The Washington State Department of Revenue issued an Excise Tax Advisory (ETA) effective July 1, 2022, that changes the method used by taxpayers to deduct member fees and dues from the measure of the Business and Occupation (B&O) tax.
The new guidance requires taxpayers to use a single allocation method based on a tiered multistep allocation approach to determine the B&O tax deduction.
The department will no longer accept allocation methods other than the tiered approach outlined in ETA 3230.2021. Failure to use the new method will result in no deduction allowed.
This is important for taxpayers with a social, professional, or other bona fide component to the initiation fees and dues collected from members, mainly in the not-for-profit, recreational, and hospitality industries.
Taxpayers claiming a B&O deduction for membership fees and dues were previously able to use either the actual records of facilities usage method or the cost of production method. Now, taxpayers must use the multistep allocation method below to determine the deductible portion of membership dues and fees.
Bona Fide Membership Fees and Dues
Bona fide initiation fees and dues are amounts paid solely for the privilege of belonging as a member of a club, organization, or society.
The definition of membership fees is an amount charged as an initiation fee to admit a person as a member. Membership dues are the recurring charges paid by members to continue their membership.
This amount doesn’t include any significant goods or services without additional charge, or graduated fees and dues based on the amount of goods or services received by the member.
Significant Goods and Services
A significant good or service isn’t defined, but recent guidance specifies what isn’t included for purposes of allocating membership dues and fees.
Maintaining a website that explains the taxpayer’s goals and objectives, promotes their business and members’ business by providing a list of its members, upcoming activities, and member locations and services isn’t considered significant goods or services.
Providing this information on printed materials, newsletters, or magazines isn’t considered significant goods or services, either.
Multistep Allocation Method
The new method uses a multistep approach for determining allocation when the taxpayer has a deductible, bona fide component to the membership fees and dues but is unable to segregate the deductible amount.
Step 1: Graduated Fees and Dues
If membership fees are graduated, the deductible amount of fees and dues attributable to a bona fide component is based on charges for the membership class that receives only the privilege of membership. That means no significant goods or services were exchanged for class members’ dues or fees.
Step 2: Guest Fees and Public Charges
If there are guest fees or public access charges for the same goods and services included in membership fees and dues, Step 2 allocates the nondeductible amount attributable to significant goods and services that are also available to the public for a guest or public access charge.
Step 3: Cost of Production
The last step is used to determine nondeductible amounts not previously allocated in Step 2, or if Steps 1 and 2 don’t apply.
For all three steps, the amount of fees and dues in exchange for significant goods and services can’t be less than the actual cost of providing those goods and services.
Separately Stated Records
If a taxpayer keeps clear records with the bona fide deductible amount of membership dues and fees separately stated from the nondeductible portion, then allocation isn’t required.
We’re Here to Help
For more information on how this exemption could affect your state and local taxes contact your Moss Adams professional.
You can also find more insights at our State & Local Tax Services.
Special thanks Jamie Ritter, Senior, State & Local Tax Services, for contributions to this article.