Questions and Answers

Identifying Information:Country Clubs
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Q & A on Country Club Dues and Purchases
Keywords:
Approval Date:03/19/2004



Body:
KANSAS DEPARTMENT OF REVENUE

OFFICE OF POLICY AND RESEARCH


Question: How are payments of membership dues to country clubs taxed? Are special assessments, capital assessments, or other one time assessments imposed by a country club taxable under the sales tax act?

Answer: Kansas sales tax is imposed on:

While not defined by statute, the term "dues" is defined by Kansas regulation:

Black's defines "dues," as it applies to clubs and membership organizations, as "sums paid toward support and maintenance of same and as a requisite to retain membership." Black's Law Dictionary, p. 501, (6th Ed. 1990). Webster's defines "dues" as "the fee or charge required for membership, affiliation, initiation, use, subscription." Webster's Third New International Dictionary, p. 699 (1963). Both definitions are consistent with subsection (b) of K.A.R. 92-19-73, quoted above. Both are inconsistent with the contention that membership "dues" cannot include special assessments and capital fees when a club dedicates the receipts to a capital improvement fund.

Country clubs' bylaws and articles of incorporation universally provide that members will forfeit their membership rights for nonpayment of club charges. These forfeiture provisions apply to nonpayment of special assessments and capital fees and show they are charges "required for membership, affiliation, initiation, use, subscription." These are payments that entitle "a member to the use [the club facilities] for recreation or entertainment," and are taxable as dues. See K.S.A. 2003 Supp. 79-3603(n).

The department first published the policy that is now codified in K.A.R. 92-19-73 in Revenue Ruling 19-86-3. This 1986 ruling stemmed from a director's order that was issued in 1984. The ruling reasoned that special assessments are charges for the right to enjoy club facilities for recreation or entertainment. As such, special assessments are taxable as the payment of membership dues. The department has followed the policy ever since.

The 1986 ruling was issued, in part, because some country club's monthly membership fees were enough to cover routine maintenance costs, such as roof replacement, painting, and other upkeep and renovation. Other clubs charged lower monthly membership fees that were not enough to pay for their maintenance costs. These clubs created special maintenance funds, in which the clubs argued they were depositing non-taxable "equity" membership payments. Revenue Ruling 19-86-3 eliminated this disparity.

K.A.R. 92-19-73 was adopted on May 1, 1988. Its definition of "dues" is consistent with Revenue Ruling 19-86-3. This version of the regulation remained in effect until July 27, 2001 when parts of it were amended. The amended version continues in place today. This means that since 1986, the department has had a ruling or regulations continuously in place that state that taxable dues include payments of capital assessments and special assessments. Over the years, the Kansas legislature has had many opportunities to modify this published policy by enacting remedial legislation. The legislature choose not to.

The department's long-standing construction of the statute, together with the legislature's acceptance of it, help validate the department's determination that capital and special assessments are taxable dues. The department's construction is also supported by the fact that appellate courts from several other states have applied the same rationale to hold that special assessments are taxable dues under their sales tax laws. Akron Mgt. Corp. v. Zaino, 94 Ohio St. 3d 101, 103-4, 760 N.E.2d 405, 408 (Ohio 2002); Oklahoma Golf and Country Club v. Oklahoma Tax Commission, 825 P.2d 267 (Okla. 1992); Crane Creek Country Club v. Idaho State Tax Commission, 122 Idaho 880, 841 P.2d 410 (1990); Wakonda Club v. Iowa State Board of Tax Review, 444 N.W.2d 490 (Iowa 1989). These opinions show the reasonableness of the department's policy, and entitles it to judicial deference under the doctrine of operative construction. State ex rel Brant v. Bank of America, 272 Kan. 182, 32 P.3d 952 (2001); In re Kroger Co., 270 Kan. 148, 150, 12 P.3d 889, 892 (2000).

In addition to the dictionary definitions, the long-standing policy, and the decisions from other states, taxing special assessments and capital assessments as dues is consistent with the principal that sales tax is premised on what consumers receive for their payments --- not on how a retailer chooses to spend its receipts. Compare Crane Creek, id. (". . . the relevant inquiry in determining the taxability of the event is the quid pro quo between the remitter and the recipient, not the ultimate use to which the recipient applies the receipts.") with Wakonda Club v. Iowa State Board of Tax Review, 444 N.W.2d 490 (Iowa 1989)("The nature of the service is not altered because the person or business providing it is required or chooses to expend part of the consideration for capital structures.") and In re the Appeal of Newton Country Club, 12 Kan. App. 2d 638, 644, 753 P.2d 304 (1988) ("Under both statutes, the amount taxable is determined by what the consumer was required to pay.") What a member gains by paying monthly fees, special assessments, initiation fees, non-refundable stock, and other club charges is the use of club facilities for recreation or entertainment. This is what is taxed under K.S.A.2003 Supp. 79-3603(n). Members must remain current on all membership charges --- whether the club assigns the payments to capital improvements or to day-to-day operating expenses --- if they wish to continue to enjoy the privilege of using the club and its facilities.

Country clubs have argued that non-refundable special assessments pay for property improvements that raise the member's "equity" in the club. These receipts, the argument runs, should be recognized as investments which increase a member's equity holding in the club rather than as dues that pay for the use of the club facilities. See K.S.A. 2003 Supp. 79-3603(n). This argument misses the mark. What a member holds in a non-profit country club that continues doing business is "membership equity" or an amount that a member paid for membership that the club's charter assures will be refunded when the membership is terminated. K.A.R. 92-19-73(b)(2) does not tax these refundable membership payments.

There is no question that a country club must construct and maintain a golf course and other facilities in order to provide its members with a gathering place for recreation, social interaction, and relaxation. In this respect, a country club is no different than any other service provider. Every time a service is purchased, part of the receipts are used to acquire and maintain the capital structure needed to provide the service. Wakonda Club v. Iowa State Board of Tax Review, 444 N.W.2d 490 (Iowa 1989); See also Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, 168 Kan. 227, 232-33, 212 P.2d 363 (1949). A service provider cannot reduce the amount of sales tax that it charges to a customer by bifurcating its billings into one charge for capital expenditures and another charge for day-to-day operating expenses. The rule against bifurcating consumer billings is implicit in the statutory definition of "selling price" and applies to country clubs and to their initiation fees, special assessments, and capital assessments. Wakonda Club v. Iowa State Board of Tax Review, 444 N.W.2d 490 (Iowa 1989); 2003 HB 2005, Sec. 5(ii) (". . . 'selling price' . . . means the total amount of consideration . . . for which . . . services are sold. . . ."; In re the Appeal of the City of Wichita, Case No. 89,934, (Kansas Supreme Court, March 19, 2004)(Charges to a water utility provider's customers cannot be broken into a taxable fee for water and a non-taxable fee for "capital costs for infrastructure.")).

A club's non-refundable receipts that fund facility maintenance and capital improvements are as much a member's payment for the use of the club's facilities as the receipts that pay for its day-to-day operating expenses. As the Supreme Court of Oklahoma stated when disposing of this same argument: "[T]he legislature did not intend to allow organizations to escape sales tax by merely denoting 'dues' as a 'capital assessment.'" Oklahoma City Golf and Country Club v. Oklahoma Tax Commission, 825 P.2d 267 (Okla. 1992). A club's assignment of receipts to a capital improvement fund, together with the possibility that the club members may dissolve the club sometime in the future to profit from the sale of the club's assets, does not transform the member's nonrefundable payment into something other than the payment of sales-taxable dues. K.A.R. 92-19-73(b)(3) applies only to a club "that continues operation, or its successor. . . ." This limitation shows that K.A.R. 92-19-73 does not tax ownership "equity" rights that may be realized after a club is dissolved.

Members do not join a country club with an expectation of profiting from selling the membership equity that they hold in the club. See e.g. Oklahoma Golf and Country Club v. Oklahoma Tax Commission, 825 P.2d 267, 270 (Okla. 1992)("The purpose of a social club is not to make a profit. That is the purpose of a business corporation. Social clubs are incorporated under different statutory provisions than business organizations. Social clubs and business corporations are treated differently for income tax purposes."). Country clubs are social clubs that are organized and operated exclusively for pleasure, recreation, and other nonprofit purposes. No part of the net earning of a club can inure to the benefit of any private shareholder. See Phelan, Nonprofit Enterprises, Vol. 2, Chaps. 23:01 & 23:04 (West Publishing Co.). Because country clubs are organized as non-profit social clubs, the only "equity" that a member is entitled to upon terminating membership is the refundable amount that was paid in earlier.

Many well-managed Kansas country clubs have operated for decades. A few have operated for more than a century. Members who hold stock or other "equity" in these not-for-profit clubs are assured only of receiving the same amount that they paid for stock or that they deposited with the club when they joined years earlier. These refundable amounts are broadly referred to as refundable membership equity. One writer discussed such refundable equity in a not-for-profit club in a trade journal for hospitality professionals:

K.A.R 92-19-73(b)(2) provides that redeemable equity contributions are not taxable when the club carries them as a liability to the member on the club's books and records. These refundable amounts can include membership stock, refundable deposits, refundable capital surcharges, and refundable special assessments. If a club amends its by-laws or articles to make these payments non-refundable instead of refundable, as McMahon recommends considering, these amounts would become taxable under K.A.R 92-19-73(b)(3).

Country clubs have asserted that K.A.R. 92-19-73(a)(2) should be struck down because it purports to tax stock sales when a club's charter does not assure that the stock purchase price will be refunded to the member. The clubs have argued that retailers' sales tax does not apply to stock sales, and therefore a club's sale of membership stock cannot be taxed. This argument misconstrued K.A.R. 92-19-73(a)(2), which premises taxability on whether the membership payment is refundable or redeemable:

Labeling a transaction a "stock sale" when it involves country club membership has been problematic for some country clubs because of federal security laws and state blue sky laws. See Annot., Sales of Memberships in Club or Similar Organization as Sale of Securities within Provision of Securities Act, 87 A.L.R.2d 1140. This has led some clubs to require new members to pay "refundable deposits" or make other similar redeemable contributions instead of buying membership stock. K.A.R. 92-19-73(a)(2) correctly provides that redeemable equity contributions can include "membership stock, certificates of membership, refundable deposits, refundable capital surcharges, and refundable special assessments." Under the regulation, these contributions are taxable if the club is not obligated to repay it to the member, regardless of what they are called.

Membership stock in a non-profit organization is not the same thing as stock held in for-profit businesses that are publicly traded. See 87 A.L.R.2d 1140. Typically, membership stock is turned in to the club when a member dies or resigns. The club reimburses the ex-member for the stock only after a new member joins the club and pays for the membership stock. Payments for membership stock are no different than other types of refundable payments required for membership, such as certificates of membership or refundable deposits. Distinguishing among these payments because one payment is for "membership stock" would elevate form over substance. The regulation correctly provides that any part of the payment for membership stock that is not refundable is taxable. Any part of the payment for membership stock that is carried on the books as being refundable is not taxed. This is the same treatment that the regulation accords to refundable deposits, refundable capital surcharges, and refundable special assessments. The inclusion of "membership stock" in K.A.R. 92-19-73(a)(2) adds to, rather than detracts from, the department's position that non-refundable membership payments to country clubs are taxable.

K.A.R. 92-19-73 implements the department's policy on dues. K.A.R. 92-19-22a and K.A.R. 92-19-22b implement the policies on admissions and on charges for participation in recreational activities. These two regulations should be reviewed when issues arise about the taxability of green fees, tournament admission fees for both participants and observers, and similar charges to club members and non-members.

Question: Is a payment for membership in a country club that is credited to a "Paid In Member Capital Fund," "Capital Improvement Fund," or "Building Fee" subject to Kansas sales tax?

Answer: Yes. Some country clubs maintain a separate "capital" fund that members contribute to on a regular basis. These funds help clubs avoid levying special assessments or reduce the amount of the special assessment that the club levies on members. Payment to these funds are taxable as the payment of dues. K.A.R. 92-19-72.

Question: Isn't taxing the special assessments as dues, and taxing the purchases made with moneys paid as special assessments, double taxation that violates the fourteenth amendment?

Answer: No. Double taxation occurs where the same tax is imposed on the same subject matter by the same taxing authority. Here, sales tax is imposed on two separate transactions and on two different parties. The club member pay the taxes on the assessment, and the contractor pays the tax on the materials used in the construction project. Therefore, taxing both the special assessment paid by members and the purchases paid for by the club with the proceeds does not result in double taxation.

Other states have applied this rationale to dispose of similar arguments. For example, there is no double taxation when an amusement operator purchases taxable ride equipment and later charges admission for the ride. Darien Lake Fun Country, Inc. v. State Tax Commission, 488 N.Y. Supp. 511 (N.Y. Sup. Ct. Appellate Div, 1986). There is no double taxation when a bowling alley collects sales tax on lane charges and pays sales tax on its purchase or lease of pin setting equipment. Boise Bowling Center v. State, 93 Idaho 367, 461 P.2d 262 (1969). Double taxation does not occur when a juke box vendor is required to pay sales tax on records and collect sales tax when the juke box is played. Ramco v. Director, Dep. of Revenue, 248 N.W.2d 122 (Iowa Sup. Ct. 1976).

Question: How does sales tax apply to contributions of capital during the construction phase of the country club?

Answer: Country clubs generally are organized as non-profit membership corporations to take advantage of the IRC 501(c)(7). During the construction phase of a club, a different and separate legal entity may buy the land, and construct the golf course, clubhouse, and other facilities. Later this entity transfers its assets (the club's golf course, clubhouse, and other facilities) to the non-profit membership corporation that is organized as a social club to take advantage of IRC 501(c)(7). Members then join the club. The payments of capital during the construction phase of the club are not "a debt owed to the club, organization, or business by an existing member or prospective member in order for the member or prospective member to enjoy the use of the facilities of the club, organization, or business for recreation or entertainment," within the meaning of K.A.R. 92-19-72. During the construction phase, there is no complete facility in existence that a club member can enjoy and use for recreation or entertainment. Similarly, there may be two or more separate legal entities involved. Power over a non-stock corporation shifts to its members once a person has been admitted to membership. K.S.A. 17-6009. Read together, K.S.A. 17-6009 and K.A.R. 92-19-72 shows that the sales tax regulation was not intended to apply to contributions of capital made during the construction phase of the country club before persons are admitted to membership.

The by-laws or articles of incorporation of Kansas country clubs generally state the "Purpose" of the club. The "Purpose" of most clubs is to operate exclusively for the pleasure, recreation, and other non-profit purposes of club members so that no part of the club's net earning inure to the benefit of any club member. Clubs do not contemplate distribution of gains, profits, or dividends to any of their members. Sales of membership stock generally are restricted to terms and conditions set out in the by-laws or articles of incorporation.

The possibility that a club will be dissolved and the assets distributed to members does not change the "Purpose" of the club as stated in its by-laws and corporate charter. That is, that the club is intended to be operated so that no part of its net earning inure to the benefit of any club member. Club by-laws and articles of incorporation that address dissolution often provide that distribution to members upon dissolution may only be made if the distribution does not effect the tax exempt status of the club. Cf .51 ALR 3d 1318, "Distribution of Funds by Nonprofit Corporation Absent Dissolution."

In addition to helping retain the club's IRC 501(c)(7) status, a clearly defined "Purpose" also helps a club to steer clear of securities entanglements that comes from the sale of a "security." See generally 87 ALR2d 114, "Sale of a membership in club or similar organization as sale of securities within provisions of securities act." A "security" involves an investment contract where money is invested in a common enterprise with profits to come solely from the efforts of others. Fred Lovitch, Legal Framework Governing the Kansas Non-Profit Corporation -- Part II, 48 Journal of the Bar Association of Kansas, 48 JKBA 343, 353 (1979). A clearly stated club "Purpose" helps assure that membership stock is not treated as a security. It should be noted that while clubs are organized as described in IRC 501(c)(7), a club is subject to income tax on any net income from unrelated business activities. See, Robert J. Terry, Social Clubs and the Unrelated Business Income Tax, 11 Washburn L.J. 44 (1971). The filing of an income tax return by a non-profit social club to report unrelated business income does not change its legal status as a non-profit entity. See Terry, supra.

Question: Is a country club or golf course entitled to the consumed-in-production exemption on its purchases of grass seed, fertilizer, pesticides, cleaners, water, soap, and similar "consumables"? Is a country club or golf course entitled to the ingredient or component part exemption for the same purchases?

Answer: No, for a number of reasons.

Country clubs purchase grass seed, fertilizer, pesticides, herbicides, water, sand, topsoil and other things to construct and maintain their fairways, greens, and roughs. Country clubs also purchase chemicals, paint, cleaner, polishes, water, toilet supplies, and other things to maintain their pools, tennis courts, clubhouses, and other facilities. The country clubs have argued that these purchases qualify for exemption as property consumed in providing taxable recreational services. See K.S.A. 79-3606(n); K.S.A. 79-3602(m); K.S.A. 2003 Supp. 79-3602(p); and K.S.A. 2003 Supp. 79-3602(dd). They argue that if these purchases are not consumed in production, the purchases qualify for exemption because they become a component part of the services. Both of these claims fail various reasons. First and foremost is that these purchases neither qualify as "property which is consumed" nor as an "ingredient or component part" of the services, as these terms have been construed by the courts and implemented by the department.

The Kansas sales tax act exempts purchases of property that becomes an "ingredient or component part" of a taxable service as well as items that are "consumed in production" of a taxable service. K.S.A. 2003 Supp. 79-3606(m) and K.S.A. 2003 Supp. 79-3606(n). The act's definition section limits these two exemptions. K.S.A. 2003 Supp. 79-3602(p), and K.S.A. 2003 Supp. 79-3602(dd). Property that qualifies as an "ingredient or component part" is limited to "property which is necessary or essential to, and which is actually used in and becomes an integral and material part of the . . . services produced." K.S.A. 2003 Supp. 79-3602(p) (underlining supplied). Property that qualifies as being "consumed in production" is limited to "property which is essential or necessary to and which is used in the actual process of and consumed . . . in . . . the providing of services." K.S.A. 2003 Supp. 79-3602(dd)(underlining supplied). These definitions in K.S.A. 79-3602 limit the two exemptions, which otherwise could be construed as extending to everything that a service provider consumes, uses, or expenses.

The grass seed, fertilizer, water, sand, and other consumables that a country club claims is "property which is consumed" does not qualify for the exemption because it is not "used in the actual process of . . . the providing of services." This is because the golf course, for example, with its fairways, greens, and traps, is not "an integral and material part of the . . . services produced" within the meaning of the act. See Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, 168 Kan. 227, 232-33, 212 P.2d 363 (1949). Since the golf course is not a part of a taxable service under the law, the grass seed, fertilizer, water, and sand used in maintaining it cannot qualify for exemption as being consumed in providing a taxable service.

Intrastate telephone services have been taxed under the Kansas retailers' sales tax act as a service since its inception in 1937. In the late 1940's, commercial telephone service was limited to "hard line" systems made up of handsets, lines, poles, switching equipment, and other equipment. This hardware was unquestionably "necessary and essential" for telephone service. This necessity did not exempt SW Bell's purchases as being component parts of the taxable service. In Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, supra, the Kansas Supreme Court considered and rejected Bell's argument that the purchases of these system components were exempt ingredient or component parts of the taxable telephone service that SW Bell provided. SW Bell was held to be the ultimate consumer of the system components, and owed Kansas retailers' sales tax on the purchases.

The grass seeds, sand, trees, and other materials that the country club uses to build their fairways, greens, roughs, and traps are taxable purchases. These items are not component parts of the taxable membership services that the club provides, just as the telephone sets, lines, poles, switching equipment, and other equipment were not component parts of the taxable telephone service that Bell provided in the late 1940's. Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, supra. Similarly, the country club's purchases used to maintain the fairways, greens, roughs, and sand traps are not consumed in the production of their taxable services --- these purchases are consumed in maintaining the fairways, greens, roughs, and sand traps, which Southwestern Bell instructs are not a component part of the club's taxable service under the sales tax act.

Over the years, various service providers have argued that they are entitled to claim a resale exemption when they buy property to use in providing a taxable services. Courts have rejected these claims in the case of: (1) equipment purchased to provide taxable circus rides, Darien Lake Fun Country, Inc. v. State Tax Commission, 488 N.Y.Supp. 511 (NY Sup. Ct. Appellate Div, 1986); (2) purchases of telephones used to provide mobile telephone services; Nashville Mobilephone Co. v. Woods, 655 S.W.2d 934 (Tenn. 1983); (3) records that are played in a jukebox, Ramco v. Director, Dep. Of Revenue, 248 N.W.2d 122 (Iowa Sup. Ct. 1976); and bowling alley equipment, Boise Bowling Center v. State, 93 Idaho 367, 461 P.2d 262 (1969).
The country clubs now put a different spin on these flawed sale–for-resale claims by arguing that they are entitled to exemption for property consumed in maintaining their golf courses. This argument was effectively rejected by the Kansas Supreme Court in In re Appeal of AT & T Technologies, Inc., 242 Kan. 554, 556-65, 749 P.2d 1033 (1988).

In AT & T, the Kansas Supreme Court held that third-party services that SW Bell purchased from AT & T to service and maintain SW Bell's handsets are taxable under Kansas law. This holding supports the notion that the country club's purchases of taxable maintenance services for their courses from third parties, such as fertilizer and pesticide application services, are taxable. Requiring a club to pay sales tax when it hires a fertilizer and pesticide application service is little different than requiring the same club to pay sales tax when it buys fertilizer and pesticides that its employees apply. As with AT & T Technologies, supra, the clubs are the final consumers of these purchases, whether purchasing fertilizer and pesticide application services or purchasing fertilizer and pesticide as tangible personal property. Both kinds of purchases are taxable. This approach is also consistent with Warren v. Fink, 146 Kan. 716, 72 P.2d 968 (1937), and with a number of sales tax regulations. See K.A.R. 92-19-20; K.A.R. 92-19-22a; K.A.R. 92-19-22b. Warren v. Fink, id., stands for the proposition that a taxable retail sale is a sale to someone who uses or consumes the property being sold. The various enactments since 1937 have not overturned the basic holdings set forth in Warren v. Fink, supra and Southwestern Bell, supra, and which was reaffirmed in AT & T Technologies, supra.

A review of the Kansas regulations in place since 1971 show that the Kansas Department of Revenue has consistently construed the consumed-in-production exemption narrowly. K.A.R. 92-19-20 was implemented six months after statutory changes to the consumed-in-production statutes were made in 1971:
The 1972 version of K.A.R. 92-19-20 continued in place until May 1, 1987, when it was amended. The amended regulation provides basically the same thing. See K.A.R. 92-19-20.
This regulations remains in place today.

In addition to K.A.R. 92-19-20, a new regulation for admissions has been adopted. K.A.R. 92-19-22a provides in part:

A new regulation for participation in recreation, sports, and entertainment has also been adopted. K.A.R. 92-19-22b provides in part:

These regulations show that when a business purchases consumables to use to maintain its premises, the purchases are taxable. This same conceptual approach that was stated in K.A.R. 92-19-20 in 1972 was restated fifteen years later when the regulation was amended in 1987. See K.A.R. 92-19-20 as amended May 1, 1987. The same approach was reiterated again in K.A.R 92-19-22a and K.A.R. 92-19-22b, which took effect in 2002. These regulations specifically address: "consumables and supplies used to . . . maintain a . . . business premises" and state that such consumables are taxable. K.A.R 92-19-22a; K.A.R. 92-19-22b. That these same consumables were taxable was implicit under the 1972 regulation since "gas, water, fuel, and electricity" were not exempt when "consumed for maintenance of buildings, business premises, offices, plants or warehouses." K.A.R. 92-19-20 as amended January 1, 1972.

The rational basis for the department's narrow interpretation of the consumed-in-production exemption is apparent. SW Bell needed to purchase and maintain its telephone system in order to provide taxable telephone services. Consumables are needed to maintain its telephone sets, lines, poles, switching equipment, and other equipment. Consumables also are needed to supply the buildings occupied by telephone operators and other personnel. Bell was in the same position as other retailers and non-retailers that had employees.

All businesses buy consumables to use to maintain their premises and to make the premises fit for human occupancy. These businesses include service providers who charge customers sales tax on admissions, on fees for participation in sports, games, and other recreational activities, and on dues for participation in sports. These businesses also include retailers of goods and non-retail businesses, such as insurance brokers, doctors, and lawyers. If the department had ruled that consumable sold to service providers are exempt, every service provider would claim exemption on all of its purchases of consumables, including electricity, water, and gas used to heat, light, and cool their business facility, and cleaning supplies, toilet supplies, sanitary supplies, and other consumables and supplies used to maintain their buildings and other premises and make them fit for occupancy. This would result in disparate treatment between retailers who provide a taxable services, retailers who sell tangible personal property, and non-retailers. It is also inconsistent with Warren v. Fink, supra, and with AT & T Technologies, supra, which held that maintenance services provided to a telephone company are taxable. Extending an exemption would also mean that clubs could avoid paying tax on fertilizer and law chemicals that they buy and apply, but would have to pay tax when they paid lawn chemical service providers to do the same thing.

Retailers would be treated differently on overhead purchases used to maintain their premises depending on whether they sold goods or provided taxable services. This would mean that the same items would be exempt when purchased by a service provider and taxable when purchased by a retailer who only sells tangible personal property. This undesirable result is not allowed under the restrictive definition of "consumed in production" in K.S.A. 2003 Supp. 79-3602(dd) or under Kansas regulations. It is not the result envisioned in Warren v. Fink, AT & T Technologies, or in any other the other Kansas cases that have construed the ingredient or component part exemption or the consumed-in-production exemption.

A country club's collection of sales tax on membership dues, green fees, and similar charges does not allow them to claim exemption on their purchases of golf course chemicals, grass, sand, water, electricity, natural gas, pool chemicals, pool water, member consumables and sanitation supplies, oil and gasoline consumed in maintenance vehicles and equipment, napkins and table cloth rental, uniform and towel rental, advertising matches, publications for members, consumable paper products and hand cream, trash can liners, bleach, air fresheners, detergents, degreasers, kitchen chemicals, and so forth.

The department has determined that score cards provided at the time that green fees are paid for are exempt as a component part of the recreational service. Score cards for a round of golf qualify as being tangible personal property that is "necessary or essential to" and which is an integral and material part of the recreational service being provided within the meaning of K.S.A. 2003 Supp. 79-3602(p). Purchases of admission tickets, admission tokens, and similar items that are used when the purchaser charges admission fees or fees for participation is recreation do not qualify for exemption except when the purchase is specifically exempted by K.S.A. 2003 Supp. 79-3606(rr).

Question: Is food purchased by the club to provide free meals to members subject to sales tax?

Answer: Yes. Sales of meals are specifically taxed at K.S.A. 2003 Supp. 79-3603(d). The only exemption for businesses that sell meals is found at K.S.A. 2003 Supp. 79-3606(j). It exempts:

This exemption does not extend to dues paying members of a country club who receive free food and meals from the club. A club is liable for tax on the cost of the food that is given to members or used to prepare meals that are given to its members.

Question: Are mandatory gratuities that are automatically charged by a club's dining room subject to tax?

Answer: Yes. When a customer is required to pay a mandatory gratuity on food or drink or when a gratuity is automatically charged, the gratuity is part of the selling price being charged and is subject to Kansas tax. In the case of food, the mandatory gratuity is part of the "total cost to the consumer" and is subject to sales tax. In the case of a drink containing alcoholic liquor, the mandatory gratuity is part of the "amount charged for a drink" and is subject to liquor excise tax. When a club does not require or automatically charge a gratuity and a tip is given by a customer voluntarily, the tip is not subject to either sales tax or liquor excise tax. In re Tax Appeal of Newton Country Club Company, 12 Kan. App. 2d 638, 753 P.2d 304 (1988).

Question: Are the unused portion of dining room minimum payments subject to Kansas sales tax?

Answer: Yes. To ensure members regularly utilize club dining facilities, clubs sometime fix dining room minimums that must be paid by the member even if the member does not purchase meals at the club. The amount of meal purchases are credited against the dining room minimum until it is extinguished. Any unused portion of a member's minimum dining room payments are subject to Kansas sales tax as dues, since these payments must be made in order to retain membership. See e.g. Crane Creek Country Club v. Idaho State Tax Commission, 122 Idaho 880, 841 P.2d 410 (1992); In re the Appeal of Newton Country Club, 12 Kan. App. 2d 638, 644, 753 P.2d 304 (1988).

Question: Are payments for locker rental subject to sales tax?

Answer: No. A locker rental is considered to be a service that is not enumerated in the Kansas retailers' sales tax act, and therefore, is not subject to Kansas sales tax.



Date Composed: 07/15/2002 Date Modified: 03/19/2004