South Carolina Determined that Book Retailer’s Discount Membership Fee is Taxable
August 25, 2017
The Administrative Law Court determined that the membership program could not exist without the retail sale of the bookstore’s tangible goods and thus the fees were taxable.
By Jess Johannesen, SALT manager
In order to attract and retain loyal customers, retailers may create membership programs. Whether it’s platinum or gold, business or executive, plus or premium, retailers often charge additional fees for the benefits these program provide, which typically include the right to purchase items at a discount or the accumulation of points that can be redeemed for merchandise.
Typically, states do not charge sales tax on these membership fees since they arguably involve a service or an intangible right (e.g., the right to receive discounts or accumulate points). However, on June 6, 2017, South Carolina’s Administrative Law Court issued a decision that a book retailer’s membership club fees were indeed subject to sales tax. 
The retailer sold books, magazines, collectibles, cards and other gifts in 13 retail locations throughout South Carolina. The retailer offered a discount program, called the Millionaire’s Club, in which customers would pay an annual $25 fee to receive benefits such as discounted book prices, free shipping with online purchases, periodic special promotions, etc. During a sales/use tax audit, South Carolina found that these fees were not originally taxed, and it issued an assessment for sales tax on the membership fees.
On appeal to the Court, the State initially noted that sales tax is imposed on, “every person engaged or continuing within this State in the business of selling tangible personal property at retail.”  South Carolina argued that a plain reading of this law imposed sales tax on the gross proceeds of all persons engaged in the business of selling tangible personal property at retail, rather than based on the specific transaction. Since the retailer was engaged in the business of selling books (i.e., tangible personal property), then the retailer was subject to sales tax on its gross proceeds.
The Court agreed and rejected the taxpayer’s argument that the Millionaire’s Club membership program is comparable to services provided by professional service providers. The Court reasoned that the Millionaire’s Club membership program would not exist but for the retail sale of the bookstores’ tangible goods. While the sale of books can exist without the membership program, the membership program cannot exist without the sale of books.
The Court then looked at the definition of “gross proceeds of sales,” which is defined as, “[T]he value proceeding or accruing from the sale…of tangible personal property.” The retailer argued that only gross proceeds from an actual sale of tangible personal property are considered gross proceeds. The Court, however, rejected this interpretation, noting that it would render obsolete the phrase “proceeding or accruing.” Based on the dictionary definitions of “proceeding” and “accruing,” the Court stated that the gross proceeds of sales include the value that comes from or is a direct result of the sale of tangible goods. Therefore, with respect to the retailer’s Millionaire’s Club membership fees, the Court concluded that the fees were taxable since they were a direct result of the retailer’s sale of tangible goods, because without the sale of tangible goods the membership program would not exist.
While this decision applies only in South Carolina and is based on South Carolina’s laws, other states could interpret their laws to similarly conclude that the membership fees such as these are taxable. As your business evolves and offers new services or other benefits to your customers for a fee, have you considered the sales tax implications of these revenues?
Aprio’s SALT team has experience helping businesses understand the sales and use tax consequences of the products and services that they sell. Our team will make sure that your business is in compliance with the sales and use tax requirements in all states in order to minimize potential tax exposure and keep more cash in the business. We constantly monitor these and other important state tax issues in order to assist you with your specific tax situation, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the August 2017 SALT Newsletter. You can view the full newsletter here.
 Books-A-Million, Inc. v. S.C. Dept. of Rev., No. 16-ALJ-17-0113-CC (S.C. Admin. Law Ct. June 6, 2017).
 S.C. Code Ann. §12-36-910(A).
 S.C. Code Ann. §12-36-90 (emphasis added).
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.
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About the Author
Jess Johannesen, Senior Tax Manager at Aprio, is a state and local tax advisor with expertise in sales/use tax and state income tax matters, state tax credits and incentives, and state and local tax M&A due diligence. Known for quick response times and technical expertise, Jess helps business leaders and decision makers in an array of industries maximize state tax benefits, and minimize risks and exposures while keeping in compliance. Defined by kindness and passion for Georgia sports, Jess is a thoughtful, curious and detail-oriented advisor.