Is a members-only store's membership fee a nontaxable intangible right, or a taxable sale of the membership badge?

Plain-English summary

A members-only store (retail and wholesale, closed to the general public) charged an annual membership fee for a membership badge. The badge lets a member get into the store and buy merchandise. The fee is a fixed yearly amount, not credited to the member's account or applied toward any purchase. The store asked whether selling these memberships is a nontaxable transfer of an intangible right or a taxable sale of tangible personal property (the badge).

DRS applied the "true object" test. Whether sales tax applies turns on the true object of the transaction — "the intention of the parties" — from Dine Out Tonight, Inc. v. Department of Revenue Services. In that case, a dining club sold memberships that came with a card and a restaurant directory; the Connecticut Supreme Court held the true object was the intangible right to free meals, and the card and directory were merely "indicia" of that right and incidental aids to its exercise — not the object of the sale.

Same result here. DRS ruled the true object of the store's membership transaction is the intangible rights to enter the store and buy merchandise — not the sale of the plastic badge. "The purchase of a membership card in and of itself is of no value without the concomitant rights to be admitted to the company's store and to make purchases." So the membership fee is not a taxable sale of tangible personal property.

What this means for you

A membership fee is usually about the right, not the card

If customers pay a fee for the right to access something or transact (a store, a club, a plan), and any physical token — a card or badge — is just proof of that right, Connecticut generally treats the fee as a nontaxable intangible right, not a taxable sale of the token.

The "true object" test controls, not the paperwork

DRS looks at what the customer is really buying, not how the transaction is labeled. A card or badge that would be worthless without the accompanying rights points to an intangible-right transaction. (The same test can cut the other way — see, for example, DRS's medical-records ruling 91-22, where the true object was the copies themselves, making the sale taxable.)

Watch for fees that are really prepaid purchases

The analysis assumed the membership fee is not credited toward merchandise. A fee that is applied to or offsets purchases can look more like a prepayment for taxable goods, which could change the answer.

Common questions

Q: Does a warehouse/members-only store charge sales tax on its membership fee?
A: Under this ruling, no. DRS held the fee buys a nontaxable intangible right of access and purchase, not a taxable membership badge.

Q: Why isn't the plastic badge a taxable sale of tangible personal property?
A: Because the true object of the transaction is the intangible right; the badge is just evidence of that right and has no value without it.

Q: What test did DRS use?
A: The "true object" test from Dine Out Tonight, Inc. v. DRS — the sales tax follows what the parties really intended to buy and sell.

Q: Would it matter if the fee counted toward purchases?
A: It could. This ruling rests on the fee not being credited to the member's account; a fee applied to purchases might be analyzed differently.

Citations and references

Case law (as cited by the ruling):

• Dine Out Tonight, Inc. v. Department of Revenue Services, 210 Conn. 567, 556 A.2d 580 (1989)
• American Totalisator Co. v. Dubno, 210 Conn. 401, 555 A.2d 414 (1989); Columbia Pictures Industries, Inc. v. Tax Commissioner, 176 Conn. 604, 410 A.2d 457 (1979)
• United Aircraft Corporation v. Connelly, 145 Conn. 176, 140 A.2d 486 (1958); United Aircraft Corporation v. O'Connor, 141 Conn. 530, 107 A.2d 398 (1954)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 92-4

Original ruling text

Ruling 92-4, Sales and Use Taxes / Intangible Personal Property

Ruling 92-4

Sales and Use Taxes Intangible Personal Property

FACTS:

A company operates a retail and wholesale business that is not open to members of the general public. It is open only to those persons who pay a membership fee to obtain a membership badge. The membership identification badge enables a member to gain access to the store and entitles the member to purchase merchandise. The membership fee is a fixed amount for a one-year period and is renewable each year for the same fixed amount. The membership fee is not credited to the member's account, nor is it applied toward the purchase price of any item of tangible personal property.

ISSUE:

Whether the sale of memberships, as evidenced by membership badges, constitutes the nontaxable transfer of an intangible right or a sale of tangible personal property subject to sales and use taxes.

DISCUSSION:

Dine Out Tonight, Inc. v. Department of Revenue Services, 210 Conn. 567, 556 A.2d 580 (1989) involved the sale of membership privileges that entitled the member, who received a membership card and a directory of restaurants participating in the dining plan, to receive a free meal when a meal of equal or greater value was purchased at a participating restaurant.

"A conclusion as to whether the sales tax is applicable to the ... membership fees requires a determination of the true object of the transaction between the club and its members. American Totalisator Co. v. Dubno , 210 Conn. 401, 406, 555 A.2d 414 (1989); Columbia Pictures Industries, Inc. v. Tax Commissioner, 176 Conn. 604, 609-10, 410 A.2d 457 (1979); United Aircraft Corporation v. Connelly , 145 Conn. 176, 184-85, 140 A.2d 486 (1958); United Aircraft Corporation v. O'Connor , 141 Conn. 530, 537-38, 107 A.2d 398 (1954); Culligan Water Conditioning v. State Board of Equalization, 17 Cal. 3d 86, 96, 500 P.2d 593, 130 Cal. Rptr. 321 (1976); Federated Department Stores, Inc. v. Lindley, 8 Ohio St. 3d 35, 37, 456 N.E.2d 1209 (1983); Accountant's Computer Services, Inc. v. Kosydar , 35 Ohio St. 2d 120, 131-32, 298 N.E.2d 519 (1973)... The determinant is the intention of the parties." Dine Out Tonight Club, supra, at 571-572.

The Court determined that the true object of the transaction between the club and its members was not "the prospect of obtaining a card and a directory, items that would be of little or no value without the concomitant right to receive free meals... [The sine qua non of the transaction between the club and its members is the intangible right to receive free meals and access to the knowledge of an expanding list of restaurants that provide them... The membership card and directory are merely indicia of that intangible right and incidental aids to its exercise." Dine Out Tonight Club, supra , at 572.

RULING:

In the transaction between the company and its members involving the purchase of membership cards, the true object of the transaction is the purchase of intangible rights that enable a member to gain admittance to the company's store and to purchase tangible personal property in the company's store. The true object of the transaction is not the sale of tangible personal property in the form of a membership badge. The purchase of a membership card in and of itself is of no value without the concomitant rights to be admitted to the company's store and to make purchases of tangible personal property.

LEGAL DIVISION

March 31, 1992