00-003

Response March 27, 2000

REQUEST LETTER

January 14, 2000

Re. Taxation of Discount Membership Fees

Dear Mr. Marrelli:

We have a client that has been contacted by the Auditing Division of the Tax Commission. After lengthy discussions with that division, we have been unable to reach a satisfactory resolution to the situation. At the recommendation of the Auditing Division, we are writing to request an official advisory opinion from the Utah State Tax Commission on the issue.

Our client, COMPANY, d/b/a COMPANY, is in the business of selling memberships, solicited by independent contractors, in a discount buying service owned and operated by a third party, Company B. Our client retains a portion of the sales price of each membership sold as compensation for having obtained each new member. The purchase of the membership entitles the member to access a database of products and services available at discount prices. Company B is the retailer of the products and services ordered by the members. Company B maintains a database of products and services available through its suppliers. Company B does not maintain an inventory of theses goods and services. When a member orders an item, Company B purchases the item from its supplier and directs the manufacturer/supplier to drop‑ship the merchandise or provide the service to the member m Utah or wherever the member directs.

Our question is whether the sale of the membership itself is subject to sales tax within your state. We have relied on Tax Commission Advisory Opinion, 96‑178, and the facts and circumstances found within, to advise our client that the transaction is exempt from sales tax. We find no significant differences in the fact patterns between those in the Advisory Opinion referenced and those of our client to warrant disparate treatment.

However, the Auditing Division disagrees with our position and maintains that the transaction is properly subjected to Utah sales tax. We are enclosing copies of our previous correspondence with the Auditing Division for your review.

If you have any questions, please feel free to call me at #####.

Very truly yours,

NAME

RESPONSE LETTER

March 27, 2000

RE: Sales Tax on Discount Membership Sales

Dear NAME,

You have requested an advisory opinion concerning the sale of discount memberships in Utah by your client, COMPANY. (ACOMPANY@). You specifically ask if the memberships sold by COMPANY are subject to Utah sales tax. By purchasing one of the memberships sold by COMPANY, the purchaser in entitled to buy products and services at discount from an Aunrelated@ company. You state that COMPANY retains a portion of the sales price of each discount membership as compensation. Accordingly, we assume that the remainder of the sales price for the discount membership is remitted to the company that sells the discounted products and services to the membership purchaser.

In Tax Commission Advisory Opinion 94-012DJ, the Tax Commission stated that membership fees which entitled the purchaser to discounted or free merchandise or services are considered taxable as part of the sales price of the merchandise or service provided. In essence, the purchase price of taxable products or services includes not only the amount paid or charged for the discounted product or service, but also the amount paid for a discount membership entitling the purchaser to make that purchase.

Tax Commission Advisory Opinion 96-178 stated that sales of discount memberships are only taxable if they are sold by the vendor or retailer who deals in the goods or services to which the discount applies. The facts presented in that opinion led the Commission to believe that the party selling the discounted membership kept the entire membership price, with none of it going to the party selling the goods and services. However, the facts you present involving COMPANY are different. 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 Aunrelated@ company. Accordingly, if these goods and services are of a type subject to sales tax, the discount memberships sold by COMPANY are also taxable.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

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