October 1, 2002

You request a letter ruling on behalf of *************** ("Company") that the fee charged for membership in Company's three collectors' clubs is not subject to Massachusetts use tax. Included in every membership fee is the cost of the club kit sent to each new or renewing member. A club kit generally consists of a *************** figurine, decorative container, and other items of tangible personal property (hereinafter collectively referred to as "club kit"). In the event that the fee at issue, or at least that portion relating to the cost of the club kit, is subject to Massachusetts use tax, you request a ruling that Company is entitled to a credit for the sales or use tax it paid to the state in which the club kit was manufactured, purchased, or shipped.

Facts

Company is located in Illinois and is engaged in the wholesale sale of figurines and other collectible products and giftware in Massachusetts and in other states. Company is registered in Massachusetts to collect sales and use taxes. Most of its figurines are sold at retail card and gift shops. However, three of Company's most popular product lines are also available through membership in three membership clubs.

Club membership applications are available at local retail shops. Additionally, Company mails applications to prospective club members from a list of names that Company has developed internally or purchased. Such individuals may purchase a one or two year membership, payable in advance. Membership fees are required to be paid by check, money order, or credit card. Checks, money orders, and credit card information are to be sent, along with the application, to Company's headquarters in Illinois for processing.

Club membership confers a number of benefits. Club members become eligible to purchase figurines available exclusively to club members and to receive a quarterly newsletter. They are invited to attend special shows, members-only events at collectors' conventions, and to go on collectors' cruises. A typical convention features seminars on crafts, interactive games, cross-stitching, painting your own collectibles, new products as well as a dinner; and a dance.

Along with a club membership, club members receive the club kit mentioned above. Club kits are shipped to Massachusetts members by common carrier from outside Massachusetts. Passage of title to the club kits is not specified in the membership applications or elsewhere. If a two-year membership is purchased, a second club kit is automatically sent on the first day of the second club year. Reflected in the membership fee, which ranges from a low of $20 to a high of $54, and not separately stated is the cost of the club kit. Depending on the club, the cost of the club kit makes up 29% to 42% of the membership fee.

Discussion

A. Sales and Use Taxes - Generally

Under the Massachusetts General Laws a sales tax is imposed on all retail sales in the Commonwealth by any vendor of tangible personal property or services, unless otherwise exempted. G.L. c. 64H, § 2. If no sales tax is paid on the purchase of the tangible personal property or services, a use tax is imposed upon the storage, use, or other consumption in Massachusetts of tangible personal property or services purchased from any vendor for storage, use, or other consumption in Massachusetts. G.L. c. 64I, § 2. Otherwise, purchases upon which sales tax has been collected are exempt from use tax. G.L. c. 64I, § 7(a). Also, with one exception not relevant here, sales exempted from the sales tax are exempted from the use tax. G.L. c. 64I, § 7(b).

For both sales and use tax purposes, "tangible personal property" means "personal property of any nature consisting of any produce, goods, wares, merchandise and commodities whatsoever, brought into, produced, manufactured or being within the commonwealth . . . ." G.L. c. 64H, § 1; G.L. c. 64I, § 1. "Services," as that term is defined for sales and use tax purposes, is limited to telecommunications services. Id.

The sales tax established by G.L. c. 64H, together with the use tax established by G.L. c. 64I, are complementary elements of a unitary taxing program created to reach all transactions, except those expressly exempted, in which tangible personal property is sold inside or outside the Commonwealth for storage, use, or other consumption within the Commonwealth. Boston Tow Boat Co. v. State Tax Commission, 366 Mass. 474, 476-7 (1974). The sales tax is generally imposed at the rate of 5% of the gross receipts of the vendor from all such sales of such property or services. G.L. c. 64H, § 2. The use tax is imposed at the rate of 5% of the sales price of the property or services. G.L. c. 64I, § 2. For both sales and use tax purposes, "gross receipts," is defined as "the total sales price received by a vendor as a consideration for retail sales." G.L. c. 64H, § 1; G.L. c. 64I, § 1. "Sales price" is defined as the "total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise." Id. Finally, "retail sale" is defined as "a sale of [telecommunications] services or tangible personal property or both for any purpose other than resale in the regular course of business." Id.

It is clear from the above that a retail sale - a sale of tangible personal property or of telecommunications services for any purpose other than resale in the regular course of business - is a prerequisite to the levying of either tax. Additionally, it is clear that if the retail sale occurs in Massachusetts the sale is subject to the sales tax, whereas, if it occurs outside Massachusetts and the property is purchased for storage, use, or other consumption in Massachusetts, the use tax applies. A "sale" of tangible personal property takes place in Massachusetts if title to or possession of the property is transferred in Massachusetts. G.L. c. 64H, § 1; G.L. c. 64I, § 1. Where the written sales agreement is silent as to the passage of title, as is the case with the club kits at hand, title to the property passes and the sale occurs when the common carrier takes possession of the property. See 830 CMR 64H.6.7(3)(a); DD 96-5; DD 98-5. In the instant case, it is the use tax, not the sales tax, that is at issue because the retail sale associated with Company's membership fee occurs outside Massachusetts. More specifically, it occurs where the common carrier responsible for shipping a club kit to a Massachusetts member takes possession of the kit.

B. Tax Treatment of Membership Fees

In applying the above statutory provisions to the payment of membership fees, the Department of Revenue concluded in DD 92-7 that a membership fee paid solely for admission into discount department stores, retail outlets, and wholesale clubs was not subject to sales tax because it was not paid in consideration for a retail sale. Rather, the membership fee was paid in consideration for the right to enter a store not otherwise open to the public, and the right to purchase nontaxable as well as taxable merchandise. DD 92-7. The membership fee in DD 92-7 was not applied toward the purchase price of any particular item of tangible personal property. In fact, the fee was the same whether or not the customer purchased any merchandise. The fee was fixed for a set period, and was renewable for each subsequent period for the same fixed amount.

C. Membership Fee at Issue

Like the membership fee in DD 92-7, the membership fee at issue here is paid in consideration for the right to purchase merchandise not otherwise available to the public, i.e., member-only figurines. Additionally, it is paid in consideration for the right to attend special shows and conventions not otherwise open to the public. Were these the only reasons for becoming a club member, then, pursuant to DD 92-7, Company's membership fee would not be subject to use tax as it would not be paid in consideration for a retail sale. Under DD 92-7, if the person paying the membership fee subsequently decides not to avail himself of the right to make purchases or attend shows or conventions, no sale at retail occurs. The right to purchase and the actual purchase of tangible personal property are not equivalent, and it is only the latter that is a "retail sale" prerequisite.

The above reasons are not the only reasons for purchasing a club membership, however. Company's membership fee also is paid in consideration for the right to receive a quarterly newsletter and club kit comprised of several items of tangible personal property. In other words, a portion of such fee is directly applied toward the purchase price of particular items of taxable tangible personal property. [1] Depending on the club, the cost of the club kit makes up 29% to 42% of the membership fee. Thus, Company's membership fee is, to a certain extent, paid in consideration for a retail sale and, thus, is entirely subject to use tax.

D. Service Enterprises Regulation, 830 CMR 64H.1.1

In concluding that Company's membership fee is entirely subject to use tax, the Service Enterprises Regulation, 830 CMR 64H.1.1 provided guidance. That regulation dealt with, in part, an analogous issue to the one at hand - the applicability of the sales tax to service transactions involving both the rendering of a nontaxable service and the transfer of taxable tangible personal property. It is the coupling of the nontaxable service with the transfer of taxable tangible personal property that we find analogous to the facts at hand - the coupling of a nontaxable membership fee with the transfer of taxable tangible personal property.

Under the regulation, the total amount charged by a service enterprise for rendering a service transaction is subject to sales tax when a transfer of tangible property occurs, the value of which is not inconsequential in relation to the total charge, and the charge for the property is not separately stated on the bill to the customer. 830 CMR 64H.1.1(2)(b)(2). In cases where the charge for the property is separately stated, however, the sales tax must be collected from the customer based on the amount charged for the property, whether or not the value of the property is inconsequential. Id. at (2)(b)(1). The term "inconsequential " as used in the regulation means "a value of less than ten percent of the total charge." Id. at (1). The term "not inconsequential" means "a value of greater than ten percent of the total charge." Id.

Based on the above rules, were Company to have separately stated that portion of its membership fee relating to the cost of the newsletter and club kit, then, only that portion would have been subject to use tax. However, given that the cost of the newsletter and club kit is reflected in Company's membership fee, not separately stated, and the cost of the club kit makes up 29% to 42% of the membership fee, Company's membership fee is entirely subject to use tax. As a vendor engaged in business and registered in Massachusetts to collect sales and use taxes, Company must collect the use tax from club members at the time it collects the membership fee. Id. at (2)(b).

E. Use Tax Exemption for Sales Upon Which Sales and Use Tax Was Paid to Another Jurisdiction

Assuming Company's membership fee, or at least that portion relating to the cost of the club kit, was found to be subject to Massachusetts use tax, you requested a ruling on Company's behalf that Company is entitled to a Massachusetts credit for the sales or use tax it paid to the state in which the club kit was manufactured, purchased, or shipped. For the reasons discussed below, it cannot be so ruled. Instead, it is ruled that Company is not entitled to a Massachusetts credit for the sales or use tax it paid to the state in which a club kit was manufactured, purchased, or shipped.

Under G.L. c. 64I, § 7(c), sales upon which a tax was paid to another state or territory of the United States are exempt from the Massachusetts use tax provided that the tax paid to such other state or territory was legally due without any right to a refund or credit thereof and that such other state or territory allows a corresponding exemption with respect to the sale or use of tangible personal property or services upon which a sales or use tax was paid to Massachusetts. G.L. c. 64I, § 7(c).

The purpose of the § 7(c) exemption is to provide relief to taxpayers who would otherwise be subject to both the Massachusetts use tax and a tax in the state where the item of tangible personal property or service was purchased. Company, in contrast, is not entitled to the § 7(c) exemption for sales upon which it paid sales or use tax to the state in which a club kit was purchased because Company is not the taxpayer statutorily responsible for payment of the Massachusetts use tax, the club member is. G.L. c. 64I, § 2. Company is statutorily responsible only for collecting the use tax from club members. G.L. c. 64I, § 4.

Although Company is not entitled to a Massachusetts credit for the sales or use tax it paid to the state in which a club kit was manufactured, purchased, or shipped, and must collect the use tax from club members, it may, when purchasing a club kit from a vendor, give the vendor a resale certificate, assuming that the state in which the vendor resides exempts sales for resale from taxation. 830 CMR 64H.1.1(4).

Conclusions

It is ruled that because Company's membership fee includes, as a single charge, the cost of a club kit, the value of which is not inconsequential, Company's membership fee is entirely subject to tax. Since title to and possession of the club kit pass outside of Massachusetts when Company delivers the kit to the common carrier, a use tax, not a sales tax is due. As a vendor engaged in business here and registered to collect sales and use taxes, Company must collect the use tax from club members at the time it collects the membership fee.

Additionally, it is ruled that Company is not entitled to a use tax exemption under G.L. c. 64I, § 7(c) for sales upon which it paid sales or use tax to the state in which a club kit was purchased. Instead, assuming that such state exempts from taxation sales for resale, Company may give the vendor selling the club kit a resale certificate.

Very truly yours,

/s/Alan LeBovidge

Alan LeBovidge
Commissioner of Revenue

AL:DMS:pls

LR 02-8



[1] The exemption from the sales tax for sales of newspapers and magazines provided by G.L. c. 64H, § 6(m) does not apply to the sale of the newsletters at issue. In construing "newspaper," as that term is used in § 6(m), the Massachusetts Supreme Judicial Court held that a "newspaper" "is distributed at periodic intervals and contains matters of interest to a significant segment of the public." Greenfield Town Crier v. Commissioner of Revenue, 385 Mass. 692, 696 (1982). Similarly, in construing the term "magazine," it was held in LR 85-58 that a "magazine" contains news and matters of interest to a significant segment of the public. Although distributed at periodic intervals, the newsletters at issue are of interest to a relatively limited segment of the public. Thus, their sale is not exempt from use tax as a newspaper or a magazine. Id. See also LR 84-67.