The Colorado Department of Revenue has issued a private letter ruling regarding the taxability of subscription-based membership fees, the primary benefit of which is to provide the purchaser with free delivery. Per the private letter ruling, the subscription-based membership fees are not subject to Colorado sales and use tax.
The company operates an online marketplace that connects purchasers with third-party retailers and independent third parties that provide delivery and related services. The company processes the payment for the transactions. The company charges purchasers who buy items on the marketplace a delivery fee, which is a separately stated fee and can vary based on order price and time of delivery. The company also charges a separately stated service fee for the fulfillment and handling of the order as well as a “busy pricing fee“ during peak delivery hours. In lieu of delivery, purchasers may also select a pick-up option for many retailers on the marketplace.
Purchasers have the option to sign up for an annual or monthly delivery membership in which they receive unlimited delivery of goods for a flat fee.
In the private letter ruling, the Department noted that transportation services (including delivery) are not among the services explicitly subject to tax in Colorado. Additionally, charges for transportation services are not taxable if they are separable from the sales transaction and stated separately on the invoice or contract. Services are considered “separable” when the nature of the service remains the same whether contracted for at the time of purchase or at a later date and when the service can be contracted for at the initial purchase or at a later time. Charges for transportation services are separable from the sales transaction if they are performed after the property is offered for sale and the seller allows the purchaser the option either to use the seller’s transportation services or use alternative transportation services.
The membership is not required to shop with the company and can be purchased at any time. The Department found that the primary benefit of the membership is unlimited free delivery. The delivery service functionally remains the same for membership subscribers and non-subscribers alike, with the time and method in which the delivery services are paid being the only substantial difference.
Because the nature of services provided in the membership remains the same whether contracted for at the time of purchase or at a later date and the services can be contracted for at the time of the initial purchase or at a later time, and because the membership is invoiced separately, the membership fee is both separable and separately stated and is not subject to state sales or use tax. (PLR 23-006, Colorado Department of Revenue, December 1, 2023, released April 2024)