Recently, the IRS caught up with some regional country clubs, claiming they neglected to pay the appropriate sales tax due on initiation fees.
"The country clubs didn't collect tax, and they got audited," says Charles M. Steines, an attorney at Jones Day in the tax group.
In the case, Akron Mgt. Corp. v. Zaino (2002), the Ohio Supreme Court decided that Firestone, Quail Hollow, Barrington and Glenmoor country clubs were required to pay sales tax on an "initiation deposit," which the clubs called an "interest-free and refundable thirty-year loan."
The clubs in question set up a refundable deposit and claimed it was a loan, not a tangible good or service subject to tax. According to the Ohio Revised Code chapter 5739, a tax is required on each retail sale made in Ohio, including all transactions in which a membership is granted, maintained or renewed. In Ohio, most clubs already pay sales tax on initiation fees, but those fees are nonrefundable.
"It has been the law for 10 years, but this particular case raised the issue of whether or not loan and equity contributions are subject to tax because that is not crystal clear," says Steines. "In this case, the court said we don't care what you call it, you have to pay tax."
The end result is that the country clubs are liable for the back tax and most likely will pass that on to their members.
The 5 to 7 percent sales tax will be an unwelcome addition to an already expensive initiation fee for most club members. Not all states require sales tax to be paid for country club initiation fees, but "Ohio expanded the scope of sales tax for a lot more services," Steines says.
"Today, members of clubs are more mobile and it becomes important to get out of your arrangement to join a club in another city."
This case, in addition to the federal government's attempts to chip away at entertainment deductions, promises only to make it harder for individuals and business to afford club memberships.
How to reach: Jones Day Reavis Pogue, (216) 568-7211