When a country club charges members a separate capital assessment to pay for remodeling the club, and the club itself already pays sales tax to the contractors doing the remodeling, is the members' assessment also taxable, or does that create impermissible double taxation?

Plain-English summary

A 501(c)(7) country club planned a capital assessment on its members in July 1995 to cover the cost of remodeling a substantial portion of the club facilities, with the funds raised restricted to that remodeling project. The club was concerned that sales tax would effectively be paid twice on the same remodeling job — once when the club paid its remodeling contractors, and again when members paid tax on their capital assessment to the club.

The Comptroller's Tax Policy Division held that this is not improper double taxation, because sales and use tax is a transactions tax, and here there are two separate sales transactions with different purchasers and different taxable services:

1. Club to contractors: The service providers remodeling the country club must collect tax from the club on the total charge for remodeling nonresidential real property, under Tax Code Sec. 151.007(a) (defining "sales price").
2. Members to club: The country club must collect tax from its members on the capital assessment, because the club is selling a taxable amusement service to its members under Tax Code Sec. 151.005(3). This result is the same whether the club raises money for remodeling through higher membership dues or through a separate capital assessment — either way, members owe tax on the additional charges.

The letter also addressed a variation: what if the contractors are paid through an escrow account not controlled by the club, with members paying into that escrow account directly? The answer is the same. The club has contracted for a taxable remodeling service and owes a debt to the contractors; payments to the escrow account are still consideration paid by members for membership privileges at the club, and by paying into escrow, members are effectively paying a debt the club owes. That's still a taxable sale of amusement services by the club to its members.

Because no legal entity is paying tax twice on the same transaction — the club pays tax as purchaser of remodeling services, and members separately pay tax as purchasers of amusement services from the club — no exemption applies to either transaction, and the duplication the club was worried about isn't the kind of duplication the Tax Code addresses.

What this means for you

Country clubs and other member-owned membership organizations

If your club charges members a special assessment (as opposed to, or in addition to, regular dues) to fund capital improvements or remodeling, that assessment is taxable as consideration for amusement services, on top of any tax the club itself owes to the contractors doing the work. Routing the payment through an escrow account instead of paying the club directly does not change this result — the members are still treated as paying a debt the club owes for taxable services.

Members of clubs facing capital assessments

Expect to pay sales tax on a capital assessment used to fund club remodeling, even though the club separately pays sales tax to its contractors. The Comptroller does not view this as an improper "double tax," because you and the club are different taxpayers making different purchases.

Accountants and tax professionals advising membership organizations

When structuring or reviewing capital assessment billing for member clubs, keep the two transactions (club-to-contractor and member-to-club) conceptually and administratively separate. There is no statutory exemption in this ruling for either leg of the transaction, and using an escrow account for contractor payments does not exempt the members' contributions from tax.

Common questions

Q: Does my country club's capital assessment for remodeling get exempted from sales tax since the club already pays tax on the remodeling job?
A: No. The club owes tax on its purchase of remodeling services from contractors, and separately the club must collect tax from members on the capital assessment, since that assessment is consideration for taxable amusement services. There is no exemption for either transaction.

Q: If members pay the contractors directly through an escrow account instead of paying the club, does that avoid tax on the members' side?
A: No. The country club still owes tax on the remodeling services it contracted to purchase, and payments into the escrow account are still consideration paid by members for club membership privileges — effectively paying a debt the club owes. This remains a taxable sale of amusement services.

Q: Is it different if the club raises the money through higher membership dues instead of a separate assessment?
A: No. The result is the same either way — club members owe tax on the additional charges whether they come through increased dues or through a separate capital assessment.

Q: Why isn't this considered double taxation on the same remodeling job?
A: Sales and use tax is a transactions tax. Here there are two separate sales transactions with different purchasers (the club buying remodeling services; the members buying amusement services from the club) and different taxable services being sold. The same legal entity is not paying tax twice on the same transaction.

Citations and references

Statutes:

• Tex. Tax Code Sec. 151.007(a) (definition of "sales price")
• Tex. Tax Code Sec. 151.005(3) (sale of taxable services, including amusement services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9505L1348D02

Original ruling text

May 19, 1995

Dear *****:

Thank you for your May 8, 1995, letter concerning capital assessments
billed to members to cover the cost of remodeling a 501 (c)(7) country club.

In July, the country club will have a capital assessment to cover the
cost of remodeling a substantial portion of the club facilities. Funds
raised by the capital assessment are restricted to the remodeling project.

Your concern is that sales tax will be paid twice on the same remodeling
job. The country club pays tax directly to the service providers
remodeling the club and the members pay tax on their capital assessment
payment to the country club.

1) Is there a provision under which the capital assessment can be
exempted from sales tax?

Response: The service providers remodeling the country club are
required to collect tax from the country club on the total charge for
remodeling nonresidential real property. See Texas Tax Code Sec.
151.007(a) on the definition of "sales price." The country club must
collect tax from members for the collection of an assessment to cover
the costs of the remodeling. See Texas Tax Code Sec. 151.005(3) on the
sale of taxable services including amusement services. There is no
exemption for the separate transactions. The results are the same
regardless of whether the country club increases membership dues to
cover remodeling expenses or, as in this situation, chooses to charge a
separate assessment to cover the remodeling expenses. The club members
owe tax on the additional charges by the country club in either case.

2) If the service providers are paid through an escrow account not
controlled by the club and payments are made by members to the escrow
account to cover these costs, could the results be different?

Response: In this situation, the country club has contracted for a
taxable remodeling service and owes a debt to the service providers.
The country club owes tax on the remodeling services the club contracted
to purchase. The payments to the uncontrolled escrow account are still
consideration paid by club members for membership privileges at the
club. The country club owes a debt to the service providers for the
remodeling services. Rather than paying an assessment to the country
club directly, the members are paying debts owed by the club. This is a
taxable sale because the country club is providing taxable amusement
services in exchange for consideration in the form of members paying
debts owed by the country club.

3) If the capital assessment cannot be exempted, can the duplication of
tax on the remodeling be exempted?

Response: Sales and use tax is a transactions tax. In this situation,
there are two separate sales transactions with different purchasers and
different taxable services being sold. The same person (i.e., legal
entity) is not paying tax twice on the same transaction. We understand
that sales taxes, property taxes, income taxes, etc., are expenses that
sellers of taxable items pass on to their customers in the form of
increased prices. Of course, this also increases the sales tax
customers pay when purchasing taxable items. This is the nature of a
tax on transactions such as a sales and use tax. The only exemptions
that are available on sales of taxable items are those specified in the
Tax Code. In the situation described, there is no exemption that
applies to either the sale of remodeling services to the country club or
to the sale of amusement services to the club members.

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct
line is 512/475-0030. You may also write to Tax Administration,
Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9505105L