SUMMARY. February 9, 2012

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1 SUMMARY QUESTION: WHETHER PAYMENTS MADE BY COUNTRY CLUB MEMBERS ARE NOT TAXABLE AS PAYMENTS TO A HOMEOWNER ASSOCIATION PURSUANT TO RULE 12A-1.005(4)(d)3., F.A.C. ANSWER: NO. THE PAYMENTS ARE CHARGES FOR ADMISSIONS. THE COUNTRY CLUB WAS NOT A HOMEOWNER ASSOCIATION AND THE COUNTRY CLUB PROPERTY ARE NOT COMMON AREAS AS REQUIRED BY THE RULE. February 9, 2012 Subject: Technical Assistance Advisement TAA 12A-005 Sales and Use Tax Admissions Sections , (1), , , , and , Florida Statutes (F.S.) Rule 12A-1.005, Florida Administrative Code (F.A.C.) Dear XXX: This letter is a response to your corporation s petition dated XXX, and additional correspondence provided thereafter for the Department s issuance of a Technical Assistance Advisement ( TAA ) concerning the above referenced parties and matter. Your petition has been carefully examined, and the Department finds it to be in compliance with the requisite criteria set forth in Chapter 12-11, F.A.C. This response to your request constitutes a TAA and is issued to you under the authority of s , F.S. The previous TAA (07A-020) issued to Taxpayer is incorporated by reference. ISSUE Whether membership dues paid to Taxpayer are exempt as provided for by Rule 12A (4)(d)3., F.A.C., regarding mandatory payments to associations. FACTS Community was founded in XXX as a planned development project pursuant to a zoning agreement with the County (the P.D.P.). The property was zoned agriculture and in XXX, by resolution of the County Commission, the zoning was changed to a planned development project (P.D.P.). At that time, the County Commission also approved a master site plan which became XXX single family homes and condominiums, XXX golf

2 Page 2 courses, a clubhouse, boat docking space, and other amenities within Community. The single family homes and condominiums are located in areas of Community which include common areas or common elements owned by different associations, including condominium associations. Taxpayer and Association are organized under Chapter 617, F.S. Association is governed by Chapter 720, F.S., regarding homeowner associations. Community, Association, Taxpayer, and the other associations, are subject to the Restated Declaration of Covenants and Restrictions for the [Community] (the Declaration ). Taxpayer owns Holdings for the purpose of obtaining an additional license to sell alcohol. The Declaration for Community provides that Assessments are charges made by Association against Association members and members residential property in Community. The Covenants provide that Association may grant exclusive use of docks and boat slip docking space. The Covenants provide that common expenses include all expenses incurred by Association. The Covenants provide that common property includes property dedicated or conveyed to Association by recorded subdivision plats or deed. The Covenants provide that Taxpayer owns and operates the Country Club. Articles 1.11 and 1.13 of the Covenants provide: 1.11 Country Club shall mean and refer to all present and future organizations consisting of members who have use and enjoyment rights in the Country Club Property Country Club Property shall mean and refer to those properties and the Improvements thereon which are designated as Country Club Property on the Development Plan, including without limitation the golf and tennis facilities, and such other properties and improvements as may now or hereafter be constructed, acquired or designated as XXX by [Taxpayer]. Article 4.2 of the Covenants provides that the Country Club property is intended for the use of the members of the Country Club and their guests and invitees. Article 4.11 provides: 4.11 Country Club Membership. All Owners shall be required to apply for a membership in the Country Club on terms established and existing for membership at the time the Owner s application is submitted. Upon approval of the Owner s membership application, the Owner shall be subject to such rules and regulations of the Country Club as are in effect as of the date of his acceptance, and shall be required to pay such fees and membership dues as may be assessed by the Country Club, pursuant to separate documents established for the Country Club. (Emphasis added)

3 Page 3 Article 5 provides members of Taxpayer and their guests are granted non-exclusive use rights to play golf and use Country Club Property. Article 6 provides Association with the right to make assessments to pay for expenses of the common property. A copy of the Restated Articles of Incorporation of Taxpayer ( Articles ) was provided with the request. Article III provides that the purpose of Taxpayer is to own and administer recreational areas and amenities for the benefit of Taxpayer members. Article IV provides that members of Taxpayer may be all owners of residential property in Association. Article IV provides that membership in Association shall be an automatic attribute of ownership in Community. Article IV provides that membership in the Club Taxpayer is determined by the Restated Bylaws of Taxpayer. The Second Restated Bylaws of Taxpayer (the Taxpayer Bylaws ) was amended in The Restated Articles of Incorporation of Association ( Association Articles ) provides that membership in Taxpayer shall be as determined from Taxpayer s Bylaws. The Taxpayer Bylaws provide that the purpose of Taxpayer is to own and administer the golf courses, tennis courts, swimming facilities, clubhouse, fitness center, and other recreational amenities for the benefit of Taxpayer s members. The Taxpayer Bylaws provide that Taxpayer is permitted to have XXX proprietary golf and social members, with a maximum of XXX social members. New members are required to be golf members and to pay an equity contribution and capital contribution upon joining. Social members are entitled to full access and use of Taxpayer s tennis, fitness, and social facilities. Golf members are granted the same access and use rights as social members. In addition, golf members are entitled to access and use of golf facilities. Article III, Section 1 of Taxpayer Bylaws establishes the manner that membership is determined. Section 1(g) and (h) provide, in part, the following: (g) Subscription for Membership. Applicants for Membership shall complete and execute a Subscription Agreement and Application for Membership accompanied by a check for the amount of the contribution to capital due and payable. The amount of the equity contribution is due on the effective date of Membership. The Membership Committee shall promptly consider the application and report to the Board of Directors which shall act on the application within thirty (30) days from the date the application is received, either granting or denying the application in its sole and absolute discretion. If the applicant is denied membership, all fees paid with the application shall be returned with the letter of denial. (Emphasis added) (h) Membership Certificates. Each Member shall receive a membership certificate. Membership certificates are not redeemable, assignable or transferable except as specifically provided in [Taxpayer Bylaws] and then only through the Treasurer of [Taxpayer]. Whenever a Member ceases to be a Member, his/her membership certificate becomes null and void.

4 Page 4 Taxpayer Bylaws provide that when a transfer of membership is made, the new members must pay joining fees and dues. Taxpayer Bylaws provide for majority vote on all issues, including assessments over XXX. The Board is empowered to determine membership dues. Joining fees are not required in certain circumstances, such as a transfer to a spouse after death. Renters and guests of members may also receive use privileges. Taxpayer may place a lien on members certificates, to the member s entitlement of return to capital contribution, and amounts due Association. The Amended and Restated Bylaws of the [Association] (the Association Bylaws ) provide that the Association Bylaws are intended to be substantially the same as the Taxpayer Bylaws. The Association Bylaws provide that the membership in Association and Club shall be the same. The Association Bylaws provide that separate corporate existence and identity of Association and Taxpayer shall be maintained. The Association Bylaws provide that the purpose of Association is to own and administer common areas and common properties for the benefit of Association members. Taxpayer is a social club pursuant to section 501(c)(7) of the Internal Revenue Code. The most recent federal income tax return provides Taxpayer is a private member owned social club whose exempt purpose is to promote social interaction of Taxpayer members by providing dining and recreational activities. In addition to membership dues and fees, Taxpayer earns income from non-member golf fees and waterfront activities. The federal income tax return provides that XXX of the total of XXX rounds of golf were by nonmembers. Other income included trail and locker fees, tournament fees, and cart rentals. Taxpayer s return was separate from Association s return. Taxpayer s website provides that green fees are XXX. In addition, packages are offered for XXX that provide for transient accommodations and use of Taxpayer s recreational facilities. The website provides that Taxpayer is a private member owned club with refundable membership equity. Taxpayer has licenses from the Department of Business and Professional Regulation for permanent food service, retail beverage sales, and mobile dispensing vehicles. For property tax purposes, the County property tax appraiser s website reflects the assessment value of Taxpayer s recreational property is with Taxpayer. However, the website reflects no value for Association-owned property. TAXPAYER POSITION Taxpayer claims that membership dues are not subject to sales tax imposed by section , F.S. Taxpayer cites Rule 12A-1.005(4)(d)3., F.A.C., because Taxpayer claims Taxpayer is an association receiving mandatory membership dues payments from members as a condition of ownership of property. The dues are for the use of common areas with the property owned by the members. The common areas are the recreational facilities used by the members but owned by Taxpayer.

5 Page 5 Taxpayer claims that the payments are mandatory for several reasons. First, the Taxpayer s request provides that membership dues and fees are determined prior to the fiscal year by Taxpayer s Board to pay for annual operating and capital needs of Taxpayer. Second, only one member may join Club for each residential unit or parcel and that person must be designated by the other owners of the unit of parcel when the membership application is made. The member is subject to approval and is jointly and severally liable with the owners for the payment of all dues, assessments, fees, and other charges made to the designated member. Also, if the dues and other charges are not paid, the Taxpayer may place a lien on the member s equity interest, including the member s certificate and right to the return of the capital contribution amounts. Taxpayer claims Taxpayer is an association in substance and in function, because Taxpayer qualifies as an association according to section (9), F.S., and all purchasers of a unit or parcel in Community must be a member of Association and Taxpayer. Taxpayer cites Downey v. Jungle Den Villa Recreational Association, Inc., 525 So.2d 438 (Fla. 5 th DCA 1988), that a recreational association organized to provide an entity for ownership, operation, and management of recreational facilities for the use of all unit owners was, in substance and in function, acting as an association. Taxpayer claims Taxpayer should be deemed a de facto association. The request cites the Articles that provide Taxpayer s purpose is to own and administer the golf courses, tennis courts, swimming facilities, clubhouse, fitness center, and other recreational amenities for the benefit of the Taxpayer s members, who are owners of parcels or units in Community. The request provides that the owners are liable for the membership dues and other charges of the members, and that Taxpayer may place a lien on the membership certificate and equity capital contribution of the member for failure to pay the dues and other charges. In addition, Taxpayer may place a lien on amounts due Association, the member s condominium association, or the member s homeowner association. Taxpayer is entitled to use remedies, such as foreclosure against the membership certificate and securing judgments for unpaid sums. Also, each member is entitled to one vote. In regard to Taxpayer s claim that the membership dues were required to be paid as a condition of ownership, the request provides that members are required to file an application. The request also provides that members and owners have joint and several liability, and that Association and Taxpayer members are the same. Taxpayer argues that the recreational facilities are common elements or common areas. Taxpayer relies on the Declaration s definition of Country Club Property and Country Club Owner. In addition, Taxpayer maintains that the Country Club Property is intended for the use Taxpayer s members and their guests and invitees and that Taxpayer is responsible for the management, maintenance, and operation of the Country Club

6 Page 6 Property. Taxpayer cites Downey, 525 So.2d 438, providing that the court found that the real property to be used for the recreational facilities, the legal title of which was in the entity created to own, operate, and manage the recreation facilities, was actually a common element. APPLICABLE AUTHORITY AND DISCUSSION Section (1), F.S., provides, in part, the following: (1)(a) It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who sells or receives anything of value by way of admissions. (b) For the exercise of such privilege, a tax is levied at the rate of 6 percent of sales price, or the actual value received from such admissions, which 6 percent shall be added to and collected with all such admissions from the purchaser thereof, and such tax shall be paid for the exercise of the privilege as defined in the preceding paragraph. Section (1), F.S., provides, in part, the following: (1) The term "admissions" means and includes the net sum of money after deduction of any federal taxes for admitting a person to any place of amusement, sport, or recreation or for the privilege of entering or staying in any place of amusement, sport, or recreation, including, but not limited to, all dues and fees paid to private clubs and membership clubs providing recreational or physical fitness facilities, including, but not limited to, golf, tennis, swimming, yachting, boating, athletic, exercise, and fitness facilities. Section (1), F.S., requires each person selling admissions to collect sales tax on the sales price or actual value received from admissions. Section (1), F.S., defines the term admissions. The definition specifically includes as admissions payments of all dues and fees paid to private clubs and membership clubs providing recreational or physical fitness facilities. Taxpayer s website provides that Taxpayer is a private equity membership club with refundable equity. Members are required to make capital contributions. Taxpayer s members receive membership certificates, are eligible to vote, and are entitled to received a return of the capital contribution paid once accepted as a member. Based on these facts, Taxpayer is a private member owned organization.

7 Page 7 Rule 12A-1.005(4)(a)1., F.A.C., provides that dues and user fees paid to any organization that provides physical fitness or recreational facilities, such as golf courses, tennis courts, swimming pools, yachting, and boating are subject to tax. Taxpayer owns and provides to its members the facilities enumerated by the Rule. As such, the dues and fees paid for the right to use the facilities are admissions as defined by section (1), F.S. Taxpayer maintains the membership dues are exempt as payments to a homeowners association. Taxpayer cites Rule 12A-1.005(4)(d)3., F.A.C. This provision was added to Rule 12A-1.005, F.A.C., effective December 16, It provides: (d) Fees paid to private clubs or membership clubs that do not entitle the payor to the use of the club s recreational or physical fitness facilities are not subject to tax. Examples of such fees are: **** 3. Mandatory dues and fees paid to a condominium association, homeowners association, or cooperative association when they are required to be paid as a condition of ownership or occupancy of real property and the club facilities are part of the common elements or common areas of the real property. Sections 33-38, Chapter 92-49, Laws of Florida ( L.O.F. ), created sections , F.S., governing homeowners associations. Sections 44-51, Chapter , L.O.F., transferred and renumbered the sections regarding homeowners associations to Chapter 720, F.S. Section (3)(b), F.S., provides that Chapter 720, F.S., does not apply to parcels intended for commercial use. This includes areas used by businesses to make sales to the general public who are non-members. Section , F.S., provides, in part, the following: (1) Assessment or amenity fee means a sum or sums of money payable to the association, to the developer or other owner of common areas, or to recreational facilities and other properties serving the parcels by the owners of one or more parcels as authorized in the governing documents, which if not paid by the owner of a parcel, can result in a lien against the parcel. (2) Common area means all real property within a community which is owned or leased by an association or dedicated for use or maintenance by the association or its members, including, regardless of whether title has been conveyed to the association: (a) Real property the use of which is dedicated to the association or its members by a recorded plat; or (b) Real property committed by a declaration of covenants to be leased or conveyed to the association.

8 Page 8 **** (3) Community means the real property that is or will be subject to a declaration of covenants which is recorded in the county where the property is located. The term community includes all real property, including undeveloped phases, that is or was the subject of a developmentof-regional-impact development order, together with any approved modification thereto. **** (9) Homeowners association or association means a Florida corporation responsible for the operation of a community or a mobile home subdivision in which the voting membership is made up of parcel owners or their agents, or a combination thereof, and in which membership is a mandatory condition of parcel ownership, and which is authorized to impose assessments that, if unpaid, may become a lien on the parcel. (Emphasis added) Taxpayer is not a homeowners association because Taxpayer is responsible for the operation of Club and not Community as required by section (9), F.S. As provided herein, Taxpayer is a private membership equity club. Taxpayer s website provides as such, and Taxpayer requires capital contributions to be paid before membership is accepted. Taxpayer reports as a social club for federal income tax purposes. Taxpayer issues membership certificates and allows voting rights. The payments made entitle members to continued use of Taxpayer s recreational facilities. Failure to pay membership dues to Taxpayer for use of property owned by Taxpayer and operated by Club can result in placement of a lien on the membership interest in Taxpayer and the right of return of the capital contribution made to Taxpayer. The lien is not placed against the member s parcel. The membership dues to Taxpayer are not an assessment as defined by section (1), F.S., because a lien cannot be placed on the owner s parcel. This is because only Association can only place the lien on the parcel. Taxpayer may only place a lien against the membership interest and the right to entitlement by a member to the return of capital. Although parcel and unit owners in Community have automatic membership in Association, Taxpayer requires the owners to file an application for membership. Then, the application must be approved. Therefore, membership is not a condition of ownership; only the filing of the application is such a condition. Furthermore, Taxpayer is not authorized to place a lien on the owner s parcel for failure to pay membership dues. Also, Taxpayer only operates the recreational facilities and does not operate all of the common areas of Community. In addition, Taxpayer has other income from nonmembers. Therefore, Taxpayer is not a homeowner s association as provided for by section (9), F.S. Taxpayer is a private equity membership club and subject to the provisions of section , F.S.

9 Page 9 Country Club property is not common area to the owners of units and parcels in Community. If Country Club Property were a common area, then the individual parcels and units would include the value of the property for property tax purposes and not Taxpayer. See sections (1), F.S., and , F.S. Taxpayer cites Downey, 525 So.2d 438. In that decision, the incorporated association was owned by only condominium unit owners. The association held title to recreational facilities, and only unit owners could use the facilities. The developer held out in the prospectus that the recreational facilities would be owned by the condominium associations. The dispute addressed the association s failure to obtain a unanimous vote of condominium unit owners in making an assessment to pay for capital improvements, as required by Chapter 718, F.S., governing condominium associations. The association claimed it was not a condominium association. The court determined that the legislative intent of protecting unit owners with a unanimous vote could not be avoided by setting up an independent entity to perform the functions of the condominium association. Although, the decision in Downey, 525 So.2d 438, is applicable in regard to protection of condominium unit owners in regard to mandatory voting procedures to make assessments by an association, the decision is not applicable to the application of Chapter 212, F.S. Courts have long recognized that while a taxpayer is free to structure his transaction as he chooses, once having done so, he must accept the consequences of his choice, whether contemplated or not... and may not enjoy the benefit of some other route he might have chosen to follow but did not. Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974); North American Company v. Green, 120 So.2d 603, 610 (Fla. 1959) ( We are not privileged to make the taxability of a transaction dependent upon any consideration of some alternative procedure which might not have been taxable. ). Because taxpayers have been accorded less freedom than tax authorities to disavow the form they have chosen, they are generally bound to the tax consequences that follow from their choice. See Bradley v. United States, 730 F.2d 718, 720 (11th Cir. 1984); Illinois Power Co. v. Commissioner, 87 T.C. 1417, 1430 (1986), aff'd 896 F.2d 580 (D.C. Cir. 1990); Regal Kitchens, Inc. v. Department of Revenue, 641 So.2d 158, 163 (Fla. 1st DCA 1994)(Those who seek the protection afforded by incorporation must also accept the burdens. Individuals may incorporate to shield themselves from personal liability, or for many other reasons, but they may not then disavow the existence of the corporation for the purpose of obtaining a tax advantage). This judicial rule seeks to avoid the uncertainty that would result from allowing the taxability of a transaction to depend on whether an alternative form exists under which more favorable tax consequences would result. National Alfalfa, supra, at 149; Department of Revenue v. McCoy Motel, Inc., 302 So.2d 440, 443 (Fla. 1st DCA 1974). Thus, the form in which the parties cast a transaction generally determines its substance for tax purposes. This is because taxpayers have the freedom to structure their transactions as they see fit and are intimately acquainted with the facts underlying the substance of the chosen transactional structure. Tax authorities, on the other hand, do not have direct access to the facts underlying a particular transaction and must by necessity rely upon the taxpayer s representations regarding the transaction when determining the

10 Page 10 resulting tax consequences. See Plante v. Commissioner, 168 F.3d 1279, 1282 (11th Cir. 1999) ("If a party could alter the express terms of his contract by arguing that the terms did not represent economic reality, the Commissioner would be required to litigate the underlying factual circumstances of 'countless' agreements.") (quoting North Am. Rayon Corp. v. Commissioner, 12 F.3d 583, 587 (6th Cir. 1993)). Therefore, for the reasons provided herein, Taxpayer is a private equity membership club, and the membership dues are for the use of Taxpayer s facilities. Thus, the dues are admissions as provided by section (1), F.S. CONCLUSION The membership dues paid to Taxpayer are not exempt, as provided for by Rule 12A (4)(d)3., F.A.C., regarding mandatory payments to associations. Taxpayer s membership dues are subject to the sales tax imposed by section , F.S. This response constitutes a Technical Assistance Advisement under Section , F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice, as specified in Section , F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes, or judicial interpretations of the statutes or rules, upon which this advice is based, may subject similar future transactions to a different treatment than expressed in this response. You are further advised that this response, your request and related backup documents are public records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions of Section , F.S. Confidential information must be deleted before public disclosure. In an effort to protect confidentiality, we request you provide the undersigned with an edited copy of your request for Technical Assistance Advisement, the backup material and this response, deleting names, addresses and any other details which might lead to identification of the taxpayer. Your response should be received by the Department within 10 days of the date of this letter. Respectfully, Chuck Wallace Senior Attorney Technical Assistance & Dispute Resolution (850) Record ID: