South Carolina: Membership fees subject to sales tax

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The South Carolina Court of Appeals recently upheld an assessment of sales taxes on membership fees. The taxpayer, a discount bookstore chain, had a membership program for customers. For an annual fee, customers received benefits, including discounts and free shipping on purchases of tangible personal property. Payment of the membership was not required to be able to purchase at the bookstore; with a membership, however, a taxpayer was entitled to various discounts on certain purchases. The taxpayer did not charge sales tax when it sold the memberships. After the Department of Revenue audited the taxpayer, it assessed tax on the proceeds from the sales of memberships. After the South Carolina Administrative Law Court upheld the assessment, the taxpayer appealed.

Under South Carolina law, sales tax “is imposed upon every person engaged or continuing within this State in the business of selling tangible personal property at retail.”  “Gross proceeds of sales” means “the value proceeding or accruing from the sale . . . of tangible personal property." The Department argued that a plain reading of the imposition statute demonstrated that all persons engaged in the sale of tangible personal property at retail are liable for sales tax on their gross proceeds of sales. In contrast, the taxpayer argued that the statute imposed sales tax only on the gross proceeds from sales of tangible personal property. As such, because sales of memberships were not sales of tangible personal property, the fees were not “gross proceeds of sales” subject to sales tax.  As support for its position, the Department cited to two earlier South Carolina cases that addressed the imposition of sales taxes on fees charged by a retailer for providing a service in which the fees were intertwined with the sale of taxable goods. The taxpayer argued that those cases were distinguishable from the current situation because the membership fees at issue were not intertwined with the sale of taxable property. In other words, the taxpayer appeared to be asserting that the membership fees were not paid in conjunction with the purchase of tangible personal property.  The taxpayer also tried to argue that the membership fees were akin to gift certificates or traveler’s check, which are not taxable when purchased. The court rejected all of these arguments and held that the ALC’s decision was supported by substantial evidence. In the court’s view, the membership fee was a direct result of the sale of tangible personal property because the taxpayer would not be able to sell memberships but for its sale of tangible personal property. Please contact Nicole Umpleby at 704-335-5586 for more information on Books-A-Million, Inc. v. South Carolina Department of Revenue.

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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US