Washington Supreme Court: Country Club Initiation Fees Now Deductible

The Supreme Court of Washington made its final decision in a case between the Royal Oaks Country Club (Royal Oaks), a nonprofit organization, and the Washington Department of Revenue (WDOR) related to the WDOR's tax assessment that Royal Oaks had to pay USD 2,640 in retail B&O tax and USD 45,245 in retail sales tax on their initiation fee receipts.

Fact of the Case and Court Decision

Although registered as a non-profit, Royal Oaks owns and operates a country club in Vancouver, Washington. The club has a golf course with accompanying practice ranges and a retail shop. It also has swimming facilities, a clubhouse with dining areas, bars, other dining spaces, and a fitness center.

Those who want to become members of Royal Oaks must pay a one-time initiation fee, which depends on the membership level to which the new member wants to subscribe. Furthermore, to use the services Royal Oaks provides its members, the initiation fee and the first monthly membership fee must be paid.

This means that paying for the initiation fee does not trigger membership, and members do not have the right to use any services. The initiation fee is paid only as a privilege to obtain club membership.

This was the stepping stone between the Royal Oaks and the WDOR. The Royal Oaks held that, following the rules and regulations, it can deduct these fees. In contrast, the WDOR did not agree with this and stated that these fees should be taxable.

Royal Oaks paid the taxes requested by the WDOR but maintained that the initiation fees were deductible, thus filing a refund action before the competent court. The first-instance court ruled in favor of the WDOR. However, upon Royal Oak's appeal, the Court of Appeals overturned the ruling and stated that the initiation fees were wholly deductible.

The WDOR requested a ruling from the Supreme Court of Washington, which ruled in favor of Royal Oaks. In its decision, the Supreme Court of Washington concluded that there is a difference between access to club facilities and the use of goods and services.

While the initiation fees may grant access to the club facilities, members may only use the club's facilities and services by paying the membership fee.

Conclusion

The Supreme Court of Washington's decision clarifies what is deductible concerning club membership fees and similar organizations. In addition, the decision underlines the different treatment from a sales tax perspective of the fees for privileges to join the club and fees for the club's services.

Finally, decisions like this give insights into the complex world of sales and use tax in the US, highlighting the importance of understanding and interpreting sales and use tax rules and regulations.

Source: Sales Tax Institute, FindLaw - Supreme Court of Washington Case No. 101770-7