Were ABC's Advantage Card and Business Card warehouse-club membership fees subject to South Carolina sales tax under PLR 92-11?

Plain-English summary

South Carolina PLR 92-11 held that ABC's annual Advantage Card and Business Card membership fees were subject to sales tax.

The fees bought more than access to the warehouse. Paid members could purchase merchandise at the posted wholesale price, while customers using a 90-day free membership had to pay the wholesale price plus a 5% surcharge. That pricing benefit made the membership fee part of the consideration paid for tangible personal property.

The membership structure

ABC was a membership-only warehouse selling brand-name merchandise, principally to the business community.

Under the policies effective January 1, 1992:

• an Advantage Card cost $25 annually, with one additional card available for $10;
• a Business Card also cost $25 annually, with additional named cardholders available for $10 each under the described limits;
• paid members bought merchandise at the posted wholesale price; and
• qualifying customers could use a free 90-day membership, but their merchandise purchases carried a 5% surcharge.

All three membership groups paid sales tax on merchandise when applicable.

Why the fee entered the sales-tax base

Section 12-36-910 imposed sales tax on gross proceeds from retail sales. Section 12-36-90 broadly measured gross proceeds by the total value from the sale without deductions, and Section 12-36-100 defined a sale as a transfer of tangible personal property for consideration.

The ruling therefore asked whether the membership fee was part of the consideration for merchandise.

It compared the arrangement with SC Revenue Ruling 90-6 and a cited Virginia ruling concerning video-club fees. Those authorities distinguished a fee that provided free or discounted rentals from a fee that merely replaced a security deposit or covered nominal processing.

ABC's paid members received a concrete pricing advantage: they avoided the 5% surcharge imposed on free temporary members. The PLR treated the membership fees as part of the consideration for purchasing merchandise and taxed them accordingly.

What this means for you

Membership retailers and warehouse clubs

A fee tied to lower merchandise prices was taxable under this ruling because it contributed to what the customer paid for the retail-purchase privilege.

Subscription and loyalty programs

The benefit attached to the fee mattered. The ruling distinguished discount access from a nominal processing charge or security-deposit substitute.

Accounting teams

The fact that merchandise purchases were separately taxed did not remove the membership fee from gross proceeds when the fee purchased a price benefit.

Current programs

Analyze the current program terms and current law. PLR 92-11 was expressly limited to ABC's policies effective January 1, 1992.

Common questions

Q: Were the Advantage Card and Business Card fees taxable?

A: Yes. The ruling included both membership fees in the sales-tax base.

Q: What benefit made the fees taxable?

A: Paid members bought at the posted wholesale price without the 5% surcharge imposed on free 90-day members.

Q: Did separate sales tax on merchandise make the fee nontaxable?

A: No. The membership fee was additional consideration for the merchandise-purchasing benefit.

Q: Did the ruling apply to ABC's older membership policies?

A: No. It expressly applied only to the policies effective January 1, 1992.

Q: Can another membership retailer rely on PLR 92-11?

A: No. The ruling was temporary, fact-specific, and nonprecedential.

Citations and references

• S.C. Code Ann. § 12-36-910(A) — historical sales tax on gross proceeds of retail sales
• S.C. Code Ann. § 12-36-90 — gross proceeds of sales definition
• S.C. Code Ann. § 12-36-100 — sale definition
• State v. Byrnes, 219 S.C. 485, 66 S.E.2d 33 (1951)
• SC Revenue Ruling #90-6 — video-club membership fees cited by the PLR
• Virginia Ruling of the Commissioner, P.D. 87-50 (February 26, 1987) — cited membership-fee comparison

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR92-11.pdf

Original ruling text

SC PRIVATE LETTER RULING #92-11

TO:

ABC

TAX MANAGER:

John P. McCormack

SUBJECT:

Membership Fees
(Sales Tax)

DATE:

December 29, 1992

REFERENCE:

S.C. Code Ann. Section 12-36-910 (Supp. 1991)
S.C. Code Ann. Section 12-36-90 (Supp. 1991)
S.C. Code Ann. Section 12-36-100 (Supp. 1991)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1991)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request.
Private Letter Rulings have no precedential value and are not intended for
general distribution.

Question:
Are the membership fees charged by ABC for its "Advantage Card Membership" and "Business
Card Membership" subject to the sales tax?
Facts:
ABC, a division of XYZ, is a membership-only warehouse offering a selection of brand-name
merchandise to business owners and managers at wholesale prices. It is a national division of
XYZ Stores principally designed to serve the needs of the business community. However, ABC
does offer memberships to members of a limited number of groups. Effective January 1, 1992,
ABC changed its membership policies, and its membership fee structure, as described below.
ABC offers two types of memberships to fit the needs of its customers - the Advantage Card
Membership and the Business Card Membership.

1

The Advantage Card Membership may be purchased by qualifying individuals at a cost of
$25.00 annually. The member may purchase one additional card for $10.00 annually. These
members pay the posted wholesale price for merchandise and are required to pay the applicable
sales tax on all purchases. The following persons are eligible for an Advantage Card
Membership:

1. A civilian or military employee of the federal, state, county or city government.
2. An employee of a public or private academic school, college or university.
3. An employee of a regulated utility company, telephone company, financial
   institution, insurance company, scheduled airline or railroad, or hospital.
4. A retired employee of any of the employment groups listed above and current
   members of AARP or members of approved credit unions.
5. XYZ shareholders.
   The Business Card Membership is available to any business with a valid retail license or a valid
   business license. The fee for this membership is $25.00 annually. If the application is accepted,
   then one personalized membership card is issued to the primary cardholder for the business. In
   addition, the business may name up to four additional cardholders who are issued personalized
   membership cards for an annual fee of $10.00 each. After two years, the business may name two
   additional cardholders who will also be issued personalized membership cards for an annual fee
   of $10.00 each. These additional cards expire at the same time as the main membership card,
   regardless of when they were issued. These members pay the posted wholesales price for
   merchandise and are required to declare at the time of purchase whether or not the transaction is
   subject to sales tax. If sales tax is due, then the member must pay the tax. Failure to pay the tax
   when due subjects the business' membership to ABC to immediate forfeiture.
   With respect to both types of membership, a membership card that is lost or stolen may be
   replaced for a charge of $2.00.
   Finally, as a marketing tool to encourage certain businesses and individuals to join, 90 day free
   memberships are available. These free memberships are offered to those persons who would
   otherwise qualify for either the Advantage Card Membership or the Business Card Membership.
   Any person using the 90 day free pass must pay the posted wholesale price for merchandise plus
   a 5% surcharge. They are also required to pay the sales tax, if applicable.
   Discussion:
   The issue is whether membership fees are includable in "gross proceeds of sales", which is the
   measure of the sales tax.
   Code Section 12-36-910(A) states that "[a] sales tax, equal to five percent of the gross proceeds
   of sales, is imposed upon every person engaged or continuing within this State in the business of
   selling tangible personal property at retail".
   2

Code Section 12-36-90 defines "gross proceeds of sales", in part, as:
[T]he value proceeding or accruing from the sale, lease or rental of tangible personal
property.
(1) The term includes:

(b) the proceeds from the sale of tangible personal property without any deduction
for:
(i) the cost of goods sold;
(ii) the cost of materials, labor, or service;
(iii)interest paid;
(iv) losses;...
In State v. Byrnes , 219 SC 485, 66 S.E. 2d 33, (1951), the Supreme Court of South Carolina
stated:
In general, the sales tax is an imposition upon the privilege of the business of selling at
retail and measured by the amount of business done, which is a clear case of an excise
tax ... (emphasis added).
In summary, the measure of the sales tax is the total proceeds of a sale; i.e., it is the sum total of
all consideration received (without any deductions whatsoever) for the sale, lease, or rental of
tangible personal property, regardless of what the payment may be called.
The term "sale" is defined at Code Section 12-36-100, in part, as [a]ny transfer . . . of tangible
personal property for a consideration". Therefore, it must be determined if membership fees are
part of the "consideration" for the purchase of tangible personal property at ABC.
With respect to membership fees, the Virginia Department of Revenue determined that if "a
membership entitles one to rent tapes at lower rates than nonmembers, the club membership fee
would be subject to the tax" (Ruling of the Commissioner, P.D. 87-50, February 26, 1987). In
reaching its decision, the Virginia Department of Revenue reasoned:
. . . the [Virginia] statutes . . . contemplate the imposition of tax upon virtually any type
of transaction under which tangible personal property is or can be . . . rented for a
consideration. [Therefore,] one must first determine whether either type of video club
membership fee entails the right to rent or receive tapes or other tangible personal
property...

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If membership in . . . [a] club is a membership which entitles one to rent tapes at lower rates than
nonmembers, the club membership fee would be subject to the tax. However, club membership
fees would not be taxable if membership merely entitles one to rent tapes without placing a
security deposit.
Also, the Commission in SC Revenue Ruling #90-6, which also concerns membership fees to
video clubs, cited this determination by the Virginia Department of Revenue and held:
Membership fees paid to a video rental "club" are subject to the sales tax as part of the
consideration paid for the rental of tangible personal property, pursuant to Code
Section 12-36-910, only if the payment of such fee entitles the purchaser to "free" or
discount movie rentals.
However, if such fee is in lieu of a security deposit or constitutes only a nominal
processing fee and does not include "free" or discount movie rentals, the fee is not
subject to the tax.
Based on the above, membership fees at ABC, like the membership fees discussed in SC
Revenue Ruling #90-6, are a part of the consideration paid by the member for tangible personal
property. Both the "Advantage Card Membership" and "Business Card Membership" receive a
benefit that the other type of membership, the "90 day free membership", does not receive. They
pay only the posted wholesale price, while this third type of membership, although temporary,
pays the posted wholesale price plus a 5% surcharge. All three memberships pay the sales tax
when applicable.
Conclusion:
The membership fees charged by ABC for its "Advantage Card Membership" and "Business
Card Membership" are subject to the sales tax.
Note: This ruling only addresses ABC membership policies that became effective on January 1,
1992 and is not applicable to ABC previous membership policies.

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