Were a country club's golf and social equity memberships and retained resale amounts taxable?

Subject

Equity Memberships in a Not For Profit Country Club

Plain-English summary

The club's $85,000 golf and $30,000 sports-social equity memberships were not subject to sales tax on the stated facts. The payments represented ownership capital, were separately accounted for, were not operating revenue, did not replace later dues or user fees, and were not used for operating expenses.

The entire equity sales price shared that treatment, including the amount retained by the club when a membership was resold, because the retained amount became paid-in capital. Those retained proceeds could not be spent freely; they had to remain capital and be used for capital expenditures.

What this means for you

Member voting and liquidation rights, separate periodic dues, refund mechanics, accounting, and actual use of proceeds supported treatment as capital rather than taxable club dues or fees.

Common questions

Q: Were the golf and social equity contributions taxable? No.

Q: Was any part of the equity price taxable? Not as described in the ruling.

Q: Could retained resale proceeds fund operations? No; they had to fund capital expenditures.

Citations and references

• Fla. Stat. § 212.02 — admissions and definitions
• Fla. Stat. § 212.03 — tax-rate provision cited in the ruling
• Fla. Stat. § 212.04 — club dues and fees
• Florida Department of Revenue v. John's Island Club, Inc., 680 So. 2d 475 (Fla. 1st DCA 1996)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 00A-055

Original ruling text

SUMMARY

QUESTION 1: Are the sales of equity membership
certificates currently stated at $85,000 and $30,000 for
Golf and Sports Social memberships, respectively, subject
to sales tax?

ANSWER - Based on Facts Below: No. Sales of the described
equity memberships are not subject to tax when the payments
are separately accounted for and not recorded in an
operating revenue account by the taxpayer; not paid for the
right to use the taxpayer's recreational, physical fitness
or other facilities or equipment without subsequent
periodic payments; not used to effect a decrease in user
fees or periodic membership dues, and; not used to pay for
the operating expenses of the organization.

QUESTION 2: Is any portion of the sales price of equity
membership certificates subject to sales tax?

ANSWER - Based on Facts Below: No. Sales of the described
equity memberships are not subject to tax when the payments
are separately accounted for and not recorded in an
operating revenue account by the taxpayer; not paid for the
right to use the taxpayer's recreational, physical fitness
or other facilities or equipment without subsequent
periodic payments; not used to effect a decrease in user
fees or periodic membership dues, and; not used to pay for
the operating expenses of the organization. This applies
to the entire sales price of the equity membership,
including the percentage of the payment not refunded to the
previous member but instead retained by the club, since
that retained percentage becomes paid in capital.

QUESTION 3: Can the Club's cash proceeds from the equity
membership commission be expended at the Club's discretion
without risk of triggering sales tax on such proceeds?

ANSWER - Based on Facts Below: No. They must be accounted
for as paid in capital as described, and used for capital
expenditures.

QUESTION 4: Must cash proceeds from the Club's equity
membership resale commission be strictly designated to a
capital asset fund to escape sales tax liability?

ANSWER - Based on Facts Below: Yes.

Oct 05, 2000

Re: Technical Assistance Advisement 00A-055
Equity Memberships in a Not For Profit Country Club
Sections: 212.02, 212.03 212.04, F.S.
Petitioner: XXX (herein "Club")
FEI: XX

Dear :

This letter is a response to your petition dated October 15,
1999, for the Department's issuance of a Technical Assistance
Advisement ("TAA") concerning the above referenced party and
matter. Your petition has been carefully examined and the
Department finds it to be in compliance with the requisite
criteria set forth in Chapter 12-11, F.A.C. This response to
your request constitutes a TAA and is issued to you under the
authority of s. 213.22, F.S.

FACTS

The following is a replication of the facts as portrayed in your
letter, which facts form the basis for the determination set
forth herein:

The Club is a member-owned private club that was
incorporated on November 1, 1985[,] as a Florida not-forprofit corporation pursuant to Chapter 617, F.S. The Club
facilities include, but are not limited to, three
championship golf courses, related practice facilities, two
maintenance facilities, three clubhouses and related

facilities, nineteen tennis courts, golf and tennis pro
shops, fitness facilities, a swimming pool, golf cart
storage facilities and a croquet court. On January 15,
1986, the Club was acquired by the equity members from the
original developer who retained all unissued memberships to
sell with the remaining undeveloped lots within the
[Community]. The Developer is entitled to receive 100% of
the proceeds collected from the initial issuance and sale
of an Equity Membership as consideration for the members'
purchase of the Club facilities. As of the date of this
filing, the Developer holds 31 remaining unissued equity
memberships.

Under the terms of the Club's By-Laws,... an equity member
shall not sell or otherwise transfer a membership other
than to the Club. The Club acts as the exclusive agent to
facilitate the resale of an equity membership. The total
number of Equity Memberships currently allowed under the
By-Laws shall not exceed 1,125 Golf memberships and 257
Sports Social memberships. The Club will be obligated to
repurchase an equity membership only if an individual, who
is acceptable to the Club, is willing to acquire the
retiring member's membership or a higher category of
membership, and has paid the required membership
contribution. The Club may, but shall not be required to,
repurchase a membership prior to another individual
acquiring a member's membership. Owner members may arrange
through the Club for the reissue of a membership
certificate to the Buyer of the member's residential unit
or lot in the [Community], if the Buyer has been approved
for membership in the Club. Each equity member is required
to pay annual dues to use the Club Facilities.

Currently, new equity memberships sell for $85,000 and
$30,000 for a Golf membership and a Sports Social
membership, respectively. In accordance with Article X,
Section 7.b., of the Articles of Incorporation,... for
those equity memberships issued on or prior to June 30,
1998, the amount to be paid to the retiring equity member
shall be the greater of: (i) the membership contribution
actually paid by the retiring Equity Member or (ii) eighty

percent (80%) of the amount of the membership contribution
then charged by the Club for the retiring member's category
of membership. For those equity memberships issued on or
after July 1, 1998, the amount of the membership to be paid
to the retiring equity member shall be seventy percent
(70%) of the amount of the membership contribution then
charged by the Club for the retiring equity member's
category of membership.

Every equity member who entered the Club through June 30,
1998[,] is guaranteed to receive no less than 100% of their
originally paid equity joining contribution. For those
members who acquired an equity position after June 30,
1998, they have the opportunity to recover 100% of their
respective initial equity membership contribution. As
exclusive broker upon resale of an equity membership, the
Club is entitled to charge a commission to facilitate the
equity membership resale transaction of either up to 20% on
memberships acquired through June 30, 1998[,] and 30% on
equity memberships purchased and resold thereafter. In any
case, the equity resale commission is not a cost in
addition to the equity joining contribution but rather
designated proceeds retained by the Club for facilitating
the resale of an equity membership. The Club's policy
requirement is to strictly appropriate the equity resale
commission monies to a designated capital asset fund. As
such, any and all equity resale commission proceeds
received by the Club are treated as additional paid-in
capital in accordance with generally accepted accounting
principles. Importantly, the Club does not utilize such
proceeds to fund operating costs or for any manner other
than solely to fund fixed asset (capital) acquisitions.

Pursuant to Article X, Section 4 of the By-Laws, equity
members have voting rights. Golf members receive two votes
and Sports Social members receive one vote. Article V of
the Articles of Incorporation further provides that the
Club shall have no capital stock and shall be composed of
members rather than shareholders. Article X, Section 6
further provides that the Club is required to issue such
membership certificates to evidence the ownership of a

respective equity membership in the Club.... Pursuant to
Article XVIII of the By-Laws, in the event of dissolution
or final liquidation of the Club, all of the property and
assets of the Club, after payment of its debts, shall be
distributed only among equity members and in proportion to
the value of their memberships.

REQUESTED ADVISEMENT

The following questions were posed in your request:

1. Are the sales of equity membership certificates currently
   stated at $85,000 and $30,000 for Golf and Sports Social
   memberships, respectively, subject to sales tax?

2. Is any portion of the sales price of equity membership
   certificates subject to sales tax?

3. Can the Club's cash proceeds from the equity membership
   commission be expended at the Club's discretion without risk of
   triggering sales tax on such proceeds?

4. Must cash proceeds from the Club's equity membership resale
   commission be strictly designated to a capital asset fund to
   escape sales tax liability?

Discussion, Analysis, and Conclusion of Law

Section 212.04, F.S., provides in part:

(1)(a) It is hereby declared to be the legislative intent
that every person is exercising a taxable privilege who
sells or receives anything of value by way of admissions.

(b) For the exercise of such privilege, a tax is levied at
the rate of 6 percent of sales price, or the actual value
received from such admissions, which 6 percent shall be
added to and collected with all such admissions from the
purchaser thereof, and such tax shall be paid for the
exercise of the privilege as defined in the preceding
paragraph....

The term "admissions" is defined, in part, under s. 212.02(1),
F.S., as follows:

(1) The term "admissions" means and includes... all dues
and fees paid to private clubs and membership clubs
providing recreational or physical fitness facilities,
including, but not limited to, golf, tennis, swimming,
yachting, boating, athletic, exercise, and fitness
facilities, except physical fitness facilities owned or
operated by any hospital licensed under chapter 395.

Section 212.04, F.S., taxes all "dues" and "fees" paid to
private and membership clubs providing recreational or physical
fitness facilities, including, but not limited to golf, tennis,
or swimming, unless specifically exempt.

"Dues" and "fees" are not defined in Chapter 212, F.S.;
therefore, we must look to the ordinary usage of the terms, as
was done in Oklahoma City Golf and Country Club v. Oklahoma Tax
Commission, 825 P.2d 267 (Okl. 1992). In that case, the court
used the definition of "dues" as found in Black's Law Dictionary
450 (5th ed. 1979) ("Black's") and Webster's Third New
International Dictionary 699 (1963) ("Webster's"). Black's
defines "dues," as applied to clubs, as "sums paid toward
support and maintenance of same and as a requisite to retain
membership." "Dues" are defined by Webster's as "the fee or
charge required for membership, affiliation, initiation, use,
subscription."

For the term "fees" it is appropriate to look to the dictionary
definition for the common meaning of the term in the same manner
as the court in the above cited case. "Fees" are defined in The
American Heritage Dictionary (2nd Collegiate ed. 1991) as "a
fixed charge."

It is a well-established fact that "stock" in a corporation
represents a proportional ownership interest in the corporation.
The characteristics of stock are a right to participate
proportionately in all profits, and in management, and in the
distribution of net assets on liquidation. U.S. v. Evans, 375

F.2d 730, 731 (9th Cir. 1967). In further support of these
characteristics of stock, I.R.S. Revenue Ruling 87-130, 1987 2CB, 69, identifies the critical entitlements as "valuation,
voting, and distribution rights."

It is necessary to distinguish between those amounts that are
paid to Club for taxable dues or fees and those that are paid in
for the non-taxable equitable ownership interest in the Club.
Because each country club has such variable provisions in its
bylaws and membership agreements regarding the rights and
obligations that arise from payment of various portions of the
required membership fee, such determination must be made on a
case by case basis. In making each determination as to the
components of the particular total membership cost that are
taxable under Section 212.04, F.S., the Department will consider
the intent or motive of the parties, as evidenced by the
documents relevant to membership. See Oakland Hills Country
Club v. Commissioner, 74 USTC 35, 39 (1980).

In Florida Department of Revenue v. John's Island Club, Inc.,
680 So.2d 475 (Fla 1st DCA 1996), the subject club filed a
petition challenging the validity of Rule 12A-1.005(5)(d)1.b.,
F.A.C. John's Island Club, Inc., argued that the rule exceeded
the Department's grant of rulemaking authority, and modified,
enlarged, and contravened the law implemented. The court
determined that additional paid in capital does not fall within
the generally understood definition of "dues" or "fees" as
applied to a club, that the terms "dues" and "fees" are not
defined by statute, and the statute did not specifically
authorize an admissions tax on all paid in capital. The court
determined, that in the absence of clearer legislative
consideration of what was meant by the terms "capitalization
fees" and "capital facility fees," the rule was inconsistent
with the provisions of chapter 212, F.S.

"Capital contribution" is defined in Black's Law Dictionary (5th
edition) as, "Cash, property, or services contributed by
partners to partnership. Various means by which a shareholder
makes additional funds available to the corporation (i.e.,
placed at the risk of the business) without the receipt of
additional stock. Such contributions are added to the basis of

the shareholder's existing stock investment and do not generate
income to the corporation." "Contribution to capital" is defined
in Black's Law Dictionary (5th edition) as "[a] fund or property
contributed by shareowners as financial basis for operation of
corporation's business, and signifies resources whose dedication
to users of the corporation is made the foundation for issuance
of capital stock and which became irrevocably devoted to
satisfaction of all obligations of the corporation." Black's
Law Dictionary (5th edition) defines "capital" as "[i]n
accounting, the amount invested in a business." Black's Law
Dictionary (5th edition) defines "capital expenditure" as
"[e]xpenditure for long term betterment or additions.
Expenditure in nature of an investment for the future chargeable
to capital asset account. An expenditure which should be added
to the basis of the property involved."

In the instant situation, the membership plan provides that
membership certificates are issued when membership contributions
are paid by Equity Members. In the event of liquidation of the
Club, the Articles of Incorporation provide that the Equity
Members are entitled to the net proceeds from liquidation from
the sales of assets after debts are paid. Equity members are to
be paid in proportion to the value of their memberships at the
time of liquidation. Equity members have voting rights, so they
are able to have input in the management of the club. Transfer
rights are limited in the sense that memberships must be sold to
the Club. However, membership contributions can appreciate or
depreciate in value, depending on future membership contribution
amounts. Equity members are required to pay dues in order to
use Club Facilities.

Members that purchased equity in the Club on or before June 30,
1998, are guaranteed a refund of their membership contribution
upon the members retirement, by virtue of receiving the greater
of their contribution or 80 percent of the current market value
of the membership at the time of retirement.

Members that purchase equity in the Club on or after July 1,
1998, receive a refund of 70 percent of the current market value
of the membership at the time of retirement. These members are
not guaranteed a refund of their initial contribution.

In each case, the difference between the current market value
and the amount paid to the retiring member is retained by the
club.

DETERMINATION

Sales of the described equity memberships are not subject to tax
when the payments are separately accounted for and not recorded
in an operating revenue account by the taxpayer; not paid for
the right to use the taxpayer's recreational, physical fitness
or other facilities or equipment without subsequent periodic
payments; not used to effect a decrease in user fees or periodic
membership dues, and; not used to pay for the operating expenses
of the organization. This applies to the entire sales price of
the equity membership, including the percentage of the payment
not refunded to the previous member but instead retained by the
club, since that retained percentage becomes paid in capital.

Your questions are answered specifically as followed:

1. Are the sales of equity membership certificates currently
   stated at $85,000 and $30,000 for Golf and Sports Social
   memberships, respectively, subject to sales tax? No.

2. Is any portion of the sales price of equity membership
   certificates subject to sales tax? Not as described in your
   request.

3. Can the Club's cash proceeds from the equity membership
   commission be expended at the Club's discretion without risk of
   triggering sales tax on such proceeds? No. They must be
   accounted for as paid in capital as described, and used for
   capital expenditures.

4. Must cash proceeds from the Club's equity membership resale
   commission be strictly designated to a capital asset fund to
   escape sales tax liability? Yes.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the department

only under the facts and circumstances described in the request
for this advice, as specified in Section 213.22, F.S. Our
response is predicated upon those facts and the specific
situation summarized above. You are advised that subsequent
statutory or administrative rule changes or judicial
interpretations of the statutes or rules upon which this advice
is based may subject similar future transactions to a different
treatment from that which is expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Sara D. Faulkenberry
Tax Law Specialist
Technical Assistance and Dispute Resolution
850/414-9838

Control #39178