A member of an online buying club (SITE ONE) purchases distressed/discounted merchandise from manufacturers using membership access, then resells it. Is the club's membership fee taxable, and what are the member-reseller's own sales tax obligations on the merchandise it resells over the Internet?

Plain-English summary

A taxpayer wrote in about their business model: they pay a membership fee to join an online buying club ("SITE ONE"), which gives members access to discounted, distressed merchandise from various manufacturers, and the taxpayer then resells that merchandise. The Comptroller looked into SITE ONE's website and addressed two separate tax questions — the club's membership fee, and the member's own resale business.

The membership fee is taxable. SITE ONE is selling a taxable information service — price lists, manufacturer information, and similar data — so it should collect Texas sales tax on the membership fee from members located in Texas (subject to the 20%-of-value information services exemption that took effect October 1, 1999). If SITE ONE isn't "engaged in business" in Texas under Rule 3.286(a)(1) and doesn't collect the tax, the responsibility shifts to the member, who must self-report and pay use tax on the membership fee as a taxable purchase.

The member's resale business has its own separate obligations. To resell the distressed merchandise (including via the Internet), the member must get a Texas sales tax permit and collect sales tax on items shipped or delivered to Texas customers — but sales shipped to customers outside Texas aren't subject to Texas sales tax, provided the member keeps shipping/delivery documentation proving the interstate shipment. Once permitted, the member can give the manufacturer a resale certificate to buy the merchandise tax-free, then collect tax on the full price (including shipping/handling) billed to Texas customers, reporting Texas sales as "taxable sales" and out-of-state sales in "total sales" but not "taxable sales." If the member instead keeps merchandise for personal use or gives it away, tax is owed on that property as a "taxable purchase," based on what the member paid for it — and if SITE ONE never charged tax on the membership fee itself, that fee also gets reported as a taxable purchase.

What this means for you

Members of online buying clubs who resell merchandise

Your buying club's membership fee is likely taxable as an information service (with a Texas self-reporting obligation if the club doesn't collect it), and separately, your own resale business needs its own permit, resale certificate, and Texas/out-of-state sales tracking — these are two distinct tax obligations layered on top of each other.

Online sellers of discounted/distressed goods shipped nationwide

Get a Texas sales tax permit, collect tax only on Texas-bound shipments, and keep your shipping documentation on file to support the exemption on everything shipped elsewhere.

Accountants and tax professionals

A useful illustration of how a taxable information-services membership fee and a separate taxable-goods resale business can both arise from the same buying-club relationship, each with its own permit/certificate/reporting mechanics.

Common questions

Q: Is a paid membership fee for access to a discount-merchandise buying club taxable in Texas?
A: Yes, if the club is providing price lists and manufacturer information -- that's a taxable information service.

Q: What if the buying club doesn't charge Texas sales tax on the membership fee?
A: The member must self-report and pay tax on the fee as a taxable purchase, if the club isn't "engaged in business" in Texas and doesn't collect it.

Q: Does a member reselling merchandise online need their own sales tax permit?
A: Yes, to collect Texas sales tax on merchandise shipped or delivered to Texas customers.

Q: Are sales shipped to customers outside Texas taxable?
A: No, as long as shipping/delivery documentation is kept proving the interstate shipment.

Q: Can I rely on this letter for my own buying-club or resale business?
A: No. It's based on the specific facts submitted and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.286(a)(1) (engaged in business in Texas)
• 34 Tex. Admin. Code Rule 3.342 (Information 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/9908618L

Original ruling text

August 6, 1999

Dear Mr. **:

Thank you for your letter concerning your sale of distressed merchandise you
purchase as a member of the SITE ONE.

I researched the information available at the SITE ONE website and it appears
the company allows its members to purchase distressed merchandise from various
manufacturers at discounted prices. There is a membership fee to join SITE
ONE. SITE ONE is selling taxable information services (i.e., price lists,
information on manufacturers, etc.) so SITE ONE should collect tax on the fee
if the member is located in Texas. Effective October 1, 1999, there is an
exemption in the sales tax law for 20 percent of the charge for taxable
information services. If SITE ONE is not "engaged in business" in Texas per
enclosed Rule 3.286(a)(1) and does not collect tax on the information service,
the member is responsible for paying the tax on the portion of the information
service used in Texas. See enclosed Rule 3.342 for further information on
taxable information services.

You must get a sales tax permit and collect sales tax on sales of tangible
personal property (including distressed merchandise and other taxable items
sold via the Internet) shipped or delivered to customers in Texas. Sales of
property shipped or delivered to customers outside Texas are not subject to
Texas sales tax. You must keep the shipping or delivery documents in your
records as proof the sales are exempt as interstate shipments. A sales tax
permit application packet has been sent to you under separate cover.

Once you get a permit, you may give a resale certificate to the vendor for the
purchase of property that you resell. Sales tax is then collected on the total
price (including any shipping or handling charges you bill) to your Texas
customer. The sales are reported on the "taxable sales" line of the sales tax
return. The exempt sales outside Texas are included in the "total sales" line
of the return, but not in "taxable sales."

You must pay sales tax on property you buy for your own use or give away as
gifts. If you purchase property tax free for resale and later use it for
yourself or give it away, you are required to report and pay tax on your sales
tax return based on the price you paid for the property. This is reported on
the "taxable purchases" line of the return. If tax was not paid to SITE ONE on
the membership fee, the fee is reported on this line as a taxable purchase.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division