Were a nonprofit country club's membership dues exempt when members prepaid them before the October 1, 1991 repeal of the club exemption?

Plain-English summary

The Section 501(c)(7) country club asked how the repeal of its sales-tax exemption applied to dues paid before October 1, 1991. The Comptroller said dues received before that date remained exempt, with no limit on how far in advance a member could prepay. The club had to retain documentation showing that it received the money before October 1.

Recognizing the prepaid dues as income after October 1 did not make them taxable. The club's proposed procedures for placing payments in member accounts and amortizing them monthly were acceptable. Its reporting description was also acceptable if normal-cycle dues meant post-September billings paid on or after October 1 and "taxable income" meant taxable sales.

The attached internal analysis explained that the sale of an amusement service was tied to collection of club dues, so the payment date—not the later period of membership service—controlled this transition question.

What this means for you

For this 1991 effective-date issue, actual receipt before October 1 was decisive. Accounting recognition could occur later, but the club needed records that separated genuine pre-effective-date payments from later taxable dues.

Common questions

Was there a limit on how far ahead members could prepay? No. Did later income recognition trigger tax? No. What documentation mattered? Records proving receipt before October 1, 1991. Were post-September billings paid on or after October 1 treated the same way? No; the approved reporting description treated those as taxable sales.

Citations and references

• Texas Tax Code § 151.005(3) (the attached analysis's definition of an amusement-service sale)
• Texas Tax Code § 151.3101 (the amended amusement-services exemption discussed in the attachment)
• Internal Revenue Code § 501(c)(7) (the club classification stated in the letter)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9110L1137A04

Original ruling text

October 18, 1991

Dear *****:

Your letter, concerning the taxability of dues charged to members of your
country club which is classified as a Section 501(c)(7) organization, has
been assigned to me for review and response.

As the result of the recent repeal of the sales tax exemption for nonprofit
clubs such as yours, you wish the following questions to be addressed:

1) Member dues prepaid in advance of October 1, 1991 are not taxable. Is
there any limitation on how far in advance dues can be prepaid?

RESPONSE: Dues prepaid by a member of a nonprofit 501(c)(7) private club
before October 1, 1991 are exempted form sales tax. There is no limitation
on how far in advance a member may prepay his dues. You should retain
documentation in your files reflecting that the prepayment was received prior
to October 1.

2) If dues are prepaid in advance, does the amount of dues have to be
recognized as income in September, or can the dues be amortized as income
over the months that the dues are prepaid? (Our records are maintained on the
accrual basis).

RESPONSE: Since the dues prepaid in September are not taxable when received,
the fact that you recognize them as income after October 1, 1991, will not
render those dues taxable.

3) If the dues can be amortized over the months that they apply you advocate
setting up the following accounting procedures:

A. Upon receipt of the prepaid dues, an invoice will be prepared billing the
member for the amount of prepaid dues submitted and this amount will be
transferred to a separate account in that member's name and shown as a credit
balance. No income is recognized at this time. The member will no longer be
billed for dues on his regular monthly statement until the prepaid dues
have been fully amortized.

B. Monthly, these prepaid dues will be amortized, recognized as monthly income
and charged against the member's monthly prepaid dues ledger.

C. For sales tax purposes, only dues billed on a normal billing cycle will be
reported as taxable on the sales tax report. Dues income that can be readily
identified as prepaid dues income prior to 10/1/91 will not be reported as
taxable income.

Is this an acceptable accounting procedure to account for taxable monthly dues
and segregate the prepaid dues as nontaxable?

RESPONSE: The procedures described in A and B are acceptable. In statement C,
if "dues billed on a normal billing cycle" means billings for months after
September 30, 1991, where payment is received on or after October 1, 1991 and
if by "taxable income" you meant "taxable sales", then this statement is acceptable.

This opinion is based on the facts presented. If there are different or additional
facts, this opinion could change.

You may write to Tax Administration Division.

Sincerely,

Tax Administration Division

DATE: September 10, 1991
TO: DEBBIE ANGUS
FROM: **
SUBJECT: Country Club Dues/Memberships (For approval)

Sandi, Richard and I have reviewed microfiche, our class notes
(copy attached) from HB61 in 1987, audit update notes, and other
information as requested in last Thursday's meeting. I called
audit to ask if they had a procedure for this; they do not,
because most of the big country clubs are nonprofit. I am a bit
shocked in the answer we've found.

We asked about and discussed the application of tax to CC
memberships paid on 9/15/91 for 10/91 through 9/92 and those paid in
January for the 1991 year, etc. Are these memberships subject to
tax on October 1, 1991 when they are paid before 10/01/91 or does
tax have to be collected before 10/01/91 when it is for a period
after 10/01/91?

Surprisingly enough, the answer is No; 151.005(3) defines the sale
of an amusement service and ties it to the transfer of title or
possession of the ticket or other admission document or the
COLLECTION OF DUES OR A FEE by a club or organization for
membership...in the club or organization. (emphasis added) Unlike
other taxable services, the date of the sale determines whether
the tax is due not the date of the amusement service.

The application of "billing cycles" and "prepaid service fees" as
we discussed does not really come into play, because of the specific
definition of sale of an amusement service.

I spoke to Wanda, who feels it should be taxed; to Tom Poole, who
feels likewise, but suggested sending the question to the
"Legislative Issues Meetings"; to Mona, who thought it had already
been answered and recalled it was based upon the date of the sale.

The only relevant, but not directly on target fiche is listed below.

1030D09 - Letter, Bob Jeffcoat: Sales of admission tickets made
prior to July 1, 1990, wouldn't be subject to the 1/4% increase in
the state sales and use tax rate.

Other fiche read include: 1032A01, 1025D03, 1053D05 ( a TR for
** ), 645A03, and other fiche regarding electricity
billing cycles, etc.

DATE: September 13, 1991
TO: Lucy Glover
FROM: Debbie ANGUS

SUBJECT: Questions for Tax Issues Meeting HB 11 - Country Clubs

We have received a few questions regarding the amendments to Sec.
151.3101, Amusement Services Exemptions. One of the amendments
takes away an exemption for amusements provided by entities
"described by Section 501(c)(7), Internal Revenue Code of 1986."
These entities are described as social and recreational clubs.

Question 1.
Some of these groups (social clubs) do not have 501(c) status, but
are chartered under the Texas Nonprofit Corporation Act. We now
exempt their dues. Will we continue to do so, or will their dues
now be taxable? From what I understand, these groups fit the
description for 501(c)(7) status.

Question 2
Will membership dues to nonprofit fraternities/sororities (social
or service) be taxable effective October 1st? Examples include a
university social fraternity or a professional women's social
sorority. Some of these are 501(c)(7) organizations, some are
not.

Question 3
In many instances, dues are paid in advance. For example, a
member may have paid dues for the calendar year 1991 in January 1991.
Will tax be due on the dues applicable to October, November, and
December 1991? Also, nearly all clubs bill ahead one month, that
is, bill in September for October dues. The member may pay in
September or October. How should these be handled?

Background: The statute defines the sale of an amusement as "...
the collection of a dues or a fee..." The sale is not tied to
the performance of the amusement but rather the collection of
dues. The only relevant fiche we located is 1030D09, in which the
taxpayer was told that sales of admission tickets made prior to
July 1, 1990, wouldn't be subject to the 1/4% increase in the
state tax rate. Also, in the 9187 legislative training classes,
we taught that the tax was due when the admission was paid.