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.”

Books A Million logo

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.

sams club card

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.


Internet sales tax is dead!

Marketplace Fairness Act internet sales tax

Long live internet sales tax!

internet sales tax

internet sales tax

Speaker John Boehner (R-Ohio) made it clear that the bill containing the current version of the Marketplace Fairness Act won’t come up for a vote in the House this session.

“The speaker has made clear in the past he has significant concerns about the bill, and it won’t move forward this year,” said spokesman Kevin Smith. “The Judiciary Committee continues to examine the measure and the broader issue. In the meantime, the House and Senate should work together to extend the moratorium on internet taxation without further delay.”

No sooner had the press release hit the air when backers claimed they’d get the bill attached to another piece of must-pass legislation and keep trying for the remainder of the lame-duck congressional session.

The fight is far from over,” claims Stephen Schatz of the National Retail Federation, a supporter of the MFA. The bill has widespread support amidst brick and mortar retailers who say online retailers have an unfair advantage because they do not have to collect sales taxes.

The bill has the unsurprising, mostly partisan support of the democrats and the Obama administration and the opposition of Republicans, conservatives, and anti-tax groups.

Stay tuned for more internet sales tax hijinks and updates as they become available.

mix one part Marketplace Fairness Act and Internet Tax Freedom Act

Marketplace Fairness Act

November is lame duck season

Senate Majority Leader Harry Reid (D-Nev.) has placed passage of the Marketplace Fairness Act (MFA) at the top of his post-election priority list claiming he’ll “do whatever it takes to get that done.”

Apparently getting that legislation passed is high enough of a priority to cause him to bundle it with the Internet Tax Freedom Act (ITFA), a soon-to-expire act which prevents taxes on Internet access. ITFA not only has widespread popular support but lends urgency to the long-languishing MFA.

But getting the legislation passed through the House this year is anything but a done deal. Both Speaker John Boehner (R-Ohio) anlame duck congressd Judiciary Committee Chairman Bob Goodlatte (R-Va.) have said they oppose the MFA.

Rep. Jason Chaffetz (R-Utah) is working on a compromise but a spokesperson for Chaffetz said it was too soon to know whether a bill could be ready by year’s end.

“We’re always working to find something that will attract the necessary votes in the House to pass,” Senate Majority Whip Dick Durbin (D-Ill.) said in September. Durbin is one of the bill’s top supporters, along with Sens. Lamar Alexander (R-Tenn.) and Mike Enzi (R-Wyo.).

Jason Brewer, of the Retail Industry Leaders Association, a supporter, said that pairing the two tax bills allowed retail groups to make the case that their measure wasn’t an “Internet tax. “For every member that is saying, ‘Let’s get ITFA done,’ there’s another member saying, ‘Let’s get both done,’ ” Brewer said.

Reid faces opposition even from within his own party. Senate Finance Committee Chairman Ron Wyden (D-Ore.) warned his colleagues that anyone trying to combine the two bills was “holding the Internet economy hostage.” “Anyone who votes for passing Marketplace Fairness Act alongside ITFA is voting to repeal the Internet Tax Freedom Act,” Wyden said.

In lieu of federal progress, Colorado passes its own version of the Marketplace Fairness Act

federal progress

Landmark law requires retailers to prove they DO NOT have nexus

On June 9, 2014, Colorado’s Gov. John Hickenlooper signed the Marketplace Fairness and Small Business Protection Act into law

Colorado’s landmark legislation requires retailers to prove their sales DO NOT create nexus for them creating new questions about what that means for online retailers doing business in the state and how they are to handle Colorado’s myriad home rule jurisdictions.

E-Commerce has fundamentally changed the way that consumers shop, with sales growing over 12% in 2013 according to the U.S. Department of Commerce. Presently e-commerce accounts for $322 billion in annual sales, representing significant growth each year from 2009 when e-commerce totaled $209 billion.

While this trend has been promising for online retailers, it’s proven to be a huge headache for state legislators who are tasked with recuperating what they see as lost sales tax from online sales. On June 9, 2014, Colorado’s Gov. John Hickenlooper signed the Marketplace Fairness and Small Business Protection Act into law, representing his state’s attempt to modernize the laws of e-Commerce sales tax to reflect current realities.

The new law expands the definition for what constitutes nexus for retailers based outside of Colorado, so that the Department of Revenue can now collect taxes from businesses that don’t have a significant physical presence in the state. Its supporters in the state legislature claim that House Bill 1269 will infuse the treasury with a stimulus of more than $67 million in sales tax during the upcoming year.

While the bill spares small businesses that have less than $50,000 in annual sales, it will have a far reaching effect on any larger retailer making sales within Colorado. This is due to a clause in the bill that creates a presumption of nexus for online retailers. The tables have been flipped, so that the burden of proof is now on the online retailers to show that they do not have nexus in the state of Colorado. If a retailer is unable to prove their lack of nexus, they will be obligated to pay state taxes.

Other states including New York, Missouri, and Maine have passed similar legislation that have been dubbed “Amazon laws” after the dominant leader of U.S. online retails sales. However, House Bill 1269 will not affect Amazon itself, since Amazon took preemptive steps and cut off its relationships with its affiliates based in Colorado. In fact, Amazon has spent millions of dollars on Capitol Hill in recent years to lobby for a nationwide internet sales tax that would grant it a competitive edge as it continues to expand.

Colorado’s bill is modeled after the similarly named federal Marketplace Fairness Act (MFA), which was passed by the Senate in May of 2013 and would grant states the authority to collect taxes from online purchases.

With little likelihood of forward progress on the MFA in the House this term, the state of Colorado has decided to try out a version of the MFA on its own. Its supporters are optimistic that its benefits will be plainly observable in the coming year, and if so, we can expect additional states to pass their own versions in the foreseeable future.

Marketplace Fairness Act will replace ineffective use taxes

Use taxes

Use taxes

Marketplace Fairness Act Header

On May 7, 2014 U.S. Senator and Assistant Majority Leader Dick Durbin (D – Ill.) called on the House of Representatives to pass the Marketplace Fairness Act. The bill passed the Senate with overwhelming bipartisan support last year, but has stalled in the House since that time.

In his comments, Sen. Durbin noted that current law only allows states to enforce sales tax on Internet sales through use taxes. Use taxes are imposed on consumers and has notoriously low compliance and enforcement. For example, Durbin notes that Illinois has a 5% compliance rate. The lack of enforceability results from the relatively low amount of tax owed per person and the difficulty of enforcing the law through audits of all state citizens. As a result, most state residents do not report or pay use taxes, and are unlikely to face an audit from the state. For this reason, state use taxes are not an effective mechanism for enforcing the sales tax.

Constitutional law prohibits states from requiring out-of-state vendors to collect the tax at the time of the sale. The Marketplace Fairness Act aims to resolve this problem by creating a congressionally sanctioned requirement for out-of-state vendors to collect tax. Durbin emphasized the need to push the legislation through, calling it the only “reasonable means of achieving fair and adequate enforcement of state sales tax laws”.

Durbin urges rapid passage of the law to reduce state tax revenue deficits as quickly as possible. You can view the full Senate colloquy on a C-Span video.

Chris Saddock

Chris Saddock

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