If a company calls its charges 'membership dues,' does that keep them out of Utah sales tax even though members are really paying for software access and an online database?

Plain-English summary

A company ("Company A") asked the Utah State Tax Commission to rule that its "membership fees" were exempt from sales tax. Company A gathered comparative grocery and household-product pricing data, let members download it through a computer modem using free software Company A provided, and also offered training and other member benefits. It argued the charges were just "annual membership dues to a private organization," which Utah Code excludes from taxable "admission or user fees" under § 59-12-102(1)(b), and pointed to an earlier ruling (91-017DJ) that had found no tax on a similar satellite-delivered subscription service because no tangible personal property changed hands.

The Commission didn't accept the "membership fee" label at face value. Looking at what members actually got, the Commission split the charge into two pieces:

• Use of Company A's canned (prewritten) software to access the data — this is a taxable sale/lease of tangible personal property under Rule R865-19S-92, so any charge tied to installing, maintaining, or using that software is taxable. (If Company A gave the software away for free, it — not the member — would owe use tax on the materials, like floppy disks, used to produce it, per Rule R865-19S-68.)
• The online service that let members access Company A's database — the Commission declined to read the sales tax statute broadly enough to reach these charges. Under 1997 law, charges purely for on-line access to information were not taxable, even while state and national tax groups were actively studying how to tax telecommunications.

What this means for you

Subscription and information-service businesses

Don't assume a name change controls your tax bill. Calling a charge "membership dues" doesn't work if what members are actually buying is bundled software plus data access — Utah looks at the true nature of the transaction. If your service requires clients to run software you provide (even for free), the value tied to that software is taxable; a pure data/content-access fee, standing on its own, may not be.

Software companies and SaaS providers

This is an early (1997) example of Utah's "canned software" rule: giving software away at no charge doesn't get you out of tax — it just shifts who owes it. The provider becomes the final consumer of the taxable inputs used to create/distribute that software.

Accountants and tax professionals

This ruling predates Utah's later, more developed "essence of the transaction" and bundled-transaction case law (e.g., B.J.-Titan Services v. State Tax Comm'n, 842 P.2d 22 (Utah 1992), and the 2000s-era PLRs on bundled memberships). It's useful as an early data point that the Commission has long looked through labels to substance, but the specific holding that online-only service charges aren't taxable reflects mid-1990s telecommunications tax policy, which has evolved considerably since — verify current law before relying on this piece of the analysis.

Common questions

Q: Does calling a charge a "membership fee" make it exempt from Utah sales tax?
A: Not by itself. The Commission looks at what the fee actually pays for. Pure annual dues to a private organization can be exempt, but if the "dues" really cover taxable items like software use, that portion is still taxable.

Q: Is online access to a database taxable in Utah?
A: Under this 1997 ruling, charges purely for on-line access to information were not taxable at the time. Telecommunications and digital-service tax rules have changed significantly since then, so this specific point should not be relied on today without checking current law.

Q: Does this ruling apply to my business?
A: No. It binds the Commission only for Company A and the facts described here. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes and rules:

• § 59-12-102(1)(b) (annual membership dues excluded from "admission or user fees")
• § 59-12-103(1)(f) (sales tax on admission or user fees)
• Utah Admin. Rule R865-19S-92 (canned/prewritten software is taxable tangible personal property)
• Utah Admin. Rule R865-19S-68 (free software: provider is the final consumer of production inputs)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/97-045.htm

Original ruling text

97-045

Response August 4, 1997

July 15, 1997

Re: Request
For Advisory Ruling

MAILING ADDRESS

POST OFFICE BOX II 655

SALT LAKE CITY. UTAH 64147 0655

On behalf of our client, COMPANY A, we request that the
Utah State Tax Commission issue an advisory ruling that, under the facts set
forth below, the receipt of membership fees are not taxable pursuant to the
Sales and Use Tax Act.

I. FACTS.

COMPANY
A. (the "Company"), is a private membership organization that has as
its long term business focus the procurement of a variety of informational,
training and benefit programs for its members.

The
Company's initial and primary business is to provide informational shopping
(grocery and household products) data by researching and gathering that data
from the various retail and wholesale establishments in the community. The results of that research are then
analyzed, summarized, compiled and made available to each member by computer
modem. Special computer software has
been developed by the Company which is made available to each member at no
cost. A member then accesses that data
by computer modem. The data, once
accessed and downloaded, can be manipulated by the member to satisfy its own
purchasing informational needs as dictated by its own circumstances.

The
Company further provides training benefits for members to teach them to be
prudent shoppers by more effectively using the shopping data made available to
them.

The
Company will provide benefit programs which will ultimately include many that
are typically available to members of other organizations and groups, such as
favorable accounting services, mortgage and real estate broker services, legal
services, eye care examinations, insurance programs, and special rates for
cruises and air fares.

The
Company earns its income from the initial set-up fees and the monthly
membership fees that each member pays.

II. DISCUSSION.

The
Company believes that no portion of its membership fees is subject to sales tax
based upon its interpretation of the exclusion definition provision of U.C.A.
�59-l2-l02(l) (b) which states that "'admission or user fees' does not
include annual membership dues to private organizations". Thus, membership dues (fees) paid to a private
organization, such as the Company, are not "admission or user fees"
which are subject to sales tax pursuant to the provisions of U.C.A.
�59-12-103(1) (f) . In addition, since
the Company's annual membership dues (fees) do not involve the use of any type
of recreation or other facility, the rulings of Tax Commission's Tax Bulletin
15-94 should not apply. Moreover, since
membership in the Company does not entitle members "to buy taxable tangible
personal property or services at a reduced or discounted rate", the
findings of the Tax Commission's Tax Bulletin 33-94 also should not apply.

The
Company's view that its membership fees are not subject to sales or use tax is further
supported by the Tax Commission's reasoning as set forth in its ruling
91-Ol7DJ. In that matter, an
out-of-state company provided electronic information to "subscribers"
by satellite transmission. Those
subscribers signed a contract, paid a one-time start-up fee, and paid monthly
fees. The Tax Commission determined
that no tangible personal property was being sold so none of the fees collected
were subject to sales tax. The Company
has a similar arrangement where its subscribers (members) sign a contract, pay
a one-time set-up fee, and also pay monthly fees. The only difference appears to be that in one case subscribers
receive information on a video screen by satellite transmission, while in the
Company's case, its subscribers (members) receive information on a computer
screen by telephonic modem. The same
principles that applied in ruling 91-Ol7DJ should apply in the Company's case.

The
Company recognizes that the Tax Commission has adopted its rule R865-195-33,
which defines "annual membership dues paid to a private organization"
to include those dues paid by members who, directly or indirectly, establish
the level of the dues. The Company also believes that the potential scope of
that rule is far broader than the statutes or other adopted Tax Commission
rules contemplate. In prior rulings
issued by the Tax Commission, "admissions and user fees" and
membership dues appear to be linked together under circumstances that involve
some type of facility that is to be used. In this context, the rule is more meaningful, especially when
applied to membership organizations such as country clubs, sportsman clubs,
etc., because the members of those organizations have available to them some facility for their use and
benefit. This is not so with the Company. It does not own any type of facilities for
use by members. It only provides
information and benefit data to its members in an intangible form by telephonic
modem.

The
Company also believes that the membership fees that it collects places it in similar
circumstances with companies such as COMPANY B, which charges a fee to maintain
distributorship or membership status, and which provides informational
materials to its members. The Company
is not aware of any sales or use tax being collected or remitted on COMPANY B'S
membership fees.

The
Company suggests that a review of the applicable statutes and Tax Commission
regulations and rulings supports the conclusion that its membership fees are
not subject to any sales or use tax since the Company is providing
informational data to its members in an intangible form by telephonic modem,
and that by doing so, it is not selling any tangible personal property on which
sales tax should be collected and remitted.

III. CONCLUSION.

In
conclusion, COMPANY A, suggests that there are sufficient facts and legal and
administrative precedents for the Tax Commission to rule on this request and to
conclude that the membership fees collected under the circumstances described
herein are not subject to sales or use taxes by the State of Utah.

If
you have any questions, or need further information, please feel free to
contact us. We would appreciate your
prompt attention to this matter.

Respectfully
submitted,

NAME

August
4, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory Opinion -
Application of sales tax to computer-generated output.

TO: NAME

We
have received your request for sales tax guidance pertaining to COMPANY A�s
charges for information. We understand that
COMPANY A is in the process of appealing a sales tax audit assessment. However, we also understand that during the
audit period in question, COMPANY A sold information to its customers in paper
form. From your description, and from
your discussions with the Auditing Division staff, COMPANY A apparently intends
to conduct its business in electronic form in the future. This opinion is issued to advise you as to
the application of sales tax to information delivered in electronic form, and
it does not resolve any issues pending on appeal.

At
the outset let us say that although you have labeled these charges �membership
fees,� we look beyond that label to the true nature of the transaction. From your description, it appears that
COMPANY A will be charging its clients for the use of canned software and a
subscription which entitles the client to on-line access to information in
COMPANY A�s databases. On that basis,
we offer the following tax guidance:

The
sale or lease of �canned� or prewritten software constitutes a sale of tangible
personal property for sales and use tax purposes. Payments under a licensing agreement are also taxable as a lease
or rental of the software package. Utah
Admin. Rule R865-19S-92. Any charges to
COMPANY A�s clients for installation, maintenance or use of the software are
taxable. If COMPANY A gives the
software to its clients at no charge, COMPANY A is considered the final
consumer of any taxable items used to produce the software, such as floppy
disks. Utah Admin. Rule
R865-19S-68. As the final consumer,
COMPANY A must pay sales tax on its purchase of these items, and may not
purchase them tax free under the resale exemption.

With
regard to charges for on-line services, the Tax Commission has declined to read the tax statutes so broadly as to
apply to these transactions. Although
the state legislature and many prominent tax groups across the country are
studying the tax issues surrounding the telecommunications field, charges for
on-line services are not currently taxable.

Please
let us know if you have additional questions.

For
the Commission,

Joe
B. Pacheco,

Commissioner