Tax Type
Retail Sales and Use Tax
Description
Sales of club memberships from out of state dealer, true object
Topic
Credits
Exemptions
Taxability of Persons and Transactions
Date Issued
09-08-2004
September 8, 2004
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in reply to your letter in which you request a ruling on the application of the retail sales and use tax to sales of club memberships by ***** (the "Taxpayer"). I apologize for the unusual delay in the Department's response.
FACTS
The Taxpayer is an out-of-state dealer engaged in the wholesale sale of collectibles and giftware. The Taxpayer has developed collectors' clubs for three of its product lines and sells memberships in these clubs. Upon purchasing a membership, a club member receives a "club kit." The club kit always includes a miniature figurine in addition to other items (such as stationery, writing pens, lapel pins, candles, stuffed novelties and a decorative box or other container). In addition to receiving the club kit, members receive a quarterly newsletter and become eligible to: (1) purchase members-only figurines, (2) attend special shows, (3) attend members-only events at collectors' conventions, and (4) attend collectors' cruises.
You contend that the "true object" sought by club members in purchasing a membership is to join an exclusive club and obtain the intangible benefits associated with being a club member. You assert that the club kits are of little value in comparison to the total membership fee and as such, they are incidental to the sale of the memberships. To support your position, you cite Bullock v. Statistical Tabulating Corp., 549 S.W.2d 166 (Tex. 1977) and MCI Airsignal, Inc. v. State Board of Equalization, 1 CA4th 1527, 2 Cal. Rptr. 2d 476 (Cal. App. 1991).
Further, you contend that the Taxpayer is not subject to the use tax on club kits shipped to Virginia club members. If, however, the Taxpayer is subject to the use tax, you contend that it is entitled to a credit for tax paid to another state.
RULING
Services versus Sale
Virginia Code § 58.1-609.5(1) provides an exemption from the sales and use tax for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made ...."
Title 23 of the Virginia Administrative Code 10-210-4040 addresses the tax on services and in Section D provides that "[i]n order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined."
In Bullock, a taxpayer encoded raw data on punch cards and provided the cards to its customers. It was ruled that the transaction did not constitute the sale of tangible personal property because the "true object" of the transaction was not the card but the purchase of the data. In MCI Airsianal, Inc., a taxpayer engaged in the business of providing telephone paging services did not owe sales or use tax on the transfer of paging devices to its customers because the "true object" of its contracts was the provision of paging services.
In this instance, the Taxpayer provides a number of tangible benefits to its members. Even if the "true object" test were applied, the Taxpayer has not established that the object sought by its club members is to obtain the intangible benefits it provides. For example, the membership application brochure, as well as the Taxpayer's web site, advertises the items in the club kits and promotes the kits as higher in value than the cost of the membership. The only intangible benefit mentioned in the brochure is the opportunity to purchase members-only figurines.
In addition, prospective members may apply for membership in one of three ways. They may obtain a membership brochure from a retailer or receive one in the mail from the Taxpayer or apply via the Taxpayer's web site. Because neither the brochure nor the web site states all of the intangible benefits, it is not clear whether a prospective member is aware of such benefits prior to submitting the membership application. Finally, one of the membership clubs is geared toward children and the club kit offers items specific to children. In this instance, it would seem that the tangible items would appeal to children, more than any intangible benefit.
Virginia Code § 58.1-603 levies and imposes the sales tax "upon every person who engages in the business of selling at retail or distributing tangible personal property." "Sale" is defined in Va. Code § 58.1-602 as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration ...." Based on these authorities and for the reasons stated, I find that the Taxpayer's sales of club memberships constitute a sale of tangible personal property and is taxable. This ruling is consistent with a prior ruling of the Tax Commissioner in Public Document 87-50 (2/26/87). In that instance, the Tax Commissioner concluded that the fee for a video club membership was taxable because the membership included free tape rentals.
Use Tax - Club Kits
The tax applies to the sales of membership to the Virginia club members. As such, the Taxpayer is not subject to the use tax on the cost of the club kits that are shipped to such members in Virginia.
Credit for Taxes Paid
Virginia Code § 58.1-611 provides that "[a] credit shall be granted against the taxes imposed by this chapter with respect to a person's use in this Commonwealth of tangible personal property purchased by him in another state." Emphasis added. Because it has been determined that the Taxpayer is making taxable sales, it makes no use of the club kits shipped to Virginia and is not entitled to a credit for taxes paid to another state in regard to the club kits.
Notwithstanding the above, the Taxpayer exercises a taxable use over the membership brochures that it provides to prospective members in Virginia. In accordance with the statute, the Taxpayer may be entitled to a credit for taxes legitimately paid to another state on the brochures.
The Code of Virginia sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this ruling, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/36012J
Rulings of the Tax Commissioner