Is the sale of a membership stock interest in a private Texas country club subject to sales tax?

Plain-English summary

A member of a private, nonprofit 501(c)(7) country club asked the Comptroller whether he could sell his membership stock interest — evidenced by a stock certificate — to a new member without charging sales tax. The club helps facilitate these transfers, keeping a 15% administrative fee and forwarding the rest to the departing member, then issuing a new certificate to the buyer.

The Comptroller's answer: as a general rule, selling stock in a corporation isn't subject to sales tax. But country club stock is different because owning it is what gets you club privileges (i.e., amusement services). So:

• If the fee for the stock is really a refundable initiation fee (backed by a written agreement), no sales tax is due under Rule 3.298(b).
• If an individual member — who doesn't habitually sell memberships and isn't in that business — sells his one stock interest directly to a prospective member, the sale qualifies as an exempt occasional sale under Rule 3.298(a)(3) (Amusement Services) and Rule 3.316(b)(3) (Occasional Sales).
• If the club itself sells the membership (rather than a member selling it), the occasional sale exemption does not apply, because the club is regularly engaged in selling amusement services.

The ruling also rejected the taxpayer's alternative argument that the sale was an exempt transfer of "an identifiable segment of a business" under Rule 3.316(d)(1)-(2): that exemption requires that the segment's income and expenses could be separately tracked in the seller's own books before the sale, and the member here doesn't directly own the club — he only owns stock in the corporation that owns the club — so the test isn't met.

What this means for you

Country clubs

If your club facilitates member-to-member stock transfers (collecting a fee and reissuing certificates), the tax treatment turns on who is legally making the sale. A transfer initiated and sold by an individual member to a new member can be tax-exempt as an occasional sale; a membership sold by the club itself is not. The club's administrative/transfer fee itself isn't addressed by this letter — the ruling focuses on the taxability of the underlying stock sale.

Members selling their stock interest

You can sell your single country club membership stock interest tax-free to an incoming member if you're not in the business of habitually selling such interests. Keep in mind this only works for a one-off sale by an individual — it doesn't extend to the club conducting the sale on your behalf as its regular business.

Accountants and tax professionals

Watch for two separate legal theories in this letter: (1) the occasional-sale exemption (Rule 3.298(a)(3) and Rule 3.316(b)(3)), which the Comptroller confirmed applies to a one-time member-to-member sale, and (2) the "identifiable segment of a business" exemption (Rule 3.316(d)(1)-(2)), which the Comptroller rejected because the member doesn't directly own the club's assets or books, only stock in the club's owning corporation. Also flag the refundable-initiation-fee carve-out under Rule 3.298(b) as a separate, fact-dependent path to non-taxability.

Common questions

Q: Does selling stock in a company always avoid sales tax?
A: As a general rule, yes — but country club membership stock is an exception because owning the stock is what grants amusement-service privileges, so the sale of that stock can itself be taxable.

Q: When is the sale of country club membership stock tax-exempt?
A: When it's a refundable initiation fee under a written agreement (Rule 3.298(b)), or when an individual member who doesn't habitually sell such interests sells his one membership directly to a new member (occasional sale under Rule 3.298(a)(3) and Rule 3.316(b)(3)).

Q: What if the club, rather than the member, handles the sale?
A: Then the occasional sale exemption doesn't apply, because the club is regularly in the business of selling amusement services.

Q: Can the member argue this is a sale of a business segment instead?
A: No — the Comptroller rejected that theory here. The member doesn't directly own the club or its books/records; he only owns stock in the corporation that owns the club, so the "identifiable segment of a business" exemption under Rule 3.316(d)(1)-(2) doesn't apply.

Citations and references

Rules cited in the letter:

• 34 Tex. Admin. Code Rule 3.298, Amusement Services (subsections (a)(3) and (b))
• 34 Tex. Admin. Code Rule 3.316, Occasional Sales (subsections (b)(3), (d)(1), and (d)(2))

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9302L1224A01

Original ruling text

February 22, 1993

Dear ****:

This is in response to your letter concerning the taxability of sales of
a membership stock interest in a private country club. I have restated the
facts present by you below followed by my response:

FACT: The item in question that is being sold is a stock interest, as
evidenced by a stock certificate, in a private nonprofit 501(c)(7) country
club that is owned by an individual who is not in the business of renting,
selling or leasing. We are not aware at this time whether or not this
member does possess a sales tax permit for an unrelated business he may
also be involved in. The club is assisting in the transfer of the stock
interest for which it retains a 15% administrative fee with the balance of
the proceeds forwarded to the withdrawing member. A new stock certificate
is issued to the new member.

You are of the opinion that the transaction is exempt under Rule
3.316(b)(3), as an occasional sale. Furthermore, you contend that this is
a sale of an identifiable segment of a business, as is required under Rule
3.316(d)(1), since it is a sale by that member-shareholder of an undivided
fractional interest in all the underlying assets of the tax exempt
corporation which his stock interest represents.

In the alternative, you contend that the contemplated sale by the member
would fall under the provisions of Rule 3.298(a)(3) as an occasional sale
as well. Your member has only this one membership stock interest to sell
and he is not habitually holding himself out as engaging in the sale of
amusement services.

RESPONSE: As a general rule, the sale of stock in a corporation is not
subject to sales tax. However, if the stock ownership is a requirement for
a special privilege, status, or membership classification in a private
club, that provides amusement services, the sale of the stock is taxable.
If the fee paid for the stock is categorized as an initiation fee and is
refundable, as evidenced by a written agreement, sales tax would not be
due (see section (b) of Rule 3.298).

A sale of membership stock in a country club by a member, who does not
hold himself out as engaging, or does not habitually engage in the selling
of amusement services, directly to a prospective member qualifies for
exemption as an occasional sale under Section (a)(3) of Rule 3.298
Amusement Services and Section (b)(3) of Rule 3.316 Occasional Sales
(copies enclosed).

If your client's membership is sold by the club, the occasional exemption
cited above would not apply as the club is engaged in the regular selling
of amusement services.

The sale of membership stock in a private club does not qualify as the
sale of an identifiable segment of a business. Section (d)(2) of Rule
3.316 requires that to qualify as a sale of an identifiable segment,
income and expenses attributable to the segment could be separately
established from the books of account and record prior to the sale. Your
client does not directly own the private club, rather he owns stock in the
corporation that has title to the club.

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 me at
1-800-531-5441, extension 3-4502. The regular number is 512/463-4600. You
may also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division