Are the annual membership fees, supplier commissions, and consulting charges earned by an operator of computer-equipment buying groups subject to New York sales tax?

Plain-English summary

David Zucker's company organizes local "buying groups" that pool members' purchases of computers and related equipment to unlock volume discounts from selected suppliers. Members pay an annual fee to cover Petitioner's administrative costs; Petitioner earns commissions from suppliers once the group's aggregate purchase volume clears a target threshold; and Petitioner separately sells consulting services (hardware installation, network design advice, software training, equipment maintenance/repair) billed at $75/hour plus costs. Crucially, Petitioner never takes title to the equipment, doesn't stock inventory, has no catalog or showroom, isn't affiliated with any supplier, and doesn't bill or collect payment for the equipment itself -- members pay suppliers directly, and suppliers bill sales tax on the equipment directly to the members. Petitioner asked whether each revenue stream is taxable.

The Department worked through three buckets. First, the annual membership fee: because the buying group isn't a "social or athletic club" (its material purpose is purchasing power, not social or athletic activity), § 1105(f)(2)'s club-dues tax doesn't apply -- and because Petitioner doesn't sell merchandise, collect payment, or act as purchaser of record (unlike two prior rulings, Costco Wholesale Corp. and John Buono, where the fee-charging entity DID handle merchandise sales), the fee also isn't a taxable prepayment for merchandise under § 1105(a). Petitioner's occasional, minimal, no-charge technical help about equipment selection didn't change that. Second, supplier commissions: these are agency fees for connecting the group to suppliers, not taxable receipts, following two established prior rulings on similar commission arrangements. Third, the consulting services split by TYPE: software training and network-design/configuration advice aren't among § 1105(c)'s enumerated taxable services, so they're untaxed; but installing, maintaining, or repairing hardware IS taxable under § 1105(c)(3) (unless the installed property becomes a capital improvement to real property, which wasn't the fact pattern here). Software installation/maintenance/repair gets its own carve-out exemption under § 1115(o) if reasonably and separately billed. The bottom line on consulting: if Petitioner bills a mixed job (part taxable hardware work, part untaxed training/design/software work) as ONE lump sum, the ENTIRE charge becomes taxable -- but if the nontaxable elements are reasonably and separately stated on the invoice, only the taxable hardware-service portion gets taxed.

What this means for you

Buying-group, group-purchasing, and co-op purchasing organizations

If you connect members to suppliers without taking title to goods, billing for goods, or collecting payment on suppliers' behalf, your membership fees and supplier commissions are likely untaxed under this reasoning -- following the contrast this opinion draws with Costco Wholesale and John Buono, where the fee-charger DID handle merchandise transactions. Keep your role strictly as a connector, not a seller, to preserve this treatment.

IT consultants and computer service providers billing mixed jobs

Separately and reasonably state your charges for taxable hardware installation/maintenance/repair from your untaxed training, network-design, and software-service charges on every invoice -- lumping them into one price makes the WHOLE charge taxable, even the parts that would be untaxed standing alone.

Common questions

Q: Why are the buying group's membership fees untaxed when similar-sounding membership fees in other rulings WERE taxed?
A: The key distinction is whether the fee-charging organization sells merchandise or collects payment for it. Petitioner here does neither -- members pay suppliers directly -- unlike Costco Wholesale and John Buono, where the entity charging fees also handled the merchandise transaction.

Q: Is hardware installation always taxable?
A: Not if the installed property, once installed, constitutes a capital improvement to real property -- that installation would be untaxed under a separate exception. This opinion's facts (equipment installation for a buying-group member) don't describe a capital-improvement scenario.

Q: What happens if a consulting invoice bundles hardware installation with software training under one price?
A: The entire lump-sum charge becomes taxable -- only reasonably and separately stated nontaxable elements escape tax.

Q: Can another buying-group operator rely on this exact result?
A: No. This advisory opinion binds the Department only as to David Zucker's business and the specific facts described; a business that takes title to goods, maintains inventory, or collects payment on suppliers' behalf should expect a different analysis.

Citations and references

Statutes and regulations:

• Tax Law § 1101(d)(13) (definition of "social or athletic club")
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(3) (tax on installing/maintaining/servicing/repairing tangible personal property)
• Tax Law § 1105(f)(2) (tax on club dues)
• Tax Law § 1115(o) (exemption for computer software services)
• 20 NYCRR § 527.11(b)(6),(7) (dues and club/organization definitions)

Prior rulings and cases referenced:

• Costco Wholesale Corporation, Advisory Opinion, Commissioner of Taxation and Finance, September 17, 1992, TSB-A-92(66)S
• John Buono, Advisory Opinion, Commissioner of Taxation and Finance, March 17, 1994, TSB-A-94(10)S
• Edna Jacobs, Advisory Opinion, Commissioner of Taxation and Finance, March 26, 1986, TSB-A-86(13)S
• Mitchell Sorkin, Advisory Opinion, Commissioner of Taxation and Finance, January 17, 1991, TSB-A-91(7)S
• Moore Business Forms, Inc., Advisory Opinion, Commissioner of Taxation and Finance, February 15, 1995, TSB-A-95(6)S
• State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software, TSB-M-93(3)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_53s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (53)S
Sales Tax
September 5, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S951121B

On November 21, 1995, a Petition for Advisory Opinion was received from David Zucker,
12 Cindy Lane, Highland Mills, New York 10930. Petitioner, David Zucker, submitted additional
information pertaining to this petition on May 31, 1996.
Petitioner, David Zucker, raises the following issues:

1. Whether the annual fee paid by members of local buying groups to Petitioner to defray
   administrative costs is subject to sales and compensating use tax.
2. Whether commissions paid to Petitioner by suppliers are subject to sales and compensating
   use tax.
3. Whether charges by Petitioner to members for consulting services such as installation of
   hardware, advice on designing or configuring entire network systems, software training or
   maintaining or repairing equipment are subject to sales and compensating use tax.
   Petitioner presents the following facts. The primary business activity of Petitioner's company
   consists of setting up local buying groups that, by combining their purchases of computers and
   related equipment, can take advantage of volume related discounts from selected suppliers.
   (Hereinafter, references to "Petitioner" shall include Petitioner's company.) Petitioner is the
   connection between the buying group and the suppliers. Members of the buying group pay an annual
   fee to defray Petitioner's administrative costs. As part of the service to the members of the local
   buying group, Petitioner may answer technical questions about the selection of a particular piece of
   equipment. This help is minimal in nature. Periodically, Petitioner will transmit consolidated orders
   of many small items with low individual dollar values to suppliers to maintain ordering efficiency.
   Membership in the buying group is open to any business without restriction. Petitioner does not have
   its own catalog, does not maintain a showroom or retail outlet and does not stock or store any
   merchandise for its membership.
   Petitioner is not affiliated with any supplier of the equipment purchased by the members of
   the group. Petitioner does not take title to any equipment purchased by the group. Any sales taxes
   on equipment purchased is billed directly to the purchasing member by the supplier. Payment for the
   equipment purchased is made by the purchasing member directly to the supplier.
   Petitioner earns a commission from the suppliers from which the members of the local
   buying group make purchases. A target threshold of volume is identified for the aggregate purchases
   made by the group as a whole. As that target threshold of volume is reached and exceeded,

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commissions are paid to Petitioner based on the excess volume. The incentive to join the buying
group is the opportunity to purchase "current model" computer hardware as differentiated from close
out merchandise or items that are "dumped" at a substantial discount below full retail.
Petitioner offers consulting services to the members of the local buying group. Consulting
fees are based on an estimate of the time needed to complete a job times a set rate per hour ($75).
Any out-of-pocket costs or subcontract labor costs if needed, are added to the base rate. The services
usually consist of installation of hardware, advice on designing or configuring entire network
systems, software training or maintaining or repairing equipment.
Section 1105(f)(2) of the Tax Law imposes sales tax upon the following:
(2) The dues paid to any social or athletic club in this state if the dues of an
active annual member, exclusive of the initiation fee, are in excess of ten dollars per
year ....
Section l101(d)(13) of the Tax Law defines the term "social or athletic club" to mean "(a)ny
club or organization of which a material purpose or activity is social or athletic."
Section 1105 of the Tax Law provides, in part:
Sec. 1105. Imposition of sales tax there is hereby imposed and there shall be paid a
tax ... upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
(1) The furnishing of information by printed, mimeographed or multigraphed
matter or by duplicating written or printed matter in any other manner, including the
services of collecting, compiling or analyzing information of any kind or nature and
furnishing reports thereof to other persons, but excluding the furnishing of
information which is personal or individual in nature and which is not or may not be
substantially incorporated in reports furnished to other persons, and excluding the
services of advertising or other agents, or other persons acting in a representative
capacity, and information services used by newspapers, radio broadcasters and
television broadcasters in the collection and dissemination of news, and excluding
meteorological services.
(2) Producing, fabricating, processing, printing or imprinting tangible
personal property, performed for a person who directly or indirectly furnishes

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the tangible personal property, not purchased by him for resale, upon which such
services are performed.
(3) Installing tangible personal property ... or maintaining, servicing or
repairing tangible personal property ... not held for sale in the regular course of
business, whether or not the services are performed directly or by means of coin­
operated equipment or by any other means, and whether or not any tangible personal
property is transferred in conjunction therewith ....
Section 1115(o) of the Tax Law states:
Services otherwise taxable under subdivision (c) of section eleven hundred
five or under section eleven hundred ten shall be exempt from tax under this article
where performed on computer software of any nature; provided, however, that where
such services are provided to a customer in conjunction with the sale of tangible
personal property any charge for such services shall be exempt only when such
charge is reasonable and separately stated on an invoice or other statement of the
price given to the purchaser.
In this case, Petitioner's local buying group is not a "social or athletic club" and therefore, the
annual membership fees are not subject to the imposition of sales tax under section 1105(f)(2) of the
Tax Law. See Section 527.11(b)(6),(7) of the Sales and Use Tax Regulations. When Petitioner
occasionally helps members by answering technical questions, which are de minimis in nature and
provided for no charge, about the selection of particular pieces of equipment, Petitioner is not
making a retail sale of an information service subject to tax. Unlike the persons who charged
membership fees in Costco Wholesale Corporation, Adv. Op. Comm. Taxation and Finance,
September 17, 1992, TSB-A-92(66)S and John Buono, Adv. Op. Comm. Taxation and Finance,
March 17, 1994, TSB-A-94(10)S, Petitioner does not sell any merchandise to the purchaser or collect
or remit payments from the purchaser. Petitioner is not affiliated with and does not formally
represent any supplier of the equipment purchased by group members. Petitioner is not the purchaser
or payor of record with respect to the equipment, and does not sell the equipment to group members.
Therefore, Petitioner's annual membership fees do not constitute prepayments for merchandise and
are not subject to tax under section l105(a) of the Tax Law.
Commissions paid to Petitioner by suppliers are in the nature of agency fees and are not
subject to sales and use taxes. See Edna Jacobs, Adv. Op. Comm. of Taxation and Finance, March
26, 1986, TSB-A-86(13)S and Mitchell Sorkin, Adv. Op. Comm. of Taxation and Finance, January
17, 1991, TSB-A-91(7)S.
Petitioner provides additional services to members of the buying group. These services
usually consist of installation of hardware, advice on designing or configuring entire network
systems, software training or maintaining or repairing equipment. Section 1105(c) of the Tax Law
imposes sales tax on certain enumerated services. Since software training and system design services
are not included within the services enumerated under section 1105(c) of the Tax Law, the receipts
from charges to customers for these services are excluded from tax. The

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services of installing, maintaining and repairing tangible personal property are taxable under Section
1105(c)(3) of the Tax Law. Installation services, however, are not subject to tax if the property when
installed constitutes a capital improvement to real property. See Sections l101(b)(9) and
ll05(c)(3)(iii) of the Tax Law. It should also be noted that installation, maintenance and repair
services performed on computer software are exempt from tax if the charges for such services are
reasonable and separately stated on the customer billing, as provided below. See Section 1115(o) of
the Tax Law.
The total receipts Petitioner receives from the sale of these additional services, which include
both taxable elements (i.e. installing, maintaining or repairing hardware) and nontaxable elements
(i.e. training, designing or configuring entire network systems and servicing computer software) will
be subject to the tax imposed under section 1105(c) of the Tax Law when the fees charged for these
services are billed to the customer as a lump sum. However, if Petitioner reasonably and separately
states the charges for the nontaxable elements and the charges for the nontaxable elements are
separately billed on an invoice or other document of sale given to the customer, the receipts from the
charges for the nontaxable elements will not be subject to the sales and use tax.
See Moore Business Forms. Inc., Adv. Op. Comm. of Taxation and Finance, February 15,
1995, TSB-A-95(6)S. (See also, STATE AND LOCAL SALES AND COMPENSATING USE
TAXES IMPOSED ON CERTAIN SALES OF COMPUTER SOFTWARE, TSB-M-93(3)S, Sales
Tax, March 1, 1993).

DATED: September 5, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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