Are homeowners association dues subject to sales tax when the HOA has recreational facilities, no facilities, or spins the facilities into a separate corporation?

Plain-English summary

A law firm (Pattison, Koskey, Rath & Florio) asked, on behalf of real-estate-developer clients, when homeowners association (HOA) dues are subject to sales tax as social or athletic club dues under Tax Law § 1105(f)(2). It posed three scenarios:

1. HOA with a small recreational facility. The common property includes roads, parking, landscaping, a lake, tennis courts, a pool, and a beach — but the recreation area is under 2% of annual expenses. Membership is mandatory for parcel owners. Can the HOA split out the small recreation-funding portion of dues from the rest? → No. Under § 1105(f)(2) and Matter of Merrick Estates Civic Association v. State Tax Commission, an association whose members share recreational facilities is a social or athletic club, and the members' assessments are club dues. Because membership is sold as a single, mandatory unit that can't be bought separately, the entire assessment is taxable — the tiny recreational share can't be carved out.
2. HOA with no sports or recreational facilities. Common property is only roads, parking, and landscaping. → Dues are not taxable. Only dues paid to a social or athletic club are taxed under § 1105(f)(2); with no recreational facilities, the HOA isn't one.
3. Separate corporation for the recreation facilities. The developer creates one corporation for the roads/parking/landscaping HOA and a separate corporation to own and run the sports/recreation facilities, membership in the recreation corporation being separately purchasable. → The two corporations are treated separately, and only the recreation corporation's membership is taxable — regardless of whether joining the recreation corporation is mandatory or optional for HOA members.

What this means for you

Developers and HOA organizers

Whether HOA dues get taxed turns on recreational facilities, not on how big they are. If your association owns shared recreation (pool, tennis, beach), it's a taxable social/athletic club and the whole mandatory assessment is taxed as dues — you cannot carve out the small slice that funds recreation when membership is one indivisible, mandatory package. An association that owns only roads, parking, and landscaping isn't a club, and its dues aren't taxed.

The structuring lever

The Department accepted a separate-corporation structure: put the recreation facilities in their own corporation whose membership can be purchased separately, and only that recreation membership is taxable — the plain HOA dues stay untaxed, and it doesn't matter whether the recreation membership is mandatory or optional. The key is that the recreation membership is genuinely a separately purchasable unit, not baked into a single indivisible assessment.

Accountants and tax professionals

This applies § 1105(f)(2) and Merrick Estates to HOAs: shared recreational facilities make the association a social/athletic club; a single-unit mandatory assessment is taxed in full (no de-minimis allocation of the recreational portion); no recreation means no tax; and a separately purchasable recreation corporation isolates the taxable dues from the non-taxable HOA dues.

Common questions

Q: Can an HOA carve out the small recreation share of its dues to reduce the tax?
A: No. If the HOA has recreational facilities, it's a social or athletic club, and because membership is a single mandatory unit, the entire assessment is taxable dues — the small recreational portion can't be separated.

Q: Are dues to an HOA with no recreational facilities taxable?
A: No. Only dues paid to a social or athletic club are taxed under § 1105(f)(2). An HOA whose common property is just roads, parking, and landscaping isn't such a club.

Q: What if the recreation facilities are in a separate corporation?
A: Then the corporations are treated separately, and only the recreation corporation's membership is taxable — regardless of whether joining it is mandatory or optional for HOA members — as long as that membership can be purchased separately.

Q: Why does having a pool or tennis courts matter so much?
A: Under Merrick Estates, homeowners sharing recreational facilities makes the association's purpose "social," bringing it within the taxable social/athletic club category of § 1105(f)(2).

Q: Can another association 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(f)(2) (tax on dues paid to a social or athletic club)
• Matter of Merrick Estates Civic Association, Inc. v. State Tax Commission, 65 AD2d 669 (homeowner association with shared recreational facilities is a taxable social club)

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_79s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (79) S
Sales Tax
November 13, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920820A

On August 20, 1992, a Petition for Advisory Opinion was received from Pattison, Koskey,
Rath & Florio P.C., 45 Five Mile Woods Road, Suite 1, Catskill, New York 12414.
The issues raised by Petitioner, Pattison, Koskey, Rath & Florio P.C., are as follows:
1.

Whether a homeowners association which has a relatively small recreational facility
in comparison to its entire operations which accounts for less than 2% of its annual
expenses, can separate the portion of the dues which funds such facility from dues
used to fund other operations when determining the dues subject to sales tax.

2.

Whether dues paid to a homeowners association which has no sports or recreational
facilities are subject to sales tax.

3.

Whether dues paid to a separate corporation to be created by a homeowners
association to operate the sports and recreational facilities, would be treated
separately from dues collected by the association for non-sports and non-recreational
activities when determining the sales tax liability, regardless of whether membership
in the recreational corporation by association members is required or optional.

Petitioner represents several clients that are real estate developers in New York State. In issue
"1", Petitioner's client has created a homeowners association, incorporated under the Not-for-Profit
Corporation Law, to own, develop and operate the common property. The common property is made
up of land and related improvements, roadways, parking areas, landscaping, a lake, tennis courts,
a pool and a beach. The expenses incurred in connection with the recreational area, in comparison
to the entire operations of the association, represents less than 2% of its annual expenses.
Membership in the association is mandatory and is limited to persons buying a real estate parcel
within the development. Moreover, the right to vote is automatically granted with the purchase of
a parcel within the development.
In issue "2", Petitioner's client proposes to create a homeowners association, to be
incorporated under the Not-for-Profit Corporation Law, to own, develop and operate the common
property. The common property will have no sports or recreational facilities and will consist of
roadways, parking areas and landscaping. Membership in the association will be mandatory and will
be limited to persons buying a real estate parcel within the development.

TP-9 (9/88)

-2­
TSB-A-92 (79) S
Sales Tax
November 13, 1992

In issue "3", Petitioner's client proposes to create a homeowners association, to be
incorporated under the Not-for-Profit Corporation Law, to own, develop and operate the common
property consisting of the roadways, parking areas and landscaping. In addition, Petitioner's client
proposes to create a separate corporation to own, develop and operate the sports and recreational
facilities. Membership in both corporations will be limited to persons buying a real estate parcel
within the development. Moreover, membership in both corporations will be mandatory for all real
estate owners in the development.
Section 1105(f)(2) of the Tax Law imposes sales tax upon the following:
(2) The dues paid to any social or athletic club in this state if the dues of an
active annual member, exclusive of the initiation fee, are in excess of ten dollars per
year, and on the initiation fee alone, regardless of the amount of dues, if such
initiation fee is in excess of ten dollars ...
In the Matter of Merrick Estates Civic Association, Inc. v. State Tax Commission, 65 AD2d
669 the Court held that where residents of a particular residential section formed a corporation in
order to construct a community swimming pool and related facilities, where membership was limited
to homeowners living in defined residential sections, that the use of the facilities was deemed
"social" and, thus, sales tax could be imposed upon dues paid to a social club. (emphasis added)
With respect to issue "1", pursuant to Section 1105(f)(2) of the Tax Law and Merrick Estates
Civic Association, Inc. v. State Tax Commission, supra, the association created by Petitioner's client
falls within the ambit of a social or athletic club. Accordingly, assessments paid by the members
would constitute dues paid to a social or athletic club. Furthermore, since membership in the
association is sold as a single unit and is mandatory for all homeowners residing in the development
and cannot be purchased separately as an option, the entire assessment paid by members for
membership in the association is subject to sales tax.
Concerning issue "2", pursuant to Section 1105(f)(2) of the Tax Law, only dues paid to a
social or athletic club is subject to sales tax. Since the common property of the homeowner's
association will not have any sports or recreational facilities, the dues paid by members for
membership in the association will not be subject to sales tax.

-3­
TSB-A-92 (79) S
Sales Tax
November 13, 1992

Regarding issue "3", since membership in the recreational corporation will be able to be
purchased separately from the membership in the homeowner's association, the corporations will be
treated separately and independent of each other and only the membership in the recreational
corporation will be subject to the tax imposed by Section 1105(f)(2) of the Tax Law. This is so
regardless of whether membership in the recreational corporation is mandatory or optional for
association members.

DATED: November 13, 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.