US - Colorado and Marketplace Rules Concerning Membership-Based Fee

Earlier this year, the Colorado Department of Revenue (CDR) published a binding private letter ruling PLR-23-006 to answer an unnamed Company's request regarding the sales or use tax taxability framework for the underlying supply of subscription-based membership.

The main issue presented by the Company was whether the fee charged for a subscription-based membership, the primary benefit of providing the buyer with free delivery on future orders that meet specific conditions, is subject to state sales or use tax. 

Facts of the Matter 

The Company in question, a non-Colorado-based entity, operates an online marketplace that connects buyers with third-party retailers and independent third parties that provide delivery and related services. The Company also handles the payment for these transactions.

As an online marketplace, the Company concludes agreements with Retailers in Colorado and the US to allow Retailers to list their products for sale on its Marketplace. Buyers can browse and select items on the Marketplace, which Couriers pick, pack, and deliver.

The Company's fee structure is comprehensive. It includes a Delivery Fee, which varies based on order price and delivery time, a Service Fee for order fulfillment and handling, and a Busy Pricing Fee during peak hours. There's also an option for a pickup fee if buyers choose to pick up their orders. 

The Company offers an annual or monthly membership that provides benefits like unlimited free delivery for orders over a certain amount, credit back on pickup orders, reduced Service Fees, and no Busy Pricing Fees. Non-membership buyers usually pay a Delivery Fee starting at a certain amount per order, with additional charges for orders below a specified amount, even if they have a membership.

Impact of the Ruling

In its ruling, the CDR stated that in Colorado, sales tax applies to retail sales of tangible personal property but does not extend to services unless specifically included in the statute. Furthermore, transportation services, such as delivery, are not taxed as long as they are separately stated on a written invoice or contract and are separable from the sales transaction.

Finally, a service is considered separable if it remains the same whether contracted for at the time of purchase or later and if it can be contracted for either at the initial purchase or subsequently. 

Based on the provided information, the CDR concluded that because the membership is invoiced separately from other charges and is separately invoiced, it is not subject to state sales or use tax.

Conclusion

An important fact regarding this ruling is that it cannot be relied upon by anyone other than the Company to whom the ruling is addressed. However, this ruling represents an important clarification of what is subject to sales and use tax in Colorado. As such, it will be a guideline for similar cases.

Source: Colorado Department of Revenue