Are Discount Membership Cards Subject to Sales Tax?
SC Dept. of Revenue vs. Books-A-Million
Sales tax normally applies to the purchase of “tangible personal property.” On its face, the definition of “tangible” is fairly straightforward. For example, South Carolina law classifies tangible personal property as “personal property which may be seen, weighed, measured, felt, touched, or which is in any other manner perceptible to the senses.”
So if a person, say, walks into a bookstore and purchases a book, there is no question that is an item of tangible personal property subject to sales tax. But what if the customer previously purchased a discount card from the store entitling them to 10 percent off each book purchase? Is the discount card itself a form of tangible personal property that is also subject to sales tax? According to a recent decision from a South Carolina court, the answer is “yes.”
Court of Appeals: Discount Program the “Direct Result of the Sale of Tangible Personal Property”
In December 2014, the South Carolina Department of Revenue initiated a sales tax audit of Books-a-Million (BAM), the second-largest bookstore chain in the United States. The audit revealed that BAM did not collect or remit South Carolina sales tax on sales of its “membership fees.” Similar to its larger competitor, Barnes & Noble, BAM offers customers membership in a discount program that it calls the “Millionaire’s Club.” As presently offered, membership entitles customers to 10 percent off in-store purchases, free shipping on online orders, and other special sales and discounts.
The SC Department of Revenue sent BAM a total sales tax bill of $242,076.97!
During the period covered by the South Carolina audit, BAM charged a $25 annual fee for the Millionaire’s Club. This fee renewed automatically each year unless the customer opted out or canceled their membership. According to the Department of Revenue, BAM failed to collect over $200,000 in tax on both the initial sale and renewal of Millionaire’s Club memberships in South Carolina from January 2012 through August 2015. Adding interest and penalties, the Department sent BAM a total sales tax bill of $242,076.97.
BAM contested the assessment before South Carolina’s Administrative Law Court (ALC). The company argued its club memberships were not tangible personal property and therefore not subject to sales tax. The ALC disagreed and upheld the Department’s assessment.
The South Carolina Court of Appeals subsequently reviewed and affirmed the ALJ’s decision. Writing for a three-judge panel in an April 29 opinion, Judge Paula H. Thomas explained that while membership in the Millionaire’s Club itself may be intangible, the membership fees collected are the “direct result of the sale of tangible personal property because BAM would not be able to sell Club Memberships but for BAM’s sale of tangible personal property.” By this reasoning, Thomas said, the membership fees were subject to state sales tax, as were the automatic annual renewals.
Thomas and her colleagues declined to adopt a contrary decision from the Tennessee Court of Appeals, Barnes & Noble Superstores, Inc. v. Huddleston (1996). In that case, the Tennessee court held that Barnes & Noble’s membership program, which is similar in form to that of BAM, was not subject to that state’s tax because “true object of the subject transactions between [Barnes & Noble] and its customers is to bestow upon club members the intangible right to receive a discount on merchandise.” In other words, the Tennessee court saw the purchase of memberships as an intangible right to a discount, and not itself a sale of tangible personal property. But as Thomas noted, South Carolina courts are not required to “follow other states’ interpretations of their tax laws in interpreting our own tax laws.
Why Treat Members-Only Warehouse Clubs Differently?
Judge Thomas, however, may not have the last word in this case. On May 14, BAM filed a petition for rehearing. This is essentially a request for the three-judge panel to reconsider its decision. The full eight-judge Court of Appeals could also decide to rehear the case as a single group. And if the appeals court decides against rehearing, BAM can then ask the South Carolina Supreme Court to review the case.
In its petition, BAM argued the panel’s decision gives an unfair “competitive advantage” to retailers like Sam’s Club and Costco, which also sell membership fees but are not subject to South Carolina sales tax. According to the Department of Revenue, “membership fees charged by a membership-only warehouse” are not taxable, provided “all membership types receive the same benefits.” Yet Sam’s Club and Costco “could not sell membership fees but for their sale of tangible personal property,” BAM pointed out. And while BAM’s Millionaire’s Club is optional, membership in a warehouse club is mandatory just to walk in the door. At the very least, BAM argued, the different treatment of memberships creates an “ambiguity” in South Carolina’s sales tax law, which must be resolved in favor of the taxpayer.