Were a country club's $10,000 refundable certificates of ownership subject to Texas sales tax?

Plain-English summary

A Section 501(c)(7) country club planned to raise money to buy its leased land and clubhouse by asking members to pay $10,000 for certificates of ownership. The certificates gave holders regular-member privileges and voting rights, and the club intended to identify the payments as refundable initiation fees in written member agreements and its bylaws.

Rule 3.298(b) generally taxed private-club dues, initiation fees, and other charges for membership privileges, but it excluded initiation fees that were refundable under a written agreement. The Comptroller concluded that these certificates qualified for that exclusion on the facts presented.

The planned refund terms mattered. A member would receive $10,000 no later than 30 years after payment, or could receive the amount paid by a replacement member upon resignation. If that replacement payment was less than $10,000, the club represented that it would either pay the difference at the 30-year anniversary or assess and report sales tax when the former member forfeited the unpaid balance.

The letter also stated that a new member's nonrefundable initiation fee and annual dues would remain taxable.

What this means for you

Country clubs and private clubs

Calling a payment a certificate of ownership was not enough by itself. The nontaxable treatment depended on written membership documents and bylaws identifying it as a refundable initiation fee, plus real refund rights.

Accountants and tax professionals

Track any shortfall between the original payment and the amount actually returned. Under the alternatives presented in the letter, the club either preserved the member's claim to the balance or reported tax when the balance was forfeited.

Common questions

Were the $10,000 certificates taxable when paid? No, on the stated terms. They qualified as written refundable initiation fees.

What documents had to show the refund right? The letter required the membership contract and/or club bylaws to identify the certificates as refundable initiation fees.

What happened if a resigning member received less than $10,000? The club represented that it would either pay the difference at the 30-year anniversary or assess and report tax on the forfeited portion.

Were all club charges exempt? No. The letter expressly said new members' nonrefundable initiation fees and annual membership dues remained taxable.

Citations and references

• 34 Tex. Admin. Code Rule 3.298(b) (private-club charges and refundable initiation fees)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9203L1165E01

Original ruling text

March 5, 1992

Dear **:

Thank you for your recent letter concerning the taxability of
refundable Certificates of Ownership (Initiation Fee). You
requested that we express an opinion as to the taxability of a
hypothetical situation involving refundable Certificates of
Ownership, identified to members as initiation fees.

FACTS:

The voting membership of a Sec. 501(c)(7) country club desires to
purchase the land and existing clubhouse which the country club
is currently leasing. In order to raise the funds necessary to
accomplish this acquisition, the country club intends to solicit
payments for refundable Certificates of Ownership (Initiation
Fee) ("Certificates") in the amount of $10,000 from existing club
membership. These Certificates will serve as evidence that a
member has paid the refundable initiation fee necessary to have
full club privileges.

All current regular club members will be encouraged to
participate in the club purchase program during which time
payment for the Certificates will be solicited. Any present
regular member who chooses not to buy a Certificate will be able
to remain a country club member, but in a membership
classification other than a regular member (i.e., tennis, social,
non-resident, junior, etc.). Members in classifications other
than regular members may make payment for Certifications on a
first-come, first-served basis entitling them to status of a
regular member. Holders of Certificates, with status as a member
in good standing, are to have one vote on club matters.

Members will be fully advised that payment for a Certificate
constitutes a refundable initiation fee. The refundable feature
of these Certificates is to be evidenced by a written agreement
between the country club and a subscribing member. Additionally,
the refundable feature of these Certificates will be recorded in
the club's Bylaws.

Certificates are to refunded pursuant to the earlier of the
following two (2) events:

1) A member's Certificate is to be refunded in the amount
of $10,000 no later than thirty (30) years from the date at
which payment for such Certificates is made; or

2) At the time a member resigns, a process will exist
whereby such member's Certificate may be redeemed for the
amount a new member will be required to pay for such
Certificate. A new member's non-refundable initiation fee
and annual membership dues will continue to be subject to
sales tax.

ISSUE:

Does the requirement to assess the Texas sales tax apply to
payments for refundable Certificates of Ownership (Initiation
Fee) as discussed above?

RESPONSE:

Section (b) of Rule 3.298 reads as follows:

(b) Charges to private club members and guests. The
membership dues, initiation fees, and other assessments and
fees charged for a special privilege, status, or membership
classification in a private club or organization...are
taxable. ...(I)initiation fees which are refundable, as
evidenced by a written agreement, are not taxable (emphasis
added).

The Certificates will qualify for exemption from tax under this
section if the membership contract and/or club by-laws identify
the Certificates to the members as a refundable initiation fee.
In the event that a member were to receive less than the $10,000
"initiation fee" paid under condition (2) of the conditions for
refund, you represented that the difference would be payable to
the member at the 30 year anniversary of the payment of the
initiation. Alternatively, the club would agree to assess and
report sales tax on the portion (of the original "initiation
fee") not refunded to the former member at the time the member
forfeits the balance.

Under the facts represented in your letter and the two
alternatives represented to be available to members under
condition (2) of the conditions for refund, the Certificates will
qualify as refundable initiation fees and would not be taxable.

This opinion is based on the facts presented. Other facts though
similar may provide a different result.

If you have other questions or need more information, you may
call 512/463-4600, or 1-800-252-5555 from outside Austin. You
may write to Tax Administration Division.

Sincerely,

Gilbert Zamora
Tax Administration Division