Was a membership fee taxable when it was calculated from the savings on each retail purchase?

Plain-English summary

A retailer planned to show public customers a retail price and a lower wholesale price. At checkout, a customer could pay a membership fee calculated as a percentage of that purchase's savings, buy at the wholesale price, and receive future membership benefits.

IDOR could not give a fully specific answer without reviewing the membership agreement and related documents. It explained that a membership fee generally was a nontaxable intangible when the membership rights did not include tangible property.

This fee appeared different because it was charged for each purchased item and related directly to the particular item's price. When a membership fee was applied to the purchase price of tangible personal property, it became part of taxable gross receipts.

If a membership charge entitled the customer to receive tangible property or a service involving transferred property, Retailers' Occupation, Service Occupation, or Use Tax could apply depending on the transaction and provider.

What this means for you

A membership label did not remove a charge from selling price. When the charge functioned as part of the economics of a specific retail purchase, IDOR treated it as taxable consideration.

Common questions

Were ordinary membership rights generally taxable? No, when they were only intangible rights.

Why was this fee taxable? It was tied to and applied against each tangible-property purchase.

Did IDOR review the actual membership contract? No.

Citations and references

• 86 Ill. Adm. Code 130.401(d).
• 86 Ill. Adm. Code 140.101.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0003.pdf

Original ruling text

ST 15-0003-GIL 01/06/2015 GROSS RECEIPTS
When membership fees are applied to the purchase price of tangible personal property,
they are considered gross receipts and are therefore taxable. See 86 Ill. Adm. Code
130.401(d). (This is a GIL.)

January 6, 2015

Dear Xxxx:
This letter is in response to your letter received on September 15, 2014, in which you
request information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
Pursuant to 2 Ill. Adm, [sic] Code 1200.110, we are requesting the Illinois Department of
Revenue to issue a Private Letter Ruling with respect to the factual situation set forth below.
General Information:

1. I am an officer of the Company, COMPANY, and am authorized to represent the
   Company before the Illinois Department of Revenue.
2. This Private Letter Ruling ("PLR") is not requested with regard to hypothetical or
   alternative proposed transactions. The PLR is requested to determine the Retailers'
   Occupation Tax consequences of the actual business practices of the Company.
3. The Company is not currently engaged in litigation with the Department in regards to this
   or any other tax matter.
4. The Company is not currently under audit by the Department in regard to this or any
   other tax matter.
5. To the best knowledge of the Company the Department has not previously ruled
   regarding this matter for the Company. In addition, the Company has not submitted the
   same or similar issue to the Department.
6. The Company requests that certain information be deleted from the PLR prior to
   dissemination to others. The Company requests that its name, address, location of the
   facility and the name of its representative be deleted.
7. The Company is not aware of any authority contrary to the authorities referred to and

cited below.
Statement of Material Facts

1. The Company is in the process of opening its first store in [CITY, ILLINOIS].
2. The Company is part of a group of companies that include a
   Manufacturing/Wholesale Company.
3. The Company will acquire all of its inventory from the Manufacturing Company.
   Substantially all of these products will be private labeled as to the Manufacturing Company.
   4.The Company's store will be open to the customers of the Manufacturing Company
   to purchase goods at wholesale prices. These customers will be required to present a valid
   Reseller's Certificate and not be subject to Sales Tax. The Company will also open the
   Store to the general public, to purchase the same goods at retail prices. Sales to the public
   are being offered as a way to enhance the product name and increase demand for the
   Manufacturing product line.
4. The Company will display two prices on the shelf for each product, the Wholesale
   price and the Retail price.
5. The Company desires to pass along additional savings to the Retail customer by
   offering them the ability to pay the Wholesale prices, with the payment of a membership
   fee. The membership fee is based on a percentage of the savings of the retail customer.
6. At the checkout, the Retail customer will be presented with the total of their
   purchase at retail pricing. They will also be shown what the total of their purchase would
   be at wholesale pricing along with the amount of the membership fee to be paid to obtain
   the favorable pricing. If they choose not to take advantage of the offer, the sale will
   conclude at retail pricing, subject to ROT. If they choose to pay the membership fee, the
   sale will be concluded at wholesale pricing, subject to ROT and the membership fee will be
   added to the total sales.
7. Customers who choose to pay the membership fee will be enrolled in the
   membership program and will be eligible for future discounts and other membership
   benefits.
   Ruling Requested
   The Company requests the Illinois Department of Revenue to rule that the membership fee
   charged will not be subject to Illinois Retailers' Occupation Tax or Illinois Use Tax.

Relevant Authorities
Illinois Retailers' Occupation Tax is imposed upon persons engaged in Illinois in the business
of selling at retail tangible personal property (see 86 Ill. Adm. Code 130.101). A
membership fee is considered an intangible, which is not subject to Retailers' Occupation
Tax or Use Tax liability. (see 86 Ill. Adm. Code 130.120)
DEPARTMENT’S RESPONSE:
The Department cannot provide a specific answer to your request based on the
limited information contained in your letter regarding the fees that you charge
customers.

The Illinois Retailers’ Occupation Tax Act imposes a tax upon persons engaged
in this State in the business of selling tangible personal property to purchasers for use
or consumption. 86 Ill. Adm. Code 130.101. The Use Tax Act imposes a tax upon the
privilege of using in this State tangible personal property purchased at retail from a
retailer. 86 Ill. Adm. Code 150.101. If no tangible personal property is being transferred
to the customers, then neither Illinois Retailers’ Occupation Tax nor Use Tax would
apply. Likewise, the Service Occupation Tax Act and Service Use Tax are imposed on
the transfer of tangible personal property incident to sales of service. 86 Ill. Adm. Code
140.101 and 160.101. If no tangible personal property is being transferred to customers
incident to the services being provided then no Illinois Service Occupation Tax nor
Service Use Tax would apply.
Generally, the Department does not consider receipts from the sale of
membership fees to be gross receipts from the sale of tangible personal property.
Rather, a membership fee is considered an intangible, which is not subject to Retailers'
Occupation Tax or Use Tax liability. 86 Ill. Adm. Code 130.401(d). This is the case when
the sale of membership rights does not include the transfer of tangible personal
property. However, if the membership charge entitles the customer to receive an item of
tangible personal property or to receive a service and tangible personal property is
transferred incident to that service, then that charge may result in either Retailers’
Occupation Tax liability, Service Occupation Tax liability or Use Tax liability, depending
upon the serviceman’s activities. See 86 Ill. Adm. Code 140.101. The information that
you have provided seems to indicate that a fee is charged for each item that is
purchased, and the fee is related to the price of each particular item. When
membership fees are applied to the purchase price of tangible personal property, they
are considered gross receipts and are therefore taxable. See 86 Ill. Adm. Code
130.401(d). We cannot provide you with a more specific answer without reviewing
contracts such as membership agreements and other pertinent documents.
I hope this information is helpful. If you require additional information, please visit our
website at www.tax.illinois.gov or contact the Department’s Taxpayer Information
Division at (217) 782-3336.

Very truly yours,

Cara Bishop
Associate Counsel

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