97-045

Response August 4, 1997

 

 

REQUEST LETTER

 

July 15, 1997

 

Re: Request For Advisory Ruling

MAILING ADDRESS

POST OFFICE BOX II 655

SALT LAKE CITY. UTAH 64147 0655

 

On behalf of our client, COMPANY A, we request that the Utah State Tax Commission issue an advisory ruling that, under the facts set forth below, the receipt of membership fees are not taxable pursuant to the Sales and Use Tax Act.

 

I. FACTS.

 

COMPANY A. (the "Company"), is a private membership organization that has as its long term business focus the procurement of a variety of informational, training and benefit programs for its members.

 

The Company's initial and primary business is to provide informational shopping (grocery and household products) data by researching and gathering that data from the various retail and wholesale establishments in the community. The results of that research are then analyzed, summarized, compiled and made available to each member by computer modem. Special computer software has been developed by the Company which is made available to each member at no cost. A member then accesses that data by computer modem. The data, once accessed and downloaded, can be manipulated by the member to satisfy its own purchasing informational needs as dictated by its own circumstances.

 

The Company further provides training benefits for members to teach them to be prudent shoppers by more effectively using the shopping data made available to them.

 

The Company will provide benefit programs which will ultimately include many that are typically available to members of other organizations and groups, such as favorable accounting services, mortgage and real estate broker services, legal services, eye care examinations, insurance programs, and special rates for cruises and air fares.

 

The Company earns its income from the initial set-up fees and the monthly membership fees that each member pays.

 

II. DISCUSSION.

 

The Company believes that no portion of its membership fees is subject to sales tax based upon its interpretation of the exclusion definition provision of U.C.A. §59-l2-l02(l) (b) which states that "'admission or user fees' does not include annual membership dues to private organizations". Thus, membership dues (fees) paid to a private organization, such as the Company, are not "admission or user fees" which are subject to sales tax pursuant to the provisions of U.C.A. §59-12-103(1) (f) . In addition, since the Company's annual membership dues (fees) do not involve the use of any type of recreation or other facility, the rulings of Tax Commission's Tax Bulletin 15-94 should not apply. Moreover, since membership in the Company does not entitle members "to buy taxable tangible personal property or services at a reduced or discounted rate", the findings of the Tax Commission's Tax Bulletin 33-94 also should not apply.

 

The Company's view that its membership fees are not subject to sales or use tax is further supported by the Tax Commission's reasoning as set forth in its ruling 91-Ol7DJ. In that matter, an out-of-state company provided electronic information to "subscribers" by satellite transmission. Those subscribers signed a contract, paid a one-time start-up fee, and paid monthly fees. The Tax Commission determined that no tangible personal property was being sold so none of the fees collected were subject to sales tax. The Company has a similar arrangement where its subscribers (members) sign a contract, pay a one-time set-up fee, and also pay monthly fees. The only difference appears to be that in one case subscribers receive information on a video screen by satellite transmission, while in the Company's case, its subscribers (members) receive information on a computer screen by telephonic modem. The same principles that applied in ruling 91-Ol7DJ should apply in the Company's case.

 

The Company recognizes that the Tax Commission has adopted its rule R865-195-33, which defines "annual membership dues paid to a private organization" to include those dues paid by members who, directly or indirectly, establish the level of the dues. The Company also believes that the potential scope of that rule is far broader than the statutes or other adopted Tax Commission rules contemplate. In prior rulings issued by the Tax Commission, "admissions and user fees" and membership dues appear to be linked together under circumstances that involve some type of facility that is to be used. In this context, the rule is more meaningful, especially when applied to membership organizations such as country clubs, sportsman clubs, etc., because the members of those organizations have available to them some facility for their use and benefit. This is not so with the Company. It does not own any type of facilities for use by members. It only provides information and benefit data to its members in an intangible form by telephonic modem.

 

The Company also believes that the membership fees that it collects places it in similar circumstances with companies such as COMPANY B, which charges a fee to maintain distributorship or membership status, and which provides informational materials to its members. The Company is not aware of any sales or use tax being collected or remitted on COMPANY B'S membership fees.

 

The Company suggests that a review of the applicable statutes and Tax Commission regulations and rulings supports the conclusion that its membership fees are not subject to any sales or use tax since the Company is providing informational data to its members in an intangible form by telephonic modem, and that by doing so, it is not selling any tangible personal property on which sales tax should be collected and remitted.

 

III. CONCLUSION.

 

In conclusion, COMPANY A, suggests that there are sufficient facts and legal and administrative precedents for the Tax Commission to rule on this request and to conclude that the membership fees collected under the circumstances described herein are not subject to sales or use taxes by the State of Utah.

 

If you have any questions, or need further information, please feel free to contact us. We would appreciate your prompt attention to this matter.

 

Respectfully submitted,

NAME

 

 

RESPONSE LETTER

 

 

August 4, 1997

 

NAME

ADDRESS

CITY STATE ZIP

 

Advisory Opinion - Application of sales tax to computer-generated output.

 

TO: NAME

 

We have received your request for sales tax guidance pertaining to COMPANY A’s charges for information. We understand that COMPANY A is in the process of appealing a sales tax audit assessment. However, we also understand that during the audit period in question, COMPANY A sold information to its customers in paper form. From your description, and from your discussions with the Auditing Division staff, COMPANY A apparently intends to conduct its business in electronic form in the future. This opinion is issued to advise you as to the application of sales tax to information delivered in electronic form, and it does not resolve any issues pending on appeal.

 

At the outset let us say that although you have labeled these charges “membership fees,” we look beyond that label to the true nature of the transaction. From your description, it appears that COMPANY A will be charging its clients for the use of canned software and a subscription which entitles the client to on-line access to information in COMPANY A’s databases. On that basis, we offer the following tax guidance:

 

The sale or lease of “canned” or prewritten software constitutes a sale of tangible personal property for sales and use tax purposes. Payments under a licensing agreement are also taxable as a lease or rental of the software package. Utah Admin. Rule R865-19S-92. Any charges to COMPANY A’s clients for installation, maintenance or use of the software are taxable. If COMPANY A gives the software to its clients at no charge, COMPANY A is considered the final consumer of any taxable items used to produce the software, such as floppy disks. Utah Admin. Rule R865-19S-68. As the final consumer, COMPANY A must pay sales tax on its purchase of these items, and may not purchase them tax free under the resale exemption.

 

With regard to charges for on-line services, the Tax Commission has declined to read the tax statutes so broadly as to apply to these transactions. Although the state legislature and many prominent tax groups across the country are studying the tax issues surrounding the telecommunications field, charges for on-line services are not currently taxable.

 

Please let us know if you have additional questions.

 

For the Commission,

Joe B. Pacheco,

Commissioner