South Carolina sales tax applies to member fees


Sean Doherty
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Carrie Phillips
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Jamie C. Yesnowitz
Washington, D.C.
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Chuck Jones
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Lori Stolly
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Patrick Skeehan
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The South Carolina Court of Appeals unanimously affirmed a lower court decision ruling that the South Carolina Department of Revenue’s audit assessment of sales tax on a book retailer’s membership program fees was valid.1 The membership fees were a direct result of the sale of tangible personal property, because the taxpayer would not be able to sell memberships but for its sale of tangible personal property.

Background Books-A-Million, Inc. (BAM) is an Alabama-based discount bookstore chain that operates over 250 locations throughout the United States, including 13 stores in South Carolina. In addition to books, the stores sell magazines, collectible supplies, cards, and other gifts. To entice shoppers, BAM offers an optional $25 annual membership for a loyalty program called the “Millionaire’s Club” that grants members additional discounts as well as free shipping on all online orders. In most cases, the membership is purchased by customers at retail checkout when purchasing other items. A membership expires after one year unless it is automatically renewed. If customers do not opt out of the automatic renewal, BAM bills the annual membership fee to the credit card provided when the customer initially enrolled in the club. BAM did not charge sales tax on the membership fees because they were not taxable receipts from the sale of tangible personal property.

In 2015, as the result of a sales and use tax audit, the South Carolina Department of Revenue issued an assessment in the amount of $226,310 plus penalties and interest after finding that the membership fees should have been included as taxable receipts with the original returns. BAM requested a contested case hearing before the Administrative Law Court (ALC) and challenged the Department’s final determination. The Department and BAM both filed motions for summary judgment in which they agreed that there were no material facts in dispute but disagreed on the application of the law to the undisputed facts.

ALC held membership fees subject to sales tax In granting the Department’s motion for summary judgment, the ALC agreed with the Department that under a plain reading of the applicable statute, the sales tax is imposed on the gross proceeds of all “persons” engaged in the business of selling tangible personal property at retail, rather than only individual transactions.2 The Department’s argument centered on a South Carolina statute providing that “[a] sales tax, equal to [six] percent of the gross proceeds of sales, is imposed upon every person engaged or continuing within this State in the business of selling tangible personal property at retail.”3 Given that BAM’s receipts are primarily related to the retail sales of tangible personal property, the Department employed the “plain reading rule” which provides “[t]he language of a tax statute must be given its plain ordinary meaning in the absence of an ambiguity therein.”4 The ALC agreed that a plain reading of the statute demonstrates that all persons engaged in the sale of tangible personal property at retail are liable for sales tax on their gross proceeds of sales, not only the specific transactions involving tangible personal properly as BAM had argued.

The ALC also rejected BAM’s argument that its membership program is comparable to services performed by professional service providers, finding BAM’s program to be “factually distinct” from those because those nontaxable services are “clearly separable” from the sale of tangible personal property. This distinction relates to the fact that such services could exist independently of the tangible personal property that those businesses cited by BAM offer, which contrasts with BAM’s Millionaire’s Club, which could not survive in the absence of the sale of its tangible personal property.

The ALC next addressed the statute that defines the phrase “gross proceeds of sales” as:

[T]he value proceeding or accruing from the sale, lease, or rental of tangible personal property . . . without any deduction for: (i) the cost of goods sold; (ii) the cost of materials, labor, or service; (iii) interest paid; (iv) losses; (v) transportation costs; (vi) manufacturers or importers excise taxes imposed by the United States; or (vii) any other expenses.5

BAM contended that this definition included only the proceeds from the sale of tangible personal property, while the Department argued it included both those proceeds along with “the value proceeding or accruing from the sale of tangible personal property.” The ALC ruled in favor of the Department on this issue by employing the dictionary definitions of “proceeding” and “accruing” and finding that a plain reading of the statute clearly encompasses the total value of the sale, rather than simply the amount attributable to tangible personal property. The ALC further cited South Carolina cases in which sales tax was found to apply to “layaway fees”6 and to “facilitation fees”7 to demonstrate that the Department can include the value of services and intangibles intertwined with the sale of tangible personal property.

BAM argued that the plain meaning rule should not be used as it is not consistently applied to these types of membership fees, citing a Department policy that membership fees for members-only warehouses are to be considered nontaxable. In a footnote to its decision, the ALC rejected the argument, but the ALC did acknowledge that this policy is potentially inconsistent with the statutes in question. With the ALC determining that the plain meaning of the statutes in question is unambiguous, BAM appealed this decision to the South Carolina Court of Appeals.

Court of Appeals affirms taxation of membership fees In a unanimous [3-0] decision, the Court of Appeals affirmed the ALC’s ruling imposing sales tax on BAM’s membership fees, whether charged by direct customer request, or via automatic renewal. The Appeals Court upheld the use and interpretation of the statutes through the “plain reading rule” and rejected BAM’s argument that the facts in its case were necessarily distinguishable from the Meyers Arnold and Travelscape decisions cited in the ALC’s ruling.

The Appeals Court further rejected BAM’s argument on appeal that its membership fees should be nontaxable because they are similar to the gift cards and fees that are exempt from South Carolina sales tax. BAM cited a Revenue Ruling that held nontaxable transactions include the sale of “gift certificates or traveler’s checks.”8 Under this ruling, the taxable transaction occurs when the gift certificate or traveler’s check is redeemed. BAM also unsuccessfully argued that Millionaire’s Club fees are similar to the membership fees charged by a membership-only warehouse that are considered nontaxable. In rejecting these arguments, the Court of Appeals found that the ALC’s decision was supported by substantial evidence and that the fees are taxable because South Carolina law includes all value that comes from or is a result of the sale of tangible personal property. Furthermore, the Court of Appeals disagreed with BAM’s argument that the statutes cited by the ALC were ambiguous.

Commentary Rewards programs not only instill customer loyalty and represent an additional source of revenue, but perhaps most importantly to the retailers running these programs, they provide key consumer data that can be used for targeted advertising and promotional offers. Unlike BAM’s Millionaire’s Club, many of these programs are free. This decision is important to retailers operating similar membership programs in South Carolina as it imposes an increased cost to customers and creates potential tax liability for retailers who have not historically charged South Carolina sales tax on loyalty club membership fees.

While these membership fees are viewed as sales of items other than tangible personal property that remain nontaxable in most states, it is possible that the Department’s approach could potentially be used by taxing authorities in other states as a means to advance many of the same arguments that were successfully made by the Department. Although many of these programs are free to join, some national retailers have established loyalty programs with membership fees that could now be subject to tax in South Carolina as a direct result of this decision.

BAM has yet to comment whether it will appeal this decision to the South Carolina Supreme Court, which could potentially clarify or even reverse the Appeals Court’s decision. However, even if the case is appealed, the South Carolina Supreme Court has no obligation to hear the case, and typically only hears a small number of cases from the Court of Appeals.

1 Books-A-Million, Inc. v. South Carolina Department of Revenue, South Carolina Court of Appeals, No. 2017-001519, April 29, 2020.
2 Books-A-Million, Inc. v. South Carolina Department of Revenue, South Carolina Administrative Law Court, No. 16-ALJ-17-0113-CC, June 6, 2017.
3 S.C. CODE ANN. § 12-36-910(A). This statute imposes a 5% sales tax, but an additional 1% sales tax is imposed by S.C. CODE ANN. § 12-36-1110.
4 Beach v. Livingston, 149 S.E. 2d 328, 330 (S.C. 1966).
5 S.C. CODE ANN. § 12-36-90.
6 Meyers Arnold, Inc. v. South Carolina Tax Commission, 328 S.E.2d 920, 923 (S.C. Ct. App. 1985).
7 Travelscape, LLC v. South Carolina Department of Revenue, 705 S.E.2d 28, 32 (S.C. 2011).
8 Revenue Ruling 04-4, South Carolina Department of Revenue, March 25, 2004.

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