Are membership dues a gated-community homeowners association charges for amenities like a golf course, swimming pool, and tennis courts taxable as amusement services?

Plain-English summary

A gated community of about 1,500 homes, with amenities including lakes, parks, meeting halls, parking lots, tennis courts, a golf course, and a swimming pool, was restructuring its governance. It had operated under two separate nonprofit charters: one an IRC Section 528 nonprofit corporation, the other a 501(c)(7) nonprofit corporation (a tax-code category for social clubs). The membership voted to fold both into the single Section 528 corporation effective January 1, 2000, with the 501(c)(7) entity ceasing to exist after December 31, 1999.

A prior advisor had told the association that "Club" dues (i.e., the 501(c)(7) entity's dues) were taxable as amusement services, while dues from the other (Section 528) entity were not. The association asked the Comptroller to confirm what would happen to the taxability of dues once only the Section 528 entity remained.

The Comptroller confirmed the earlier advice was correct as far as it went — it was premised on the 501(c)(7) club's continued existence — and that once only the Section 528 nonprofit corporation exists (as of January 1, 2000), its billing to residents for fees and dues covering the use, benefit, and enjoyment of the amenities will not be subject to sales tax as amusement services. This follows Rule 3.298(g)(1)(A), which exempts amusement services provided exclusively by a nonprofit organization, corporation, or association — except organizations described in IRC § 501(c)(7) — as long as proceeds don't benefit an individual (outside a purely public charity). Organizations under 501(c)(7) specifically, even though nonprofit, do not qualify for this exemption if they provide amusements.

What this means for you

Homeowners associations and property managers

The taxability of your association's amenity dues can turn entirely on which IRS nonprofit category your entity is organized under — a 501(c)(7) social-club designation makes amusement-service dues taxable, while an IRC § 528 homeowners-association designation (or other qualifying nonprofit categories under Rule 3.298(g)(1)(A)) does not. If your association is considering restructuring or merging entities, this letter shows the tax consequences of that choice can be significant.

Accountants and tax professionals

This letter is a clean illustration of Rule 3.298(g)(1)(A)'s carve-out within a carve-out: the general nonprofit amusement-services exemption applies broadly, but Congress's own 501(c)(7) "social club" category is expressly excluded from it, even though 501(c)(7) organizations are themselves nonprofits. Watch entity classification closely when advising HOAs and similar member-amenity organizations.

Common questions

Q: Are homeowners association dues for amenities like a pool or golf course taxable as amusement services?
A: Not if the association is a qualifying nonprofit other than a 501(c)(7) organization (such as an IRC § 528 nonprofit) and proceeds don't benefit an individual — Rule 3.298(g)(1)(A) exempts those dues.

Q: Why would a 501(c)(7) club's dues be taxable when other nonprofits' dues aren't?
A: Rule 3.298(g)(1)(A) specifically excludes IRC § 501(c)(7) organizations from the amusement-services nonprofit exemption, even though they are nonprofit entities.

Q: If our association merges a taxable 501(c)(7) entity into a nonprofit Section 528 entity, does that change our dues' tax treatment?
A: Based on this letter, yes — once only the qualifying non-501(c)(7) nonprofit entity remains and provides the amenities exclusively, its dues fall under the exemption.

Citations and references

Rule and statute:

• 34 Tex. Admin. Code § 3.298(g)(1)(A) (Amusement Services — nonprofit organization exemption)
• 26 U.S.C. § 501(c)(7) (IRC social club category, excluded from this exemption)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9910773L

Original ruling text

October 14, 1999

Dear **:

This is in response to your request for a ruling on the taxability of
memberships dues charged by a nonprofit homeowners association. Your fact
situation and questions are restated below followed by my response:

Reference our conversation pertaining to ASSOCIATION which consists of
approximately 1500 Home Owners, all of which are members of the Association. It
is a gated community, closed to the public. Non-members can only utilize the
facilities as a guest of a member.

The Association is a nonprofit association maintaining nominal ownership to
lakes, parks, meeting halls, parking lots, tennis courts, a golf course, a
swimming pool and other similar amenities. All members have the use, benefit
and enjoyment of these facilities equally.

Presently, the Association operates under two separate charters and bylaws.
**, Charter Number 722366, a 528 nonprofit corporation.
**, Charter Number 263751, a 501 (c) (7) nonprofit corporation.

The Membership voted and approved revised Bylaws that incorporated these two
corporations into the **, Charter Number 722366, a 528 non -profit
corporation, effective January 1, 2000. The name of the Corporation shall be
** The 501 (c) (7) ** Charter Number 263751 will cease
to exist after December 31, 1999.

Your accounting firm inquired to Mr. Al Van Allen regarding this subject, his
response stated that sales tax on amusement services was due.

Reviewing Mr. Al Van Allen's response, he referred to Club dues as taxable and
** dues as not taxable. As of January 1, 2000, only the 528
** Corporation dues will be in existence.

Please advise me if Amusement Service for this 528 corporation is taxable.

Response: Mr. Van Allen's response was premised on the Club's (a 501(c)(7)
organization) continued existence.

If as of January 1, 2000, only the IRC Section 528 non-profit **,
will be in existence, its billing to residents, of fees and dues for the use,
benefit and enjoyment of the amenities provided exclusively by the nonprofit
organization, will not be subject to sales tax as the sale of amusement
services. This is pursuant to the language provided in subsection (g) (1) (A)
of Rule 3.298 - Amusement Services, which provides that sales tax is not due on
the sale of an amusement service if the service is provided exclusively:

(A) by a nonprofit organization, corporation, or association, other than
organizations described by the Internal Revenue Code of 1986, sec. 501(c)(7),
if the proceeds do not go to the benefit of an individual, except as a part of
the services of a purely public charity. Initiation and membership fees and
other assorted fees charged by such a nonprofit organization, corporation, or
association are not taxable. Examples would include: organizations,
corporations, or associations recognized as nonprofit organizations under the
Internal Revenue Code, sec. 501(c), Kiwanis clubs, labor unions, and
ex-students organizations. Organizations described by the Internal Revenue Code
of 1986, sec. 501(c)(7), that provide amusements, do not qualify for this
exemption even though organized as nonprofit organizations;

Emphasis added.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy