On January 31, 2020, the Pennsylvania Department of Revenue (“Revenue”) issued Letter Ruling No. SUT-20-001, which concluded that the taxability of a membership fee in a professional association depends upon what a member receives in exchange for the membership. If the member does not receive any taxable tangible personal property or taxable services in exchange for the fee, then the fee is not taxable. However, if a member receives taxable tangible personal property or taxable services in exchange for the membership fee, then the fee is taxable. Revenue notes that a membership fee in and of itself is not taxable because it is not an enumerated taxable service. However, if the membership fee includes the transfer of taxable tangible personal property, in addition to nontaxable services, the entire charge for the membership fee is subject to tax if it is not separately stated from the taxable tangible personal property under Downs Racing, LP v. Commonwealth, 196 A.3d 603, 611 (Pa. 2018). In the fact pattern contained in the Letter Ruling, Revenue determined that the membership fees were subject to Pennsylvania sales tax on members located in Pennsylvania because the members received taxable tangible personal property (published guide, tools and templates, on demand webinars, and publications) along with nontaxable services (networking opportunities, discounts on certifications, and certification tracking). Additionally, Revenue nixed application of the “essence of transaction test,” by pointing out that the Pennsylvania Supreme Court has never endorsed that test.
This Letter Ruling has the potential to cause a host of problems for professional associations that charge membership fees. If you are a professional association charging membership fees, it is in your best interest to determine what is included with your paid membership and whether or not any of those membership benefits are taxable. However, if they are taxable, how do you quantify the separate value for taxability purposes? If you haven’t been separately stating taxable and nontaxable membership fees, what is your potential audit risk?
If you have questions about the Letter Ruling or any state tax matter, please feel free to contact a member of the McNees State and Local Tax team.