Could a health club exclude diagnostic-analysis and optional-service charges from taxable membership fees?

Plain-English summary

The Comptroller reversed an earlier 1985 position and ruled that diagnostic analysis was directly related to a health club's amusement service. A separately stated analysis charge therefore had to be included in the membership sales price.

The combined membership and analysis charge was entirely taxable or entirely exempt, depending on whether it was purchased under a licensed practitioner's written prescription as described in Rule 3.298(g)(8). Individual contracts signed before March 17, 1986 that separately stated and excluded diagnostic analysis were honored until renewed, extended, or modified.

The record also addressed genuinely optional services such as classes and babysitting. The March 17 letter said separately stated optional charges remained excludable and could be stated as a percentage of the total fee. But an enclosed February 7 letter said qualifying charges had to be stated in dollars, not as a percentage. Because the reproduced record contains both statements, this page does not resolve that internal inconsistency.

An earlier January letter added that the entire membership was taxable unless members could choose the particular services or classes they wanted and each fee was unique to that individual.

Common questions

Was diagnostic analysis excluded merely because it was separately stated? No. The Comptroller reversed that treatment and included it in the membership price.

When could the combined charge be exempt? When purchased under the written prescription of a licensed practitioner under the cited amusement rule.

What happened to existing contracts? Contracts signed before March 17, 1986 were honored until renewal, extension, or modification.

Could optional services be separated? The record says genuine optional charges could be excluded when separately stated, but its March and February letters conflict over whether percentages were acceptable.

Citations and references

• Tex. Tax Code § 151.005(3), § 151.007(a)(2), and § 151.0101(b) — cited in the record's analysis of the sales price and separately stated charges.
• 34 Tex. Admin. Code Rule 3.298(g)(8) — written-prescription treatment for the amusement service.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8603L0707E02

Original ruling text

March 17, 1986

Dear **:

Pursuant to our recent telephone conversations, we discussed the
exclusion from the
sales tax base of a separately stated charge for diagnostic analysis. We
had told the
Association of Physical Fitness Centers in 1985, that this separately
stated charge was
not subject to soles tax as an amusement. This letter is to notify you
that we have
reversed this decision.

Upon reexamination of the issue, we have determined that the diagnostic
analysis is a
service directly related to the providing of the amusement service. The
charge for the
analysis must be included in the sales price of the membership. Please
refer to sections
151.005(3), 151.007(aX2), and 15 1.01 0 1 (b) of the Texas Tax Code.

The total charge, membership and analysis, will be totally taxable or
totally exempt
depending upon whether it is purchased pursuant to a written prescription
of a licensed
practitioner as outlined in section 3.298(g)(8) of the amusement rule.

Any contracts with individual customers you have which were signed prior
to the date
of this letter, which separately stated and excluded from the tax base,
diagnostic
analysis, will be honored until such time as the contracts with
individual customers are
renewed, extended or modified.

Additionally, charges must continue to be excludable from the tax base
when
separately stated, such as optional charges for classes or babysitting,
may be stated as
a percentage of the total fee.

You should address any additional questions on the amusement services to
our Tax
Policy section at 512/463-4600.

Sincerely,

(Mrs.) Wanda Hutcheson
Director, Tax Administration

February 7, 1986

Dear ***:

I have reviewed your correspondence and discussed it with Mrs. Hutcheson
and the members of the Tax Policy Section.

It is our opinion that for any qualifying charges to be exempt, the
charges
for each must be stated in dollars and; not in a percentage of a total
fee.
Please refer to Section 151.0101(b), for our authorization. I have
enclosed a
copy of the statute for your reference.

I would like to make it clear that for diagnostic analysis charges to be
exempted, the diagnostic analysis must be performed by a licensed
practitioner of the healing arts. Additionally, the charge of $490 for
the
analysis seems unreasonable compared to $70 for a year's use of
equipment.

Please feel free to contact me if you have additional questions. You may
write me, call toll free 1-800-252-5555 from anywhere in Texas or phone
512/463-4600.

Sincerely,

Al Van Allen
Tax Policy Section
Tax Administration Division

January, 16, 1986

Dear ***:

Thank you for your recent letter to Ms. Burchard. I have been asked to
respond.

Unfortunately, the information you provided in the paragraph below
appears
contradictory.

Presently, the membership contracts make no allocation of payments
to particular services offered. The Centers propose to modify
their contracts to provide for such an allocation on a "pick and
choose" basis by inserting the following provision:

The cash price and renewal dues paid hereunder shall be
allocated, in the proportions set forth below, to the following
services and facilities available for use by the member provided,
however, that all amounts due under this contract shall be paid
whether or not the member elects to use all of such facilities and
services. Seller agrees to sell the member at member's request
prior to execution of this contract only the services and facilities
shown below as member shall designate for a cash price equal to
the allocable percentage shown below for the services and facilities
so designated, multiplied by the cash price disclosed on the face
of this contract.

In your second sentence of the above paragraph you say the client must
pay
for use of all facilities and services while in the third, you say he
does not.

To restate Ms. Burchard's opinion, "There is no provision for taxing a
percentage of a fee. You must collect tax on the total amount charged
for a
membership unless the member has the option of selecting the services or
classes they wish to participate in, making each fee unique to that
particular
individual. "

Unless the charges are separately stated they are taxable.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,

Al Van Allen
Tax Policy Section
Tax Administration Division