In a recent case1 arising from a sales tax audit by the South Carolina Department of Revenue (DOR), Books-A-Million, Inc. (BAM) appealed the order of the Administrative Law Court (ALC) that upheld the DOR’s assessment of taxes, penalties, and interest against BAM for BAM’s failure to include sales of the Millionaire’s Club Memberships (Club Memberships) in BAM’s gross proceeds of sales. BAM argued in South Carolina Supreme Court that the ALC erred in finding the following: 1) the fees and renewal fees collected by BAM for Club Memberships are subject to sales tax, and 2) the statutes are not ambiguous.
BAM operates a discount book retail business headquartered in Birmingham, Alabama that sells books, magazines, collectible supplies, cards, and other gifts in retail stores throughout the country and online. BAM operates 13 retail locations in South Carolina. Customers pay a $25 annual fee (Membership Fee) to belong to the Millionaire’s Club, which provides discounts on purchases. Customers can pay the Membership Fee separately or along with other store purchases. Club Memberships expire one year from the date of payment of the Membership Fee or can be automatically renewed each year unless customers affirmatively opt out of the automatic renewal. BAM does not charge sales tax on the cost of the Membership Fee.
BAM requested a contested case hearing before the ALC, challenging the DOR’s final determination. The sole issue before the ALC was whether the proceeds from BAM’s South Carolina sales of Club Memberships were subject to sales taxes and should have been included in BAM’s gross proceeds of sales. Both parties filed motions for summary judgment, agreeing there were no material facts in dispute but disagreeing as to the application of the law to the undisputed facts.
At the hearing before the ALC, the DOR argued a plain reading of the statute2 demonstrated that all persons engaged in the sale of tangible personal property at retail are liable for sales tax on their gross proceeds of sales. BAM argued sections 12-36-910(A) and 12-36-90 only imposed a sales tax on the gross proceeds of the sale of tangible personal property.
The ALC found BAM failed to point to any ambiguity in either section. Thus, the ALC concluded sections 12-36-910(A) and 12-36-90 were unambiguous, and the plain meaning rule applied. The ALC found the application of the plain meaning rule to the terms in the statutes at issue demonstrated the Membership Fees were includable in BAM’s gross proceeds of sales and subject to sales tax. On appeal, BAM again argues the statutes are ambiguous regarding whether optional membership fees are included in the sales tax base, and such ambiguity must be resolved in favor of the taxpayer.
The Court agreed with the conclusion of the ALC in this case stating: “South Carolina case law demonstrates that gross proceeds of sales includes all value that comes from or is a direct result of the sale, lease, or rental of tangible personal property.”
Further, the Court continued in its position that the fees are taxable: “Customers pay the Membership Fee to obtain discounts and free shipping on their purchases of tangible personal property. Thus, the Membership Fee is a direct result of the sale of tangible personal property. But for [BAM’s] sale of tangible personal property, [BAM] would not be able to sell [Club Memberships] and, therefore, would not collect Membership Fees. The Membership Fees are payment for services or benefits that are incident to the sale of tangible personal property. Moreover, the Membership Fees are inextricably linked to, and incapable of being separated from, the sale of tangible personal property.”
As the Court’s 3-2 decision does not indicate a solid opinion on the issue, it is possible that the issue will be further litigated. We will keep you updated on further actions.
1 Books-A-Million Inc. v. South Carolina Department of Revenue, Case Number 28110, in the South Carolina Supreme Court.
2 “Gross proceeds of sales, or any similar term, means the value proceeding or accruing from the sale . . . of tangible personal property.” S.C. Code Ann. § 12-36-90 (2014).
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