If most members join a collectibles club mainly for the intangible right to buy exclusive pieces later, is the membership fee still taxable because a low-value welcome kit and newsletter come with it?

Plain-English summary

A company sold memberships to a collectors' club built around its figurines and gift items. New members received a "club kit" made and assembled overseas -- a membership figurine or teddy bear, a lapel pin, a fun kit box, a treasure-search game, and a newsletter subscription -- and the company asked whether the membership fee was taxable.

The company made a "true object" argument. It argued (backed by survey data) that new members primarily wanted the intangible benefit of exclusive club status and the future right to buy members-only pieces -- not the kit itself, which the company said cost less than $2 to produce and was smaller/less desirable than purchased figurines. Under this theory, providing the kit was just incidental to selling a nontaxable membership, not a retail sale of tangible personal property.

The Comptroller rejected the argument and held the membership fee taxable. The reasoning walked through several Tax Code provisions: § 151.005 defines "sale" to include a club's furnishing/distribution of tangible personal property to anyone, and § 151.007(e) specifically says a club or organization's membership "sales price" includes dues, fees, and other charges for membership. Because the membership fee is paid in exchange for actual taxable items -- the kit's tangible personal property AND a taxable newsletter/information service -- that squarely meets the statutory definition of a sale, regardless of members' subjective motives or the kit's modest cost. Low kit value or the presence of intangible membership benefits doesn't create an exemption.

Use tax and multistate tax credit: if the company is "engaged in business" in Texas, it must collect use tax on membership sales to Texas residents. If the company already paid sales tax to another state on the kit components (before reselling them via the membership), it should seek any refund/credit from THAT state -- Texas will not give a credit or deduction against the Texas use tax owed for tax paid to a different state on these items.

What this means for you

Membership clubs, collector societies, and subscription businesses that include a welcome kit

Don't assume a low-value welcome gift or newsletter makes your membership fee "mostly intangible" and therefore exempt. Under this letter's reasoning, ANY transfer of tangible personal property (or a taxable service like an information newsletter) bundled into a membership fee for consideration makes the entire fee taxable, regardless of relative value or members' stated motivations.

Businesses selling nationally with a fulfillment kit sourced/taxed elsewhere

If you already paid sales tax to another state on components later included in a Texas membership sale, pursue a refund/credit from that OTHER state -- Texas won't offset its own use tax for tax paid elsewhere on the same items in this scenario.

Accountants structuring club/membership offerings

Consider separately pricing genuinely intangible membership access from any tangible deliverables if you want a shot at nontaxable treatment on the intangible portion -- bundling everything into one membership fee, as here, invites the whole charge being taxed.

Common questions

Q: Does it matter that most members join mainly for intangible club benefits, not the kit?
A: Not under this letter -- because the fee includes actual tangible items (and a taxable newsletter) for consideration, it meets the statutory sale definition regardless of members' subjective primary motive.

Q: Does the kit's low cost (under $2 to produce) matter?
A: No -- relative low cost of included items doesn't create an exemption or exclusion from tax.

Q: If tax was already paid to another state on the kit items, can it offset Texas use tax?
A: No -- Texas won't allow a credit or deduction for tax paid to another state in this scenario; pursue a refund from that other state instead.

Q: Does this letter bind the Comptroller for other membership/subscription businesses?
A: No -- this is an informal 2001 letter addressing one company's specific club structure, not a modern Private Letter Ruling or General Information Letter, and it cannot be relied on by anyone else.

Citations and references

Statutes:

• Tex. Tax Code § 151.005 (definition of "sale"/"purchase"; includes club/fraternal-organization furnishing of TPP)
• Tex. Tax Code § 151.007 (sales price/receipts)
• Tex. Tax Code § 151.007(e) (club/organization membership sales price includes dues, fees, charges)
• Tex. Tax Code § 151.010 (taxable item definition)
• Tex. Tax Code § 151.051 (sales tax imposed)
• Tex. Tax Code § 151.101 (use tax imposed)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200108417L

Original ruling text

August 15, 2001

Dear **:

Thank you for your letter regarding the taxability of a client's membership
fee, kits transferred to members upon joining the club, and credit for tax paid
to another state.

Your client sells memberships to a club. The club consists of members that
collect the figurines and gift items sold by your client. Upon joining the
club, your client sends the member a membership kit. The kits consists of
several items of tangible personal property such as membership figurines or
teddy bears, a lapel pin, a fun kit box, a treasure search game, and a
subscription to a newsletter. The kits are manufactured and assembled in the
Far East.

You asked if the membership is taxable and if your client is considered the
consumer of the club kit.

In your analysis, you stated: "In the present case, the "true object" of the
membership is the desire to join an "exclusive" club and to obtain the right to
purchase exclusive members' only pieces, whether or not such pieces are
actually purchased. Surveys indicate that the primary motive of new members is
not to obtain the Club Kits and the free membership piece. Indeed, each of the
items in the kit is of relatively little value, including the free membership
piece, which generally costs less than $2.00 to produce and is smaller and less
desirable than purchased figurines. As such, COMPANY'S provision of the club
kits is not a retail sale of tangible personal property but is merely the
transfer of such property as an incident to the sale of the nontaxable
membership."

TAX STATUTES:

Section 151.005 of the Texas Tax Code defines "Sale" or "Purchase" as:

"Sale" or "purchase" means any of the following when done or performed for
consideration:

(1) a transfer of title or possession of tangible personal property;

(2) the exchange, barter, lease, or rental of tangible personal property;

. . . . . . .

(5) the furnishing and distribution of tangible personal property by a social
club or fraternal organization to anyone.

Section 151.007 defines "sales price" or "receipts" to mean the total amount
for which a taxable item is sold, leased, or rented, valued in money.

Furthermore, Section 151.007(e) states:

The sales price of membership in a private club or organization consists of the
dues, fees, and other charges and assessments, including initiation fees,
required for membership or a special privilege, status, or membership
classification in the club or organization.

Section 151.010 defines a "Taxable Item" as:

"Taxable item" means tangible personal property and taxable services.

Section 151.051 states"

(a) A tax is imposed on each sale of a taxable item in this state.

(b) The sales tax rate is 6 1/4 percent of the sales price of the taxable item
sold.

Section 151.101 states:

(a) A tax is imposed on the storage, use, or other consumption in this state
of a taxable item purchased from a retailer for storage, use, or other
consumption in this state.

(b) The tax is at the same percentage rate as is provided by Section 151.051
of this code on the sales price of the taxable item.

Based on this review of the tax statutes, the conclusion of this office is that
the memberships are taxable.

The relative low cost of the items provided with the membership in relation to
the cost of membership or the fact that there are certain intangible benefits
incurred with membership trigger an exclusion or exemption from tax. Based upon
your description and a review of your client's Internet website, your client's
membership fees represents more than the sale of an intangible. While the
surveys provide evidence that the intent of the purchaser is to purchase the
intangible benefits of membership, it is a fact that taxable items (i.e.,
tangible personal property in the figurines or teddy bears and a taxable
information services in the newsletter) are exchanged for consideration. This
clearly falls within the meaning of a sale as defined in the tax statute.
Because the charge for membership includes the transfer of tangible personal
property and a newsletter for a consideration, the membership fee is taxable.

You also asked if use tax would be due on the membership kits sent to Texas
members and if a credit would be allowed for tax paid to another state on the
costs of the kits.

Response: If your client is engaged in business in Texas, your client is
responsible for collecting use tax on the sales price of the memberships sold
with the kits to Texas residents.

If your client paid tax to another state on items that are being resold in
Texas, your client should contact that state regarding any refund or credit for
the tax paid to that state. If tax was originally paid to another state on the
taxable items included with the membership dues, Texas will not allow a credit
or deduction of the use tax due on the sales price of this transaction for tax
paid to the other state.

A complete set of rules, along with the text of the Tax Code, and a wealth of
other information are available through our website at window.state.tx.us. You
may view the rules at
http://www.window.state.tx.us/taxinfo/rulendx/rulelist3.html#sst. You must
scroll down to the appropriate rule.

This opinion is based on the facts presented. Other facts, though similar, may
result in different answers.

I hope this information is helpful. I'll be glad to help you if you have
additional questions. You may email your questions to
[email protected]. My direct line is 512-475-0037. The toll-free number
is 1-800-531-5441, ext. 5-0037.

Sincerely,

Lindey Osborne
Tax Policy Division