09-43 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Taxpayer contends membership card is same as a coupon on merchandise

Topic

Collection of Tax

Property Subject to Tax

Taxable Transactions

Date Issued

04-27-2009

April 27,2009

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in response to your letter submitted on behalf of ***** (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued for the period October 2004 through August 2007. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a retail business that sells beauty products. In the audit, the Taxpayer was assessed tax on the sale of discount program memberships. The Taxpayer contends the assessment of tax on the discount program charges is erroneous. The Taxpayer contends the use of the membership card is similar to the use of a coupon that provides for a discount on merchandise.

DETERMINATION

Virginia Code § 58.1-603 provides that a tax is imposed "upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth, or who rents or furnishes any of the things or services taxable under this chapter . . . ."

Virginia Code § 58.1-602 defines sale 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 . . . ."

The Tax Commissioner has previously addressed situations similar to that of the Taxpayer's. In Public Document (P.D.) 04-105 (9/8/04), the taxpayer sold at wholesale, collectibles and giftware. The taxpayer developed a collectors' club for three of its product lines and sold memberships in these clubs. Members received a club kit that always included a miniature figurine in addition to other items [of tangible personal property]. Members also received a quarterly newsletter and were eligible to purchase members-only figurines, attend special shows, attend members-only events at collectors' conventions and attend collectors' cruises. The taxpayer contested the assessment of tax on the sale of memberships into the collectors' clubs. The taxpayer contended the true object sought by the club members was to join an exclusive club and obtain the intangible benefits associated with being a member. The taxpayer maintained that the club kits were of little value and were incidental to the sale of the memberships. The Tax Commissioner determined the tax was correctly assessed on the sale of the memberships into the collectors' clubs because the membership provided a number of tangible benefits to the members. Additionally, the taxpayer did not establish that the object sought by its members was to obtain the intangible benefits provided by the taxpayer. Accordingly, the assessment was upheld.

In P.D. 87-50 (2/26/87), the taxpayer was in the business of selling and renting movies and other video tapes to customers. The taxpayer offered video club memberships to its customers. While not specified in the taxpayer's letter, it was assumed that the economy membership entitled members to rent tapes at a lower rate than nonmembers and/or relieved the members of having to place a security deposit on each rental. The deluxe membership carried the same privileges as the economy membership, but also entitled members to a number of free tape rentals. The taxpayer requested a ruling regarding the application of the sales tax on the sale of its video club memberships. The Tax Commissioner deemed the deluxe membership taxable because the memberships entitled the members to free rentals of video tapes.

During the performance of the audit at issue, the audit staff reviewed the Taxpayer's website to become familiar with the benefits associated with the Taxpayer's discount program. According to the Taxpayer's website, membership in the program provides for discounts on qualifying purchases. The membership also entitles members to receive tangible personal property valued at $10 or less during their birthday month. The membership fees were held taxable in the audit because the Taxpayer's discount program entitled its members to receive tangible personal property.

The Taxpayer's discount program is similar to the collectors' clubs and video club discussed in the aforementioned public documents. Like the taxpayers in the public documents, the Taxpayer's customers pay a fee for membership and are entitled to receive tangible personal property as a benefit of membership.

The Taxpayer contends that its discount program does not entitle its members to receive tangible personal property. However, the Taxpayer has not proven otherwise. The Taxpayer states in its appeal that the terms of its discount program have changed, but the Taxpayer's website, during the audit period and afterwards, has indicated that the members receive a $10 gift as a benefit of membership. Additionally, any changes the Taxpayer made to the terms of the benefits after the audit period would not change the application of the tax to the membership charges during the audit period. The terms in place during the audit period are the terms that must be considered in determining whether the Taxpayer correctly applied the tax to the membership fees. Based on the facts presented, the Taxpayer should have charged and collected the sales tax on sales of its discount program memberships. Accordingly, the Taxpayer is liable for the tax as assessed in the audit.

Based on this determination, the assessment is correct. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days of the date of the bill. Please remit payment within 30 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *****, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-2241616083P

Rulings of the Tax Commissioner