Sales Tax Articles
Sales Tax State Activity Update - May 2007
Utah – Membership Has Its Privileges – And Exemptions
Membership fees paid for Web-based discount and service programs/clubs are exempt from sales and use tax. Warranty or repair work that is taxable in Utah, and is provided as protection under some of the memberships are taxable. Tax is obligated to be paid if the repair or warranty is paid by the member and reimbursed by the club or if the club pays for the work directly.
Background
The taxpayer provides Internet based discount and service membership programs/clubs. The taxpayer is not located in Utah. To become a member of one of these membership programs/clubs, a person must sign up over the Internet. Moreover, the taxpayer also solicits members through contracts with other various Web-based service providers and sellers over the Internet. The taxpayer itself is not a shopping club or organization that sells tangible personal property.
For a monthly membership fee, the members receive membership privileges and benefits, such as discounts to hundreds of third party attractions, restaurants, hotels, car rentals, air fares, best price guarantee protection, delivery guarantees, road and towing protection, credit card fraud protection and theft and loss protection on the member's internet purchases.
Some of the membership programs/clubs also offer to the member's credit report access, daily credit report monitoring services and identify theft protection. They also automatically protect members qualifying purchases from retailers, by giving the members free extended limited warranty protection on their purchase equal to the original warranty period provided by the manufacturer. As part of its services and intangible benefits, one of the clubs provides a free weekly e-newsletter and monthly magazine.
Ruling
The membership fees were considered an intangible because they are provided for by a third party. Extended warranty protection was considered taxable because it represents a future repair. (See Rule R865-19S-78) In this case there was not a reasonable way to allocate a portion of the membership fee to the warranty or repair work protection. On the other hand, if the repair work was paid for by the member and reimbursed by the club and it was a taxable under Utah law, tax should be paid. If the club paid for the repair or warranty work directly and it is taxable under Utah law, the tax should also be paid. In the latter two instances the cost of the work is now identifiable.
This ruling can be viewed on the Utah Government website.
(Utah Tax Commission, Private Letter Ruling 06-025, 2/28/07)
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