Is a warehouse club's annual membership fee subject to sales tax when it buys members access to lower merchandise prices?

Plain-English summary

Costco Wholesale asked whether the annual membership fee it charges for access to its warehouse stores (then $25 for a business membership, $30 for an individual membership) is subject to New York sales tax. Costco stressed that the fee buys nothing but access: members pay the same posted prices, the fee isn't applied against any purchase, there's no minimum purchase, and the fee is fully refundable.

The Department held the membership fee is taxable under Tax Law § 1105(a). The key is Costco's own explanation to members: its "dramatically lower prices" are "made possible … by income from a modest annual fee from its members." Because the fee is what enables the discounted merchandise pricing, the Department treated the fee, in substance, as a prepayment for the merchandise members buy — and a prepayment for taxable merchandise is itself taxable. The Department relied on a line of authority treating "membership" charges that merely entitle members to reduced prices as taxable prepayments:

• Credit Bureau of Central New York v. State Tax Commission (105 AD2d 1042) — membership fees to a credit-reporting agency were taxable because they were, in reality, prepayments entitling members to reduced charges for credit reports;
• Norman Eiger (TSB-A-81(20.1)S) — movie-club membership fees entitling members only to reduced rental charges were taxable prepayments; and
• TSB-M-86(8)S — video-club "membership fees" are in substance prepayments for movie rentals and are taxable.

Notably, this fee was not analyzed as tax-free social/athletic-club dues — the members had no control, no proprietary interest, and the fee bought discounted shopping, so the "prepayment for merchandise" theory controlled.

What this means for you

Retailers and membership-based sellers

If your "membership fee" is essentially the price of admission to buy your goods at lower prices, expect New York to treat it as a taxable prepayment for merchandise, even if the fee is separate, refundable, and not credited against purchases. What mattered here was the economic substance — the fee subsidizes the low prices — not the label "membership."

Where this differs from tax-free club dues

Some membership charges are analyzed under the social/athletic-club dues rules (Tax Law § 1105(f)(2)) and can be non-taxable when members lack control and any proprietary interest. This warehouse fee went the other way: it was taxable as a prepayment for tangible goods under § 1105(a), because the fee funds the discounted merchandise pricing rather than buying membership in a club.

Accountants and tax professionals

The controlling theory is substance-over-form under § 1105(a): a fee that entitles the payer only to reduced prices on taxable property/services is a taxable prepayment. Compare Credit Bureau of Central NY (105 AD2d 1042), Norman Eiger (TSB-A-81(20.1)S), and TSB-M-86(8)S.

Common questions

Q: Is a warehouse-club membership fee taxable in New York?
A: Yes, on these facts. Because the fee funds the club's lower merchandise prices, it's treated as a prepayment for the merchandise and is taxable under § 1105(a).

Q: The fee is refundable and isn't applied to purchases — why is it still taxable?
A: The Department looked at economic substance, not form. Costco's own materials said the low prices are made possible by the membership-fee income, so the fee is in substance a prepayment for the discounted merchandise.

Q: Isn't this like tax-free club dues?
A: No. Social/athletic-club dues are analyzed under § 1105(f)(2), and can be non-taxable when members lack control and proprietary interest. Here the fee simply buys cheaper shopping, so it's a taxable merchandise prepayment under § 1105(a).

Q: Can another taxpayer rely on this opinion?
A: No. An advisory opinion binds the Department only as to the petitioner and the facts described; another taxpayer with different facts cannot rely on it.

Citations and references

Statutes and authorities:

• Tax Law § 1105(a) (tax on receipts from retail sales of tangible personal property)
• Matter of Credit Bureau of Central New York v. State Tax Commission, 105 AD2d 1042 (1984) (membership fees taxable as prepayments for reduced-charge credit reports)
• Norman Eiger, Adv Op St Tx Comm, December 3, 1985, TSB-A-81(20.1)S (movie-club membership fees taxable as prepayments)
• Technical Services Bureau Memorandum TSB-M-86(8)S, July 7, 1986 (video-club membership fees taxable as prepayments for rentals)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_66s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (66) S
Sales Tax
September 17, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920630B

On June 30, 1992, a Petition for Advisory Opinion was received from Costco Wholesale
Corporation, 10809 120th Avenue N.E., Kirkland, WA 98083-9777.
The issue raised by Petitioner, Costco Wholesale Corporation, is whether the annual
membership fee paid by members for access to its warehouses is subject to New York State and local
sales and use taxes.
Petitioner is a Washington corporation that operates a chain of cash and carry membership
warehouses in thirteen states and Canada. Petitioner's operations are based on the concept that
offering very low prices on a limited selection of national brand products, over a wide range of
merchandise categories, will produce rapid inventory turnover and high sales volume. Petitioner sells
a variety of merchandise including food, candy, tobacco, sundries, appliances, electronics, tools,
office supplies, furniture, automotive supplies, apparel, linens, jewelry, housewares, books, optical,
prescription and over-the-counter medicines. Petitioner planned to open its first New York
warehouse in Nanuet on June 30, 1992.
Petitioner operates in the membership warehouse segment of specialty retailing. Petitioner's
membership format is designed to reinforce customer loyalty and to reduce credit risks. Petitioner
has two types of members: business members and individual members. Business memberships are
available to owners or managers of a business. A business member may shop for business or
personal use. The business membership fee is $25 annually. The fee includes a free spouse card. Two
additional business cards may be obtained under the same membership for an additional $10 annual
fee.
Individual memberships are available to persons from certain eligible groups, such as state
and local government employees, civilian federal employees, school and hospital workers, bank
employees, public utility employees, and other eligible groups. Individual membership requires
payment of a $30 annual fee and includes a free spouse card.
Upon payment of the annual membership fee Petitioner issues a plastic membership
identification card, which grants the member access to any of Petitioner's warehouses in the United
States and Canada. Only members who have paid a membership fee and obtained a membership
identification card, are allowed access to a warehouse sales facility. All of Petitioner's members,
whether business or individual, pay the same posted prices for merchandise sold at Petitioner's
warehouses. Payment of the annual membership fee does not entitle a member to any free
merchandise nor is the fee used to reduce the purchase price of any subsequent purchase. Members
are not required to purchase any specific merchandise nor is there a maximum or minimum purchase
requirement. In addition, Petitioner allows a full membership fee refund at any time before the
membership's annual renewal date.
TP-9 (9/88)

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TSB-A-92 (66) S
Sales Tax
September 17, 1992

Petitioner's stock is traded on the NASDAQ over-the-counter market. Petitioner's Board of
Directors is elected by its shareholders. It is not controlled by its membership. Members do not
participate in the operation or management of Petitioner. They do not participate in the selection of
new members or have a proprietary interest in the Petitioner unless they also happen to be a
shareholder.
The following statement appears in the Petitioner's catalog which is given to all new
members:
Costco is a membership wholesale distribution center that operates 120,000 square
foot warehouses and carries only quality name brands at substantially lower prices
than other wholesale sources.
Costco's lower wholesale prices are made possible by eliminating many of the
traditional costs inherent in conventional wholesale procedures and by income from
a modest annual fee from its members.
This combination makes it possible for you to select from hundreds of quality name
brands at dramatically lower prices for business supplies, equipment, merchandise
for resale and personal use.
Section 1105(a) of the Tax Law imposes sales tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided.
In the Matter of Credit Bureau of Central New York v. State Tax Commission, 105 AD2d
1042 (1984), the court determined that membership fees paid to a credit reporting agency were
merely part of the members' cost of the credit reports since the credit reports were the only things
provided to members by the credit bureau in return for the fee. The court concluded that such fees
are subject to tax since they are, in reality, prepayments which only entitled members to reduced
charges for the credit reports.
In Norman Eiger, Adv Op St Tx Comm, December 3, 1985, TSB-A-81(20.1)S the State Tax
Commission held that membership fees charged by petitioner which entitled members only to a
reduced rental charge on movies and no other rights or benefits, was subject to sales tax since the
membership fee represented a prepayment for the rental of the movies.
Technical Services Bureau Memorandum TSB-M-86(8)S, July 7, 1986 states as follows:
This memorandum reflects the policy of the Tax Department on the taxability of
video club membership fees.
Video club "memberships" generally enable purchasers to rent movies at rates lower
than the rates charged to persons who do not purchase memberships.

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TSB-A-92 (66) S
Sales Tax
September 17, 1992

Even though vendors of memberships in video clubs characterize the charges as
"membership fees", the substance of the charge is the of a prepayment for the rental
of a movie. Therefore, the fee for joining is determined to be taxable (section 1105(a)
of the Tax Law).
Petitioner charges its members "dramatically lower prices" on the merchandise it sells
because of the "income from the modest annual fee from its members" Accordingly, pursuant to
Credit Bureau of Central New York v. State Tax Commission, supra, Norman Eiger, supra, and
TSB-M-86(8)S the annual membership fee paid by members for access to its warehouse sales
facilities is subject to sales tax pursuant to Section 1105(a) of the Tax Law since in substance, the
membership fee is a prepayment for the merchandise sold by Petitioner.

DATED: September 17, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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