Were fees for memberships in a third-party discount buying service subject to Utah sales tax when the product-and-service retailer received part of each membership fee?

Plain-English summary

Utah Private Letter Ruling 00-003 said fees for a discount buying membership were taxable when the retailer of the discounted products and services received part of each membership fee and the underlying items were taxable.

The Commission treated that part of the fee as part of the purchase price of the products or services the membership allowed the customer to buy at a discount.

It distinguished an earlier advisory opinion in which the membership seller kept the entire membership price and none went to the retailer.

The arrangement

The requester's client sold memberships in a discount buying service operated by another company.

The membership gave the buyer access to a database of discounted products and services.

The client kept part of the membership price as compensation for obtaining the member. The ruling assumed the rest was remitted to the company that sold the discounted goods and services.

That third-party retailer did not keep inventory. It bought an ordered item from a supplier and directed the supplier to ship the item or provide the service to the member.

Membership fee as part of the sales price

The Commission referred to Advisory Opinion 94-012DJ for the principle that a fee entitling a buyer to discounted or free merchandise or services could be part of the sales price of that merchandise or service.

Under that analysis, the amount paid for a taxable discounted item included both:

• The amount paid for the item or service.
• The amount paid for the membership that allowed the customer to make the discounted purchase.

Why the earlier opinion differed

The requester relied on Advisory Opinion 96-178.

The Commission said that earlier opinion treated a discount membership as taxable only when the vendor or retailer of the discounted goods or services sold it.

But the Commission understood the earlier facts to mean that the membership seller kept the entire fee and none went to the retailer.

Here, the third-party retailer received part of every membership fee. That payment connected the fee to the later discounted purchases and made it part of their purchase price.

Holding

The Commission concluded:

• The retailer received part of each membership fee.
• That part of the fee was included in the purchase price of the discounted goods or services.
• If those goods or services were taxable, the discount membership fee was taxable too.
• The result differed from an arrangement in which the membership seller kept the entire fee.

What this means for you

Membership and discount-club operators

Track who receives each part of the membership fee. A retailer's share can connect the fee to taxable purchases made under the program.

Retailers

The ruling did not say every discount membership was taxable. Its conclusion depended on the retailer receiving part of the fee and selling taxable goods or services.

Accountants and tax professionals

Review the contracts and payment flow, not just the label “membership.” Determine what benefits the fee buys and whether the underlying products or services are taxable under current law.

Common questions

Q: Was the membership fee taxable?

A: Yes, if the discounted goods or services were taxable, because the retailer received part of each membership fee.

Q: Why did the retailer's share matter?

A: The Commission treated that payment as part of the purchase price for the retailer's discounted products or services.

Q: Did the ruling make every discount membership taxable?

A: No. It distinguished a prior arrangement in which the membership seller kept the entire fee.

Q: What if the discounted product or service was not taxable?

A: The ruling's conclusion was conditional: the membership was taxable if the goods or services were of a type subject to sales tax.

Key source language

• Sales-price principle: “membership fees which entitled the purchaser to discounted or free merchandise or services are considered taxable as part of the sales price of the merchandise or service provided.”
• Distinguishing fact: “the party that sells the discounted products and services receives a portion of each membership fee that COMPANY sells.”
• Conditional result: “if these goods and services are of a type subject to sales tax, the discount memberships sold by COMPANY are also taxable.”

Citations and references

• Utah Tax Commission Advisory Opinion 94-012DJ
• Utah Tax Commission Advisory Opinion 96-178

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 00-003
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

00-003

Response March 27, 2000

REQUEST LETTER

January 14, 2000

Re. Taxation of Discount
Membership Fees

Dear Mr. Marrelli:

We have a client that has
been contacted by the Auditing Division of the Tax Commission. After lengthy discussions with that division, we have been unable to reach a satisfactory resolution to the situation. At the recommendation of the Auditing Division, we are writing to request an official advisory opinion from the Utah State Tax Commission on the issue.

Our client, COMPANY, d/b/a
COMPANY, is in the business of selling memberships, solicited by independent contractors, in a discount buying service owned and operated by a third party, Company B. Our client retains a portion of the sales price of each membership sold as compensation for having obtained each new member. The purchase of the membership entitles the member to access a database of products and services available at discount prices. Company B is the retailer of the products and services ordered by the members. Company B maintains a database of products and services available through its suppliers. Company B does not maintain an inventory of theses goods and services. When a member orders an item, Company B purchases the item from its supplier and directs the manufacturer/supplier to drop‑ship the merchandise or provide the service to the member m Utah or wherever the member directs.

Our question is whether the
sale of the membership itself is subject to sales tax within your state. We have relied on Tax Commission Advisory Opinion, 96‑178, and the facts and circumstances found within, to advise our client that the transaction is exempt from sales tax. We find no significant differences in the fact patterns between those in the Advisory Opinion referenced and those of our client to warrant disparate treatment.

However, the Auditing
Division disagrees with our position and maintains that the transaction is properly subjected to Utah sales tax. We are enclosing copies of our previous correspondence with the Auditing Division for your review.

If you have any questions,
please feel free to call me at #####.

Very truly yours,

NAME

RESPONSE
LETTER

March 27, 2000

RE: Sales
Tax on Discount Membership Sales

Dear NAME,

You have requested an advisory opinion concerning the sale of discount memberships in Utah by your client, COMPANY. (ACOMPANY@). You specifically ask if the memberships sold by COMPANY are subject to Utah sales tax. By purchasing one of the memberships sold by COMPANY, the purchaser in entitled to buy products and services at discount from an Aunrelated@ company. You state that COMPANY retains a portion of the sales price of each discount membership as compensation. Accordingly, we assume that the remainder of the sales price for the discount membership is remitted to the company that sells the discounted products and services to the membership purchaser.

In Tax Commission Advisory Opinion 94-012DJ, the Tax Commission stated that membership fees which entitled the purchaser to discounted or free merchandise or services are considered taxable as part of the sales price of the merchandise or service provided. In essence, the purchase price of taxable products or services includes not only the amount paid or charged for the discounted product or service, but also the amount paid for a discount membership entitling the purchaser to make that purchase.

Tax Commission Advisory Opinion 96-178 stated that sales of discount memberships are only taxable if they are sold by the vendor or retailer who deals in the goods or services to which the discount applies. The facts presented in that opinion led the Commission to believe that the party selling the discounted membership kept the entire membership price, with none of it going to the party selling the goods and services. However, the facts you present involving COMPANY are different. You state that COMPANY does not retain the entire membership fee. Instead, the party that sells the discounted products and services receives a portion of each membership fee that COMPANY sells. As a result, the membership fees paid to COMPANY would be considered part of the purchase price for the products or services sold by the Aunrelated@ company. Accordingly, if these goods and services are of a type subject to sales tax, the discount memberships sold by COMPANY are also taxable.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

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