Was an annual online shopping membership taxable in South Carolina, and was its free one-month trial taxable?

Plain-English summary

South Carolina Private Letter Ruling 16-1 reached different results for the paid and free versions of an online shopping membership.

The annual paid membership was taxable. Members received access to streamed movies, television, and music; member-only merchandise; discounted prices; free or discounted shipping; digital books; cloud storage; and other benefits. The Department treated streaming audio and video as taxable communication services and treated the member-only price and delivery benefits as connected to anticipated taxable merchandise purchases.

The free one-month trial was not taxable. Trial members received the same benefits, but they paid nothing and could decline to continue after the trial. Because Section 12-36-100 required consideration for a sale or purchase, the Department found no taxable retail sale during the free trial.

Why the paid fee was included in taxable proceeds

The membership did not sell a known bundle of fixed products. The fee was paid in advance, the parties did not know which benefits a member would use, and the fee was not refunded when a member used few or none of them.

Even so, the Department found the fee taxable for two independent reasons:

1. Membership gave access, for no extra charge, to taxable streamed audio and video communication services.
2. Membership gave discounts, special product access, and free or discounted delivery on taxable merchandise that nonmembers did not receive.

South Carolina measured sales and use tax by total consideration without deductions for materials, labor, service, transportation, or other seller expenses. The Department therefore treated the annual fee as part of the consideration connected to taxable property and services, despite the membership's other potentially nontaxable benefits.

Membership-fee distinctions in the ruling

The Department explained that not every retail membership fee is taxable. It identified potentially nontaxable situations where:

• a membership fee charged by a members-only retailer merely replaced a security deposit or was only a nominal processing fee;
• every member bought merchandise at the same lower price; or
• the retailer sold only exempt products.

ABC's membership did not fit those exceptions. Its paid members received taxable streaming plus discounts and shipping benefits unavailable to nonmembers.

Common questions

Q: Did it matter that some membership benefits might be nontaxable?

A: No under these facts. The taxable streaming and purchase-related benefits were enough for the Department to include the full membership fee in taxable proceeds.

Q: Did members have to use the benefits for the fee to be taxable?

A: No. The fee bought the right to use them and was not refunded for nonuse.

Q: Why was the free trial different?

A: No consideration was paid, so the trial was not a sale or purchase under the cited definition.

Q: Would a token or nominal trial charge change the answer?

A: The ruling did not decide that situation. Its free-trial conclusion depended on no consideration being paid.

Q: Can another online retailer rely on this PLR?

A: No. It binds the Department only for the requesting taxpayer and the stated program.

Citations and references

• S.C. Code Ann. Sections 12-36-910 and 12-36-1310 (sales and use tax)
• S.C. Code Ann. Section 12-36-60 (taxable communications included in tangible personal property)
• S.C. Code Ann. Sections 12-36-90 and 12-36-130 (gross proceeds and sales price)
• S.C. Code Ann. Section 12-36-100 (consideration required for a sale or purchase)
• S.C. Regulation 117-310 (delivery charges)
• SC Revenue Ruling #16-5 (streaming media discussed by the PLR)

Subject

Website Shopping Membership Fee – Free Trial Membership or Annual Membership

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR16-1.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 12265, Columbia, South Carolina 29211

SC PRIVATE LETTER RULING #16-1

SUBJECT:

Website Shopping Membership Fee – Free Trial Membership or Annual
Membership
(Sales and Use Tax)

REFERENCES: S.C. Code Ann. Section 12-36-910 (2014)
S.C. Code Ann. Section 12-36-1310 (2014)
S.C. Code Ann. Section 12-36-60 (2014)
S.C. Code Ann. Section 12-36-90 (2014)
S.C. Code Ann. Section 12-36-130 (2014)
S.C. Code Ann. Section 12-36-100 (2014)
S.C. Regulation 117-310 (2012)
AUTHORITY:

S.C. Code Ann. Section 12-4-320 (2014)
S.C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific taxpayer by
the Department to apply principles of law to a specific set of facts or a
particular tax situation. It is the Department’s opinion limited to the specific
facts set forth, and is binding on agency personnel only with respect to the
person to whom it was issued and only until superseded or modified by a
change in statute, regulation, court decision, or another Departmental advisory
opinion, providing the representations made in the request reflect an accurate
statement of the material facts and the transaction was carried out as proposed.

Questions

1. Are annual membership fees paid to ABC LLC that allow members to receive the benefits
   listed in the facts below that are associated with shopping on-line subject to South Carolina
   sales and use tax?
2. Are free one month trial memberships offered by ABC LLC that allow individuals to receive
   the same benefits listed in the facts below as other members that are associated with
   shopping on line subject to South Carolina sales and use tax?

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Conclusions

1. The annual membership fees paid to ABC LLC that allow members to receive the benefits
   listed in the facts below that are associated with shopping on-line are subject to South
   Carolina sales tax as part of the consideration paid for the purchase of tangible personal
   property pursuant to Code Section 12-36-60.
2. The free one month trial membership offered by ABC LLC that allows individuals to receive
   the same benefits listed in the facts below as other members that are associated with
   shopping on-line is not a sale of tangible personal property for a consideration under Code
   Section 12-36-100 and, therefore, is not subject to South Carolina sales and use tax.

Facts
ABC, LLC (“ABC”), an affiliate of XYZ, Inc., offers a membership program known as
“membership”. While ABC does not directly provide the benefits, it is contractually obligated to
ensure the benefits are provided to the members. To meet its contractual obligations, ABC pays
its affiliates to provide the underlying service related to each benefit.
Participants in the program are referred to as “members” and are required to agree to the terms
and conditions provided by ABC and/or its affiliates to activate their membership. The public
may sign up for a free one-month trial or annual paid membership to receive certain benefits
associated with shopping on-line. The membership benefits are the same for both trial and paid
members.
The membership entitles members to a variety of benefits (e.g., free and discounted shipping,
ability to download and stream digital content, certain website pricing and purchase benefits).
Members do not purchase a bundle of distinct and identifiable products as part of their
membership. At the time of purchase, neither the member nor the company knows how many, or
if any, of the benefits the member will use. The membership fee is charged in advance of the
year to which it applies and is not refunded if members do not use their membership or use some
but not all of the benefits.
The membership benefits currently available are:
•

Access – Access is a line of premium, everyday essential products (currently limited to baby
wipes) available for purchase only by Members.

•

Pricing – Pricing provides Members discounts on certain items of tangible personal property.
For example, Members can purchase certain televisions and software at a discount. The suite
of products offered to Members at a discount continues to expand.

•

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•

Store – The heavy/bulky items in Store are available for purchase only by Members. The
Store benefit allows Members to ship up to 45 pounds of heavy/bulky items for a flat
shipping fee of $5.99.

•

Shipping – Members are entitled to receive free two-day shipping and other discounted
shipping benefits on eligible purchases made on the Website. Products eligible for these
shipping benefits are designated as such on the Website. Also, certain products sold by thirdparty merchants participating in the “Joy” program are eligible for shipping benefits.

•

Videos – Members may view movies and television shows, designated as “Videos,” an
unlimited number of times at no additional cost during the course of their Membership.
Videos can be viewed on the Member’s television, computer, gaming system, or other
compatible device. All Members are permitted to stream Videos; Members with a specific
device can also download Videos if their phone or tablet is registered to the same XYZ
account as their Membership. In compliance with the content agreements, there are
restrictions on how much time Members are allotted to access downloaded Videos without an
Internet connection.

•

Music – Music provides Members with unlimited, ad-free access to more than a million
songs and albums. Music may be played on the Member’s computer, or other compatible
device. Music may be streamed or downloaded for listening without an Internet connection.
If a Member allows his Membership to lapse or expire, he will lose access to the downloaded
Music titles.

•

Owners’ – The Owners’ allows Members who own specific devices to choose from
thousands of electronic books (“e-books”) to borrow for free, as frequently as a book a
month, with no due dates. Members can only borrow one e-book at a time, and must own a
device that is registered to the same XYZ account as the Membership to access this benefit.
If a Member cancels his Membership, or the Membership expires after a book is borrowed,
the Member will lose access to the borrowed book.

•

First – The First feature allows Members who own specified devices to receive one free ebook per month from four e-books selected by ABC. The selected e-book becomes a
permanent part of the Member’s device library. To access this benefit, Members must own a
specified device that is registered to the same XYZ account as the Membership.

•

Sunrise – Members receive 30 minute early access to select “Deals” on-line and sales events
on www.myplace.com. The deals and sales events are designated as such on the product
detail page or on the respective websites.

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•

Photos – Members receive unlimited storage for photos in the Cloud and 5GB of storage for
videos and files. Members must have a Cloud account registered to the same XYZ account as
their Membership to activate this benefit. As long as the Membership is active, photos
uploaded to the Member’s Cloud will not count against the Member’s 5GB of fixed storage
capacity in the Cloud for files and videos.

Discussion
A. Yearly Membership Fee
Code Section 12-36-910(A) imposes a sales tax upon every person engaged or continuing within
this State in the business of selling tangible personal property at retail and Code Section 12-361310(A) imposes a use tax on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this State,
regardless of whether the retailer is or is not engaged in business in this State.
Code Section 12-36-60 defines the term “tangible personal property” to mean personal property
which may be seen, weighed, measured, felt, touched, or which is in any other manner
perceptible to the senses. It also includes services and intangibles, including communications, the
sale or use of which is subject to South Carolina sales and use taxes under Chapter 36 of Title 12.
Communications are subject to sales and use taxes under Chapter 36 of Title 12 pursuant to Code
Sections 12-36-910(B)(3) and 12-36-1310(B)(3), which impose the tax on the gross proceeds
accruing or proceeding from the charges for the ways or means for the transmission of the voice
or messages, including the charges for use of equipment furnished by the seller or supplier of the
ways or means for the transmission of the voice or messages.
It is the Department’s longstanding position that charges for the ways or means of
communications include charges for access to, or use of, a communication system (the manner,
method or instruments for sending or receiving a signal of the voice or of messages). SC
Revenue Ruling #06-8 addresses the application of the sales and use tax to a wide variety of
communication services. It provides that communication services such as telephone services,
paging services, answering services, cable television services, satellite programming services
(including emergency communication services and television, radio, music or other
programming services), fax transmission services, voice mail messaging services, e-mail
services, and database access transmission services (on-line information services), such as legal
research services, credit reporting/research services, and charges to access an individual website
are communication services subject to the sales and use tax pursuant to Code Sections 12-36910(B)(3) and 12-36-1310(B)(3). In addition, it provides that charges for other communication
services not listed in the advisory opinion are taxable if they constitute charges for the ways or
means for the transmission of the voice or messages and are not otherwise exempted under the
law. While the streaming of audio and video is not specifically discussed in SC Revenue Ruling

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#06-8, “streaming” 1 is the “transmission of the voice or messages” and, therefore, is subject to
the sales and use tax. It is a communication service similar to cable or satellite radio and
television services. See SC Revenue Ruling #16-5 for a discussion of streaming television
programs, movies, music, and other similar content.
Based on the above, ABC is in the business of selling tangible personal property at retail. In
addition, persons who pay the membership fee have the right, for no additional consideration, to
access or use streaming audio and video, which is a communication service (tangible personal
property) subject to sales and use tax.
The next issue is whether the membership fee is includable in “gross proceeds of sales,” the
measure of South Carolina’s sales tax.
Code Section 12-36-90 provides that gross proceeds is the value proceeding or accruing from the
sale of tangible personal property. It includes the proceeds from the sale of tangible personal
property without any deduction for the cost of goods sold, cost of materials, labor, or service,
transportation costs, or any other expenses. Similarly, the use tax is calculated on the “sales
price” of tangible personal property. Code Section 12-36-130 provides that sales price is the total
amount for which tangible personal property is sold, without any deduction for the cost of the
property sold, the cost of the materials used, labor or service cost, any services or transportation
costs that are a part of the sale, or any other expenses.
The Department has determined, in certain instances, membership fees related to the anticipated
sales of tangible personal property are includable in gross proceeds of sales, the measure of the
sales tax and, therefore, are subject to the sales and use tax. Examples of membership fees held
to be taxable by the Department include:

1. A membership fee that allows for the purchase of tangible personal property for no additional
   consideration (i.e., the membership fee is the sales price of the tangible personal property).
   For example, if a direct mail movie rental company charges a monthly or annual membership
   fee that allows members to receive movies for short term use and no other charges are paid
   by the members to receive the movies, then the monthly or annual membership fee is the
   sales price of the tangible personal property and subject to the tax. 2
2. A membership fee that allows members to receive a discount on the purchase of
   tangible personal property (e.g., allows members a lower product purchase price, free
   shipping, or receive free downloads of books) that nonmembers or other categories of
   paying or nonpaying members, if any, do not also receive.

1

The American Heritage Dictionary, Fifth Ed. (2011) defines the word “stream” as “to transmit
(audio or video content), especially over the Internet, in small, sequential packets that permit the
content to be played continuously, as it is being received and without saving it to a hard disk.”
2
South Carolina Sales and Use Tax Manual (2015 Edition), Chapter 6.
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For example, if a video rental club charges a monthly membership fee that allows
members to receive “free” or discount movie rentals while nonmembers rent movies
at a higher price, then the membership fee is considered subject to the sales tax as part
of the consideration paid for the rental of tangible personal property. 3
In certain circumstances, the Department has determined that membership fees related to
the anticipated sales of tangible personal property are not includable in gross proceeds of
sales and, therefore, are not subject to the sales and use tax. Examples include:

1. A retailer sells its product only to members and charges a membership fee that is in
   lieu of a security deposit or constitutes only a nominal processing fee.
2. A retailer sells its product only to members and charges a membership fee that allows all
   members to purchase the tangible personal property at the same lower price.
3. A retailer only sells products that are exempt from South Carolina sales and use tax.
   The membership fees charged by ABC do not fall within these exceptions.
   The term “gross proceeds of sales” also includes certain delivery charges. Regulation 117-310
   provides that whether or not delivery charges may be deducted by the seller from the selling
   price of tangible personal property does not depend on whether the charges are separately billed,
   but depends on whether the services rendered by the transportation agency are rendered to the
   seller or the purchaser. Since ABC contracts to deliver the tangible personal property to the
   buyer’s home or business (i.e., F.O.B. point of destination), the delivery charges are not
   deductible by the seller in computing its South Carolina sales tax liability.
   Based upon the above, the measure of the sales and use tax is the total proceeds of a sale; i.e., it
   is the sum total of all consideration received for the sale of tangible personal property, regardless
   of what the payment may be called, without any deductions whatsoever. The annual membership
   fees paid to ABC that allow members to receive the benefits listed in the facts above are subject
   to South Carolina sales tax since it entitles members to receive tangible personal property (i.e.,
   streaming video and audio) subject to South Carolina tax as a benefit of membership. Since the
   membership fee also entitles members to receive discounts on the purchase price and cost of
   delivery of items that are subject to the sales and use tax, and these benefits are not available to
   nonmembers, the membership fee is subject to South Carolina sales and use tax. The fact that the
   membership fee entitles the member the right to receive certain benefits that may not be subject
   to sales and use tax does not change the result.

3

SC Private Letter Ruling #90-6.
6

B. One Month Free Membership
Code Section 12-36-100 defines the terms “sale” and “purchase” to mean any transfer, exchange,
barter, conditional or otherwise, of tangible personal property for a consideration. The one month
trial membership is a promotional membership. Trial members may at any time choose not to
continue to paid membership at the end of the trial period. Since there is no consideration for the
one month trial membership, there is no retail sale in South Carolina, and therefore no South
Carolina sales tax is due.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Rick Reames III
Rick Reames III, Director
July 6
, 2016
Columbia, South Carolina

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