Is a country club's separately stated mandatory monthly gratuity charge taxable as club dues, even the portion paid to employees?

Plain-English summary

Park Country Club of Buffalo, Inc. is a country club whose members hold no proprietary interest but control the club: they select management through committees, run club activities, and nominate and select new members. Members' monthly statements include a separately stated gratuity charge — set at 10% of total à la carte restaurant and bar sales — and the club does not pay all of that money over to employees. The club asked whether the portion paid to employees is exempt from sales tax.

The Department held the whole monthly gratuity charge is taxable dues.

• Park Country Club is a "social or athletic club." A "social or athletic club" is one whose material purpose or activity is social or athletic (Tax Law 1101(d)(13)); the regulation lists factors including members controlling activities, elections, committees, member selection, or holding a proprietary interest (20 NYCRR 527.11(b)(5)(1)). Because Park's members control the club's activities, management, and membership, it qualifies — so its dues are taxable (Tax Law 1105(f)(2)).
• The gratuity charge is "dues." "Dues" means any dues or membership fee including any assessment, irrespective of the purpose for which made (Tax Law 1101(d)(6)). Since members must pay the fixed monthly gratuity charge to be members, it is taxable dues — regardless of what the money is later used for.
• The food-and-drink gratuity exclusion doesn't reach the dues tax. The club pointed to the regulation excluding a gratuity from tax when it is separately stated, designated as a gratuity, and paid over in total to employees (20 NYCRR 527.8(l)). But that regulation applies only to the tax on food and drink under 1105(d) — not to the dues tax under 1105(f)(2). So it does not apply here.
• And the club fails it anyway. Even on its own terms, the exclusion requires that all the gratuity monies be paid over to employees; here they are not, so the criteria aren't met regardless.
• Result. The club must collect tax on the separately stated monthly gratuity charge as dues.

What this means for you

A mandatory charge you must pay to stay a member is taxable "dues," whatever you call it. New York defines dues broadly enough to sweep in assessments and fees "irrespective of the purpose." Labeling a required monthly charge a "gratuity" doesn't remove it from the dues tax at a social or athletic club.

The food/drink gratuity break is narrow — it doesn't apply to dues. The rule that lets a properly handled tip escape the food-and-drink tax lives in the 1105(d) world. It does nothing for charges taxed as club dues under 1105(f)(2).

If you ever rely on the gratuity exclusion, pay it all to staff. The exclusion (where it applies at all) requires the gratuity to be separately stated, designated as a gratuity, and paid over in full to employees. Keeping any part of it defeats the exclusion.

Common questions

Q: We add a mandatory monthly "gratuity" to members' bills. Is it taxable?
A: Yes, as club dues. At a social or athletic club, a fixed charge members must pay to remain members is taxable dues under 1105(f)(2), regardless of the "gratuity" label (1101(d)(6)).

Q: Can we use the gratuity exclusion to exempt the part paid to employees?
A: No. That exclusion (527.8(l)) applies only to the food-and-drink tax under 1105(d), not to the dues tax. And it requires paying the entire gratuity to employees, which this club doesn't do.

Q: What makes us a "social or athletic club"?
A: Members controlling the club's activities, management, elections, committees, or member selection, or holding a proprietary interest (1101(d)(13); 527.11(b)(5)(1)).

Citations and references

Tax Law:

• 1105(f)(2) — imposes tax on the dues paid to any social or athletic club in the state
• 1101(d)(6) — "dues" includes any dues or membership fee, including any assessment, irrespective of purpose
• 1101(d)(13) — "social or athletic club": a club or organization a material purpose or activity of which is social or athletic

Regulation:

• 20 NYCRR 527.11(b)(5)(1) — factors identifying a club or organization (member control of activities, elections, committees, member selection, proprietary interest)
• 20 NYCRR 527.8(l) — gratuity exclusion (separately stated, designated a gratuity, paid over in total to employees) applicable only to the tax on food and drink under 1105(d)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_38s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(38)S
Sales Tax
August 28, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S850131A

On January 31, 1985, a Petition for Advisory Opinion was received from Park Country Club
of Buffalo, Inc., 4949 Sheridan Dr., Williamsville, New York 14221.
The issue raised is whether the portion of club members' monthly gratuity charge paid to
employees is subject to State and local sales and use tax imposed under Articles 28 and 29 of the Tax
Law.
Petitioner is a country club. The club's members do not acquire a proprietary interest in the
club. However, the members exercise control over the selection the club's management and exercise
control of the clubs activities through member committees. Additionally, club members nominate
all new members and control the selection of new members.
Monthly statements issued to club members include a separately stated charge for gratuities.
Such charges are paid to club employees at the rate of ten percent of total a la carte restaurant and
bar sales. The gratuity charges collected from members are not paid over in total to employees.
Section 1105(f)(2) of the Tax Law imposes a tax on "the dues paid to any social or athletic
club in this state."
Section 1101(d)(13) of the Tax Law defines the term "social or athletic club" as "any club
or organization of which a material purpose or activity is social or athletic."
Section 527.11(b)(5)(1) of the Sales and Use Tax Regulations provide that:
"The phrase club or organization means any entity which is composed of
persons associated for a common objective or common activities. Whether the
organization is a membership corporation or association or business corporation or
other legal type of organization is not relevant. Significant factors, any one of which
may indicate that an entity is a club or organization are: an organizational structure
under which the membership controls social or athletic activities, tournaments,
dances, elections, committees, participation in the selection of members and
management of the club or organization, or possession by the members of a
proprietary interest in the organization. The organizational structure may be formal
or informal."
Since the membership controls the club's activities, membership and management, Park
Country Club is a "social or athletic club" within the meaning of section 1105(f)(2) of the Tax Law.
Any dues paid by members, therefore, are subject to tax.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-85(38)S
Sales Tax
August 28, 1985

Section 1101(d)(6) of the Tax Law defines dues as:
"any dues or membership fee including any assessment, irrespective of the purpose
for which made. . . ." (Emphasis supplied).
Petitioner's club requires a fixed monthly gratuity fee from each member. Since this charge
must be paid for the privilege of being a club member, it constitutes taxable dues or membership
fees.
Petitioner asks whether the portion of the gratuity fee paid to employees is exempt from tax,
referring to the provisions of regulation section 527.8(1). This section provides that receipts from
the sale of food and drink are subject to tax unless:
"(i) the charge is separately stated on the bill or invoice given to the customer; and
(ii) the charge is specifically designated as a gratuity, and
(iii) all such monies received are paid over in total to employees."
The provisions of regulation section 527.8(1) are applicable only to the tax imposed on the
sale of food and drink under section 1105(d) of the Tax Law. Inasmuch as they are so limited, they
do not apply to the tax on dues imposed under section 1105(f)(2) of the Tax Law. Accordingly,
Petitioner is required to collect tax on the separately stated monthly charge for gratuities.
It should be noted, however, that Petitioner does not satisfy the criteria for exemption stated
in section 527.8(1) in any event. Although the charges are separately stated and specifically
designated as a gratuity, the revenues received are not paid over in total to employees.

DATED: August 12, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.