Are monthly fees for web-based discount and service membership clubs subject to Utah sales and use tax?

Plain-English summary

An out-of-state company operated seven web-based membership programs ("Clubs A through G") that, for a monthly fee, gave members a bundle of intangible discounts and benefits -- discounts on hotels, car rentals, and restaurants; best-price guarantees; road/towing protection; credit card fraud and identity-theft protection; extended limited-warranty protection on unrelated purchases; and, for two clubs, a free weekly e-newsletter and monthly magazine. The company itself never sold tangible personal property; it solicited members directly and through contracted third-party sellers who received a one-time solicitation fee for each referred member (but no ongoing share of the membership fee). The company asked whether the monthly fees were subject to Utah sales and use tax, and whether any free tangible items or taxable services provided to members were taxable on the club's own cost.

Membership fees are exempt, applying the "true object" test. Utah taxes retail sales of tangible personal property and certain enumerated services (§ 59-12-103(1)), but under Eaton Kenway, Inc. v. Utah State Tax Comm., 906 P.2d 882 (Utah 1995), the "true object" of a transaction controls: if the true object is a nontaxable intangible benefit, no tax is due on the price paid, even if some taxable services or property are incidentally provided. The Commission agreed that for all seven clubs, the essence of the transaction is the broad bundle of intangible discounts and privileges, not any tangible property or service -- so the monthly membership fees are not subject to Utah sales and use tax. This followed the Commission's own prior ruling on discount clubs (Private Letter Ruling 96-178) and matched how other states (Texas, New York, California, New Jersey, Ohio) and a Connecticut case (Dine Out Tonight Club v. Dep't of Revenue Services, 210 Conn. 567 (1989)) treat similar membership programs.

The extended-warranty benefit doesn't change the answer -- but a fee-sharing arrangement could. Two of the clubs bundled in "extended limited warranty protection," and ordinarily selling an extended warranty is a taxable repair service under Utah Admin. Rule R865-19S-78. But because the warranty benefit is just one of many bundled privileges with no reasonable way to allocate consideration to it specifically, and the clubs aren't in the business of selling warranties, its inclusion doesn't make the membership fees taxable. However, the Commission distinguished a different prior ruling (PLR 00-003) where a club retained only part of the fee and passed the rest to the seller of the discounted goods/services -- there, the fee was treated as part of the purchase price of taxable goods/services and became taxable. Here, since the third-party sellers only get a flat one-time solicitation fee (not a cut of the ongoing membership fee), that fee-sharing rule doesn't apply.

Free tangible items are still taxable to the club. Any tangible personal property or taxable service the company provides to members without a separate charge -- the complimentary magazine, newsletter content's paper/ink/printing cost, or a free membership kit (decal, cap, patch) given during a trial period -- is taxable, but only on the club's own purchase cost of that item, via Utah use tax, not on the membership fee itself.

What this means for you

Discount club, buying club, and membership program operators

If your true product is an intangible bundle of discounts, guarantees, or protections -- not tangible goods or an enumerated taxable service -- Utah treats the membership fee itself as exempt, even if the bundle includes something that would be taxable if sold on its own (like an extended warranty), as long as there's no reasonable way to carve out separate consideration for that piece. But watch your revenue-sharing structure: if you pass along part of the membership fee (rather than a flat referral fee) to the seller of taxable goods or services, the fee can become taxable as part of that sale's purchase price.

Businesses that ship free promotional items to Utah customers

Even when your core service is exempt, giving away tangible items (magazines, kits, swag) to Utah customers at no separate charge creates a Utah use tax obligation on your own cost of those items -- track and remit that separately from the exempt membership revenue.

Accountants and tax professionals

This ruling is a clean application of the Eaton Kenway true-object test to bundled intangible/tangible transactions, and usefully contrasts two Commission rulings on the same general fact pattern (96-178 exempt vs. 00-003 taxable) based solely on how the vendor's compensation is structured relative to the underlying taxable sale.

Common questions

Q: Are membership fees for discount clubs taxable in Utah?
A: Generally no, if the true object of the membership is an intangible bundle of discounts, guarantees, and protections rather than tangible property or a taxable service.

Q: Does bundling a taxable extended warranty benefit into a membership program make the whole fee taxable?
A: Not automatically -- if the warranty benefit is just one of many bundled intangible privileges with no reasonable way to allocate a separate price to it, and the club doesn't sell warranties as a business, the fee stays exempt.

Q: If a club splits its membership fee with the seller of the discounted goods or services, does that change the tax treatment?
A: Yes -- if the club retains only part of the fee and remits the rest to the seller of taxable goods/services, the fee can be treated as part of the purchase price of that taxable sale and become taxable. A flat, unrelated one-time referral fee paid to solicitors does not have this effect.

Q: Are free promotional items given to members taxable?
A: The club owes Utah use tax on its own purchase cost of any tangible items (magazines, kits, etc.) given free to Utah members, even though the membership fee itself is exempt.

Q: Does this ruling apply to my membership or subscription business?
A: No. It binds the Commission only for the requesting taxpayer and the specific clubs and facts described, and can't be relied on by another taxpayer -- though it illustrates how the Commission applies the true-object test to similar programs.

Citations and references

Statutes and rules:

• § 59-12-103(1) (tax on retail sales, services, and use of tangible personal property)
• Utah Admin. Rule R865-19S-62 (meal tickets/coupon books/merchandise cards)
• Utah Admin. Rule R865-19S-78 (extended warranties as taxable repair services)

Case law:

• Eaton Kenway, Inc. v. Utah State Tax Comm., 906 P.2d 882 (Utah 1995) (true-object test)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/06-025.pdf

Original ruling text

REQUEST LETTER

06-025

Commissioners
Utah State Tax Commission
210 North 1950 West
Salt Lake City UT 84134

Re: Private letter Ruling Request on Application of the Utah Sales and Use Tax to
Web-based Discount and Service Membership Programs/Clubs.

Dear Commissioners:

This letter requests a private letter ruling as to the applicability of the Utah Sales and Use
Tax to Web-based Discount and Service Membership Programs/Clubs. However, if the
requirements of a private letter ruling are not met by this request, we request that you
please provide an information letter addressing these issues.

                                             FACTS

The Company we represent (the “Company”) provides Internet based (“web-based”)
discount and service membership programs/clubs. The Company is not located in Utah.
To become a member of one of these membership programs/clubs, a person must sign up
over the Internet. Moreover, the Company also solicits members through contracts with
various web-based service providers and sellers which allow the Company to solicit over
the Internet the customers of such sellers and service providers to become members in the
Company’s various membership programs/clubs.1 (The Company itself is not a shopping
club or organization that sells tangible personal property.) The Company is not currently
being audited by the Commission, nor is it involved in litigation with the Commission on
this matter.

In the Company’s membership programs/clubs, for a monthly membership fee, the
members receive membership privileges and benefits, such as discounts to hundreds of
third party attractions, restaurants, hotels, car rentals and air fares, best price guarantees
protection, delivery guarantees, road and towing protection, credit card fraud protection
and theft and loss protection on the member’s internet purchases. Some of the
membership programs/clubs also offer to the members credit report access, daily credit
report monitoring services and identify theft protection. As part of its services and
intangible benefits, one of the clubs provides a free weekly e-newsletter and monthly
magazine.

1
These sellers and services providers do not receive any of the monthly membership fees, however, a seller
or service provider will get one-time cash solicitation fee (depending on the type of solicitation or
advertising employed) for each customer solicited that become a new member that joins the club.

Page 2

The Seven Membership Programs/Clubs are listed below:

1. Club A – provides up to 50% discount at hundreds of attractions, restaurants,
   retailers, service providers and cinemas for members. The membership
   benefits also include trip delay, hotel over-booking, baggage delay and loss,
   road and towing protections.

2. Club B – provides up to 50% discount on hundreds of hotels, up to 25%
   discount on car rentals, the receipt of road and tow protection, up to $500
   savings (discounts) on airfare and hotel fire/theft protection.

3. Club C – provides discounts and rebates at hundreds of online merchants. It
   also provides best price guarantee protection of up to $100 per claim on the
   difference between the price paid by a member to various retailers and any
   lower price offered by those retailers within 90 days. Other benefits include
   delivery guarantees, and protection for credit card fraud and unauthorized
   charges. It also automatically protects any members’ qualifying purchases
   from retailers, by giving the members free extended limited warranty
   protection on their purchase equal to the original warranty period provided by
   the manufacturer. In addition, damage, theft and loss protection is provided
   for purchases for 90 days.

4. Club D – provides essentially the same benefits and privileges as Club C,
   except it does not provide discounts and rebates at hundreds of online
   merchants.

5. Club E – provides free unlimited online credit report access to a member, as
   well as daily credit monitoring service. The credit report information is
   available through a third party credit card reporting agency. A ##### Identity
   Theft Insurance and $##### in credit card loss and theft protection is
   included. Dispute forms and tools and assistance services are also provided to
   assist members in correcting any inaccuracies in their credit reports.

6. Club F – provides a 10% discount to certain race car events, access to insider
   race car events, special pass programs and pre-race benefits, $#### in savings
   (discounts or other offers) for racing related programs, free access to special
   member related interactive websites, access to special free offers and race
   related discounts for members, a free subscription to members magazine, a
   free weekly e-newsletter and up to 50% in discounts at certain attractions,
   restaurants, etc. In addition, during the free trial period (no fee is charged), the
   prospective paying member will receive a membership kit which includes a
   free member decal, referral cards, baseball cap, patch and other items.

7. Club G – provides a twenty-four (24) hour concierge service, discounts at
   national amusement parks and movies theaters, a complementary magazine

Page 3

       subscription, discounts on hotel and car rentals, and travel related protections
       including trip delay, hotel overbooking, hotel fire/theft, baggage delay and
       loss, travel accident insurance and credit card fraud protection.

                               RELEVANT LAW

Utah imposes a sales and use tax on retail sales of tangible personal property and certain
enumerated services in Utah and on the use or consumption of such property and services
in Utah. Utah Code Ann. Sec. 59-12-103. In this regard, sales of extended warranties are
taxable services under Utah law. Utah Tax Commission Rule R865-19S-78. However,
membership fees to discount clubs/programs are not subject to tax, when sold by a third
party who is not the vendor for the goods or services provided. Tax Advisory Opinion 96-
178 (12/6//96).

In determining whether a transaction is taxable, the “true object” of the transaction must
be determined. Eaton Kenway, Inc v. Utah State Tax Comm., 906 P. 2d 882 (Utah,
1995). Therefore, if the true object of the transaction is a nontaxable intangible benefit or
service, no tax is due on the price paid for that transaction, but any taxable services or
tangible personal property used or transferred in the transaction is taxable on the purchase
price paid by the provider. Id.

Significantly, while there is no Utah case law or regulations on the taxability of web-
based discount membership clubs, other states have recognized that such membership
programs that provide “intangible rights” to receive a discount or other privileges are not
subject to sale and use tax. See e.g.s. Texas Ruling Nos. 9105L1113E11 (1991),
200106309L (2201), and 9605290L; Comptrollers Decision Nos. 42,657 (2006) 39,557
(2004) 22,260 (1998) and 22,613 (1988); See similarly New York TSB-A-01 (23) S
(Sales Tax) (7/31/01; TSB–A-04(3)S (Sales Tax) (2/24/04); TSB-A-96(7) (Sales Tax)
(12/4/92; See also dine Out Tonight Club v. Department of Revenue Services, 210 Conn.
567 (1989) (True object of transaction was the conveyance of non-taxable intangible
rights.)

                           OPINIONS REQUESTED

1. The monthly membership fees paid for the membership program in Clubs A
   through G are not subject to Utah Sale & Use Tax.

2. Any tangible personal property or taxable services provided without
   additional charge to Utah members of the Clubs, either in the free trial period
   or as part of the membership benefits and privileges provided (e.g. a
   magazine) is taxable at the cost of such property or service to the Clubs.

Page 4

                                   ANALYSIS

Clubs A through G are membership programs/clubs that provide various intangible
benefits, privileges (e.g. third party discounts), and related services to their members.
These clubs have no facilities in Utah, nor do they sell amusements or tangible personal
property. Under the Utah Sales and Use Tax, the membership fees paid to belong to these
clubs are not taxable sales in Utah. Here, the essence of the transaction for the members
is the broad array of intangible membership benefits received. Any information
transferred merely conveys the nature and extent of the benefits provided (e.g. types and
extent of discounts). So no Utah Sales and Use Tax is due on this transaction. See Tax
Advisory Opinion 96-178 (12/6/96).

The fact that some tangible personal property or services are transferred by a couple of
the clubs incident to the club membership does not change the essence of the transaction.
See Eaton Kenway, Inc., supra.; Young Electrical Sign Co. v Utah State Tax
Commission., 291 P. 2d 900 (Utah, 1955). Rather, any such property or services
transferred to a Utah member are taxable on their cost to the club. Id.

Notably, in applying its similar sales and use tax, the New York Department of Finance
and Taxation has stated that similar types of membership fees are not taxable. New York
TSB-A-01(23)S (7/31/01), (Sea Tow International, Inc. membership program/club
(Advantage Network) which provided numerous intangible benefits, privileges and
services, was held to be not taxable). New York TSB-A-04(3)S (2/24/04). (Membership
fees paid to Boat U.S., a boater’s travel club, was also held not to be subject to New York
Sales and Use Tax.)

California’s board of Equalization, the New Jersey Division of Taxation and the Ohio
Department of Taxation have also ruled for this specific situation that the membership
fees paid to Clubs A through G are not taxable, since they are sales of “intangibles” and
not tangible personal property. Opinion Letters attached.

                              CLUBS A, B AND E

Clubs A, B and E provide only non-taxable intangible privileges and benefits to its
members. Therefore, there is no Utah Sales or Use Tax due on their membership fees.

                               CLUBS C AND D

Clubs C and D provide numerous intangible benefits, privileges and related services for
their membership fees. All of these benefits, privileges and services are free (no
additional charge) to their members. Therefore, the membership fees are not taxable
under the Utah Sales and Use Tax. The fact that one of the intangible privileges or
benefits available is a free extended limited warranty protection benefit for purchases

Page 5

made by the member from a wide range of unaffiliated retailers (located throughout the
country) does not convert the payment of the membership fees into a taxable transaction
for Utah Sales and Use Tax purposes. The clubs do not sell these warranties; they are
merely privileges of club membership. 2 The essence of the transaction is till the same.
Simply put, the Company is not in the business of selling extended warranties.
Nevertheless, it is understood, that any taxable services or tangible personal property
provided to the clubs members may be taxable to the clubs based on the clubs purchase
price (if any) of such tangible personal property and taxable services. Id.

                                       CLUBS F AND G

Clubs F and G’s membership fees are not subject to Utah Sales and Use Tax. Here, the
essence of the transaction to the sale of a non-taxable membership. However, the
purchase price Clubs F and G pay to another for tangible personal property provided as
part of the intangible membership benefits and privileges provided to their members in
Utah may be subject to Utah Sales and Use Tax. Therefore, the cost of any
complimentary magazine or the cost of any paper, ink or printing of the members
magazine sent to Utah Members may be taxable. Likewise, the cost of the free
membership kit provided, by Club F, during the free trail period, for delivery to a Utah
member may be taxable.

                                         CONCLUSION

The monthly membership fees paid to the Company for the intangible benefits and
privileges provided by membership programs of Clubs through G are not subject to Utah
Sales and Use Tax. Rather, to the extent these are any tangible personal property or
taxable services purchased at retail by the Company and supplied free to the members as
part of the membership benefits and privileges may be taxable based on their cost to the
Company.

Please call me if you have any questions concerning the above. Thank you for your time
and consideration of this matter.

Very Truly Yours,

NAME
ADDRESS
PHONE
EMAIL
RESPONSE LETTER

2
The limited warranty/guarantee protection benefit is not for a specific item purchased but is a general
intangible benefit covering a wide category of potential purchase.

Page 6

February 28, 2007

NAME
ADDRESS

RE: Private Letter Ruling 06-025
Applicability of Utah sales and use tax to web-based discount and service membership
programs/clubs

Dear NAME,

     We have received your letter requesting a ruling as to the taxability of “web-based

discount and service membership programs/clubs.” This letter ruling is not intended to be
a statement of broad Tax Commission Policy. It is an interpretation of the tax law as it
relates to the facts presented in your request letter and the assumptions stated in this
letter. If the facts or assumptions are not correctly described in this ruling, please let us
know so we can assure a more accurate response to your circumstances.

                                      FACTS

     You stated the following facts in your request letter. Your client, henceforth

“Company,” is not located in Utah. Memberships are solicited over the Internet directly
and also by entering into contracts with various web-based sellers and service providers
that allow Company to solicit their customers. The providers whose customers have
become members of Company’s program receive a one-time solicitation fee.

    For a monthly fee, members receive various privileges and benefits depending on

the particular club he/she has joined. Some examples are: discounts at restaurants, hotels,
car rentals and air fares; best price guarantee protection; delivery guarantees; road and
towing protection; extended limited warranty protection; credit card fraud protection;
internet theft protection; credit report access; and a weekly newsletter and monthly
magazine.

   Company does not sell any of the tangible personal property provided in the

various clubs. Third parties provide all such items.

 The request letter outlined the various benefits provided by each of the clubs that

Company offers.

                              APPLICABLE LAW

   Utah Code Section 59-12-103(1) imposes tax on the purchaser for amounts paid

Page 7

or charged for, “(a) retail sales of tangible personal property made within the state; …(e)
sales of prepared food; (f) …amounts paid or charged for admissions or user fees for
theaters, movies, … (g) amounts paid or charged for services for repairs or renovations of
tangible personal property…(i) amounts paid or charged for tourist home, hotel, motel, or
trailer court accommodations…(l) amounts paid or charged for tangible personal property
if within this state the tangible personal property is: (i) stored; (ii) used; or (iii) otherwise
consumed:…”

   Tax commission rule R865-19S-62 states that sales of meal tickets, coupon books,

or merchandise cards are taxable if they are sold by, “persons engaged in selling taxable
commodities or services.” The commission used this provision to apply to discount
membership clubs in Private Letter Ruling 96-178.

    In a subsequent private letter ruling where the promoter retained a portion of the

membership fee and remitted the balance to the provider, the commission reached a
different decision: “You state that COMPANY does not retain the entire membership fee.
Instead, the party that sells the discounted products and services receives a portion of
each membership fee that COMPANY sells. As a result, the membership fees paid to
COMPANY would be considered part of the purchase price for the products or services
sold by the ‘unrelated’ company. Accordingly, if these goods and services are of a type
subject to sales tax, the discount memberships sold by COMPANY are also taxable.”3

    You indicated that a seller or service provider will get a one-time cash solicitation

fee for each customer solicited. It is not clear from the request how that compensation is
determined. Accordingly, we do not address whether all or a portion of those fees may be
subject to sales tax when received by the providers. Those payments, however, are
sufficiently unrelated to the ongoing membership fees and any potential use of the
services or products by club members, that payment of those solicitation fees will not
cause the membership fees to be subject to Utah sales tax. If a service provider received a
portion of the monthly membership fee, however, the answer as to the taxability of the
various club memberships could change.

                                     ANALYSIS

    Club A: The attractions, restaurants, and theaters would under normal

circumstances be taxable. If they are provided entirely by the third party, the membership
fees are for intangibles and are exempt from tax. However, if a portion of the club
membership is transferred to the provider, then the membership fee is taxable.

       Club B: Same as Club A.

   Club C: This club has many of the same items as clubs A and B above and the

answer for Club A applies. It also has some additional items of protection and insurance.

3
See Private Letter Ruling 00-003.

Page 8

Among those are “extended warranty protection.” In general, the sale of an extended
warranty is a taxable transaction because it is considered to be for future repair under Tax
Commission Rule R865-19S-78. In this case, however, the extended warranty protection
is only one of many services provided. There appears to be no reasonable way to
calculate what portion of the consideration for the membership fees is allocable to the
warranties. Accordingly, the inclusion of extended warranty services in a variety of
services, as outlined in your letter, will not cause the membership fees to be taxable. If
the terms of the arrangement is for the club to reimburse the customer for repairs the
customer is charged for, then the repair would be taxable when purchased by the
customer. If, however, the arrangement is for the club to obtain the repair and the
customer does not pay for the repair directly or pays only a reduced amount, then the club
will be liable for sales tax when it purchases the repair. Any reduced amount paid by the
club member would also be subject to tax.

Club D: Same as Club C.

Club E: The items for this club appear to be all for non-taxable services and would be
exempt from sales or use tax.

Club F: Same as Club A.

Club G: Same as Club A.

   Finally, the complimentary newsletters and magazines would be considered

incidental to the transactions and by themselves would not make the membership fees
become taxable. However, use tax would be required to the State of Utah for the costs to
Company of any such magazines or newsletters shipped to Utah members.

                                 CONCLUSION

   Therefore, based on the analysis provided above and in line with the facts

provided in your request letter, we agree with your conclusion that:

   1.        The monthly membership fees paid for the membership programs in
             Clubs A through G are not subject to Utah sales & use tax;

   2.        With respect to the warranties provided with Clubs C and D, taxes will
             be imposed on the payment for the actual repairs that are taxable under
             Utah Law. If the club member pays for the repairs and is reimbursed by
             the Company, the club member is required to pay sales or use tax. If the
             Company pays for the repair directly, it would be obligated for the tax.

   3.        Any tangible personal property or taxable services provided without
             additional charge to Utah members of the Clubs, either in the free trial
             period or as part of the membership benefits and privileges provided is

Page 9

              taxable at the cost of such property or service to the clubs.

Our conclusion is based on the facts you presented. Should the facts be different from
those represented in this letter, our opinion may change accordingly. Thank you for you
inquiry into this matter.

For the Commission,

Marc B. Johnson
Commissioner

MBJ/BA
06-025