Is selling stock in a corporation that operates a country club subject to Texas sales tax when stock ownership is required for membership?

Subject

Refundable Initiation Fees For Membership To Country Club/Athletic Club; Limited Only To Refunded Portion Of Initiation Fee & No Other Fees Per Plain Language Of Rule

Plain-English summary

An individual planned to set up a corporation to run a country club, capitalized by selling stock. Under the plan, owning stock would be what makes someone a dues-paying member -- every member had to own stock. The taxpayer asked the Comptroller two questions: (1) is the sale of that stock subject to sales tax, and (2) does the answer change if the stock is sold to someone outside Texas and the stock is issued by a foreign corporation?

The Comptroller's answer starts from a general rule and then carves out the club-membership situation:

• General rule: selling stock in a corporation is not subject to sales tax.
• Membership exception: if owning the stock is required to get a special privilege, status, or membership classification in a private club that provides amusement services, the sale of that stock is taxable.
• Refundable initiation fee exception: if the payment for the stock is categorized as an initiation fee and is refundable, as shown by a written agreement, no sales tax is due -- this comes from section (b) of Rule 3.298.

On the out-of-state question, the Comptroller distinguished two scenarios. If the foreign corporation also owns country clubs in other states, it would need a separate contract for stock tied to a club located outside Texas in order to avoid Texas tax on that out-of-state sale. But if every contract sold is for stock in a country club located in Texas, Texas tax applies to all stock sales, regardless of whether the purchaser is inside or outside Texas.

As with other STAR letters of this era, the Comptroller notes the answer is based on the facts presented and that different facts could lead to a different result.

What this means for you

People setting up a country club or athletic club as a corporation

If your plan requires stockholders to own stock in order to become or remain a club member, that stock sale is generally taxable as tied to a membership privilege in a club providing amusement services -- it is not treated as an ordinary, non-taxable stock sale.

Clubs structuring fees as refundable initiation fees

The one way described in this letter to avoid sales tax on the fee is to structure it as a refundable initiation fee backed by a written agreement, invoking section (b) of Rule 3.298. A fee that isn't refundable, or isn't documented in writing as refundable, does not get this treatment.

Clubs selling stock/memberships to out-of-state buyers

If your corporation's country clubs are located only in Texas, selling stock to an out-of-state buyer does not get you out of Texas tax -- tax is due regardless of where the purchaser lives. Avoiding Texas tax on an out-of-state sale requires a separate contract tied to a club actually located outside Texas.

Common questions

Q: Is selling stock in a corporation normally subject to Texas sales tax?
A: No -- as a general rule, the sale of stock in a corporation is not subject to sales tax.

Q: When does selling stock in a country club become taxable?
A: When stock ownership is required for a special privilege, status, or membership classification in a private club that provides amusement services -- then the sale of the stock is taxable.

Q: How can a country club avoid sales tax on the amount paid for stock/membership?
A: If the payment is categorized as an initiation fee and is refundable, as evidenced by a written agreement, sales tax would not be due, per section (b) of Rule 3.298.

Q: Does selling stock to an out-of-state buyer avoid Texas tax?
A: Not by itself. If all the corporation's contracts are for stock in a Texas-located country club, Texas tax is due on all stock sales no matter where the purchaser is located. A separate contract tied to a club located outside Texas would be needed to avoid Texas tax on that sale.

Citations and references

Rules:

• 34 Tex. Admin. Code § 3.298(b) (Rule 3.298, governing refundable initiation fees for amusement services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1429F08

Original ruling text

August 26, 1996

FAX ***

Dear ***:

Thank you for your letter dated August 5, 1996, concerning sales tax.

Facts: An individual wants to setup a corporation whose
business will be a country club. He would like to issue stock for capitalizing
the business. The ownership of stock enables each stockholder to become a due
paying member. All members must own stock in the company in order to be a
member of the country club.

Questions: Is the sale of stock subject to sales tax?
What if the stock is sold to someone outside the state of Texas and the stock
being sold is from a foreign corporation?

Comptroller 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 (section (b) of Rule 3.298).

Presuming the sale is to someone located outside Texas
the following will apply: If the foreign corporation also owns country clubs in
other states, a different contract for the sale of stock (in a country club
located outside Texas) would be required in order to avoid Texas tax on the
sale to someone outside Texas. If all contracts are for the sale of stock in a
country club located in Texas, Texas tax is due on all sales of stock, whether
the purchaser is located in Texas or in another state.

This opinion is based on the facts presented and
current law. Different facts although similar, may result in different
answers. Please call me if you have any questions or need more information.
Our toll free number is 1-800-531-5441, and my extension is 5-0330. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bettie Peterson
Tax Policy Division

NOTE: Previous Accession Number 9608547L