certificates are structured as loans, bonds, or stock rather than a straight cash payment?
A: No -- Tax Law § 1101(d)(7)'s initiation-fee definition expressly covers any payment, contribution, or loan required as a membership condition, "whether or not such payment... is evidenced by a certificate of interest or indebtedness or share of stock."

Q: What's the difference between the taxable "initiation fee" here and ordinary annual "dues"?
A: Both are taxed under Tax Law § 1105(f)(2) once over $10, but they're analyzed separately -- this opinion addressed the one-time membership-purchase payment as an initiation fee; the club's future annual operating dues (also anticipated to exceed $10) would be taxed separately as ordinary club dues once the facility opens.

Citations

• Tax Law § 1105(f)(2) -- imposes sales tax on club dues over $10/year and on initiation fees over $10, regardless of dues amount.
• Tax Law § 1101(d)(7) -- defines "initiation fee" broadly as any payment, contribution, or loan required as a condition of membership.
• 20 NYCRR § 527.11(b)(4) -- implements the initiation-fee definition, with an example holding a required $50 bond purchase for membership is a taxable initiation fee.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a94_48s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (48)S
Sales Tax
October 18, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940811B

On August 11, 1994 a Petition for Advisory Opinion was received from Hudson National
Golf Club, Inc., 71 Arch Street, Greenwich, Connecticut 06830.
The issue raised by Petitioner, Hudson National Golf Club, Inc., is whether the sales tax on
dues paid to any social or athletic club imposed by Section 1105(f)(2) of the Tax Law becomes due
on membership subscriptions currently being raised by Petitioner.
Petitioner is a New York not-for-profit corporation organized to finance and construct a golf
club and 18-hole golf course (the "Club") in the Village of Croton-on-Hudson in Westchester
County, New York. The total capital required to purchase the Club property, design and construct
the Club and provide operating capital is approximately $26,300,000.
The Club does not presently exist and no athletic, dining for other facilities are currently
available to purchasers of membership interests. If fundraising and construction proceed according
to current plans, the Club will open to members during the summer of 1996.
Petitioner is authorized to issue an aggregate of 370 membership interests divided into two
classes. The first class of 10 memberships has full voting rights and the second class of 360
memberships ("General Memberships") has only limited rights to vote as a class for the election of
a minority of the members of Petitioner's board of directors and on certain major transactions. Once
the Club has been constructed, holders of General Memberships will have rights to use all Club
facilities. After issuance of the General Memberships, no new members will be admitted unless
there is a vacancy caused by the death, resignation or default of a current member. It is expected that
vacancies will be filled only by persons who have been recommended by current Club members.
Petitioner is currently offering a minimum of a 40 and a maximum of 65 General
Memberships at $75,000 per Membership. The proceeds of this offering will be used to acquire the
land on which the Club will be built, begin construction of the golf course and club house facilities,
pay for infrastructure and road development and pay golf course and club house designers. The
proceeds of this offering (estimated to be $3 million to 4.8 million) will not be sufficient to finish
construction of the Club.

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TSB-A-94 (48)S
Sales Tax
October 18, 1994

After completion of the preceding offering, Petitioner plans to offer 185 to 220 additional
General Memberships at $100,000 or more per membership, the proceeds of which will be used to
complete the construction of the Club. These funds (estimated to be 17.8 million to 20.2 million)
will be used to construct greens, complete course grading, install irrigation equipment, lay sod,
complete the clubhouse and driving range, and complete infrastructure development. In lieu of
selling this number of General Memberships, Petitioner may seek to raise financing through
borrowing. Only after these funds have been raised and applied to finish construction will the Club
be a useable athletic facility.
Once the Club is operating, Petitioner expect that annual membership dues in excess of ten
dollars will be assessed on all General Memberships to pay annual operating expenses.
Section 1105(f)(2) of the Tax Law imposes sales tax upon "[T]he dues paid to any social or
athletic club in this state if the dues of an active 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 1101(d)(7) of the Tax Law defines "Initiation fee", for the purposes of Section
1105(f)(2) of the Tax Law as "[A]ny 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."
Section 527.11(b)(4) of the Sales and Use Tax Regulations states:
(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.
Example 12: As a condition necessary for membership in a social club, an applicant
is required to purchase a $50 bond from the club. This purchase is an initiation fee
subject to tax.
In the instant case the payment made for a General Membership constitutes the payment of
an initiation fee in accordance with the meaning and intent of Section 1101(d)(7) of the Tax Law and
Section 527.11(b)(4) of the Sales and Use Tax Regulations. The fact that the facilities of the club
are not open and available for use by the members at the time the members make the payment for
a General Membership does not change the character of the payment, since an initiation fee is merely
any payment required as a condition precedent to membership in the club. There is no requirement
in the law or regulations that a physical plant has to exist in order for the payment for the
membership to be considered an initiation fee.

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TSB-A-94 (48)S
Sales Tax
October 18, 1994

Accordingly, sales of General Memberships by Petitioner prior to the construction of the club
facilities are subject to the sales tax imposed by Section 1105(f)(2) of the Tax Law.

DATED: October 18, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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