When did SC Revenue Ruling 90-6 tax video-rental club membership fees and late-return charges?

Plain-English summary

South Carolina Revenue Ruling 90-6 treated a video-club membership fee as taxable consideration for renting tangible personal property when the fee gave the customer free rentals or reduced rental rates.

A fee was not taxable when it merely replaced a security deposit or was only a nominal processing charge and provided no free or discounted rentals.

Late-return charges were taxable in every case addressed. The Commission treated them as part of gross proceeds and as additional rental charges.

Membership-fee test

The ruling focused on what the customer received for the fee:

• Taxable: a specified number of “free” video or VCR rentals, or access to discounted rental rates.
• Nontaxable: only the ability to rent without posting a security deposit, or only nominal processing, without free or discounted rentals.

The taxable membership rule applied to fees received on or after January 1, 1991.

Why discounted-rental memberships were taxable

Section 12-36-910 imposed sales tax on gross proceeds from retail sales. The historical gross-proceeds definition included the value arising from a sale, lease, or rental without deductions, and “sale” included a transfer of tangible personal property for consideration.

The membership payment was part of the consideration for the rental when it purchased free-rental credits or lower rental prices. The label placed on the charge did not remove it from gross proceeds.

Late fees

Video clubs charged daily amounts when tapes were returned after the due date, sometimes using the normal daily rental amount.

RR 90-6 held that these charges arose only because of the rental and therefore formed part of its gross proceeds. It also characterized them directly as additional rental charges. That conclusion applied to all periods open under the statute.

What this means for you

Historical video-rental businesses

Look through the fee label to the benefit sold. A membership connected to free or reduced-price rentals was taxable; a deposit substitute without rental benefits was not.

Late-charge accounting

The ruling did not treat lateness charges as separate damages or penalties. It included them in the taxable rental proceeds.

Current businesses

Do not transfer this 1990 result automatically to streaming, digital subscriptions, equipment rentals, or modern penalties. Apply current law to the actual product and charge.

Common questions

Q: Was every video-club membership fee taxable?

A: No. Tax depended on whether the fee bought free or discounted rentals.

Q: Was a fee charged instead of a security deposit taxable?

A: Not when it provided no free or discounted rentals.

Q: Were late fees taxable?

A: Yes. The ruling treated them as gross proceeds and additional rental charges.

Q: Did the membership and late-fee rules have the same effective date?

A: No. Membership fees were covered from January 1, 1991; late fees were covered for all open periods.

Citations and references

• S.C. Code Ann. § 12-36-90(1)(b) — historical gross-proceeds definition
• S.C. Code Ann. § 12-36-100 — historical sale definition
• S.C. Code Ann. § 12-36-910(A) — historical sales tax
• Meyers Arnold, Inc. v. South Carolina Tax Commission, 285 S.C. 303, 328 S.E.2d 920 (Ct. App. 1985)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR90-6.pdf

Original ruling text

SC REVENUE RULING #90-6

SUBJECT:

Video Club Memberships and Late Fees
(Sales and Use Tax)

TAX ANALYST:

Jean P. Croft

EFFECTIVE DATE:

With respect to membership fees, the effective date is January 1, 1991.
With respect to late fees, this ruling applies to all periods open under
statute.

SUPERSEDES:

All previous documents and any oral directives in conflict herewith.

REFERENCE:

S.C. Code Ann. Section 12-36-90(1)(b)
S.C. Code Ann. Section 12-36-100
S.C. Code Ann. Section 12-36-910(A)
(As Enacted June 1990)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of how tax
law is to be applied to a specific set of facts. A Revenue Ruling is
public information and remains a permanent document until superseded
by a Regulation or is rescinded by a subsequent Revenue Ruling.

Questions:

1. Are membership fees paid to a video rental "club" subject to sales tax pursuant to Code
   Section 12-36-910?
2. Are late fee charges paid to a video rental "club" subject to sales tax, pursuant to Code
   Section 12-36-910?
   Facts:
   Some video rental businesses charge a membership fee to their customers. In some cases this
   membership fee entitles a customer to one of the following benefits:

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a) A specified number of free video and/or VCR rentals;
b) A reduced rental rate; or
c) Such "membership" fee may be charged in lieu of a security deposit.
Video "clubs" typically charge a late fee for videos which are returned past the due date. For
example, a $2 late fee may be charged for each day the video is late on a normal rental of $2.50.
Others may charge a full day's rental for each day the video is late.
Discussions:
The issue is whether membership fees and late 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".
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 for the sale, lease, or rental of tangible personal property, regardless of
what the payment may be called, without any deductions whatsoever.
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 and
late fees are part of the "consideration" which must be paid for use of the videos.

2

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...
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.
With respect to late fees, the Vermont Department of Taxes, in Ruling 87-13 dated September
28, 1987, provides
an analogous situation. The Department held that a "lease cancellation
fee" was a receipt from the rental of tangible personal property. The Department stated:
. . . the cancellation fee you have described is a "receipt" from the rental of tangible
personal property and is therefore subject to tax. In effect the Lessor has simply agreed to
accept less than it is legally entitled to receive under the lease agreement. The amount
that is paid, whether it is nominated rental payments or a "cancellation fee", is subject to
tax as part of the consideration for the lease (emphasis added).
The Tax Commission also held such fees were subject to taxation in SC Private Letter Ruling

88-5.

In addition, the decision of the Court of Appeals of South Carolina in Meyers Arnold, Inc. v.
South Carolina Tax Comm'n., 285 S.C. 303, 328 S.E.2d 920 (1985, App.), provides insight
concerning this question. The court, in determining if lay away fees were includible in "gross
proceeds of sales", held:
But for the lay away sales, Meyers Arnold would not receive the lay away fees. The fees are
obviously charged for their service rendered in making lay away sales. For these reasons, this
court holds the lay away fees are part of the gross proceeds of sales and subject to the sales tax.
Id. at 306, 328 S.E.2d at 923.
Conclusion:

1. 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 1236-910, only if the payment of such fee entitles the purchaser to "free" or discount movie
   rentals.

3

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.
The Commission has determined that the imposition of the sales tax on video club
membership fees will be effective for membership fees received on or after January 1, 1991.

2. Late fee charges paid to a video rental "club" are subject to the sales tax pursuant to Code
   Section 12-36-910, as such charges are part of "gross proceeds of sales", and also constitute
   additional rental charges.

SOUTH CAROLINA TAX COMMISSION

S. Hunter Howard, Jr., Chairman

A. Crawford Clarkson, Jr., Commissioner

T. R. McConnell, Commissioner
Columbia, South Carolina
August 14
, 1990

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