95-027
Response May 25, 1995
Request
Re:
Sales/Use Tax for XXXXX
Dear XXXXX:
At your request, I am writing to provide a legal
analysis of whether payments for aerobics instruction are subject to tax under
Utah Code Ann. § 59-12-103(f)(i). As
you know, I represent XXXXX, one of the few businesses which offers “pure”
aerobics instruction; i.e., the business has no workout equipment or facility
where its students work out on their own.
You indicated that you have reported your findings to the Utah State Tax
Commission and that the Commission may be providing “informal guidance” on this
issue. You encouraged me to copy the
Commissioners on this letter. I
appreciate the opportunity to comment.
In order to provide a legal analysis of the
potential tax, it is necessary that I provide sufficient factual
background. My discussion begins with a
description of the qualifications of the XXXXX aerobic instructors. At the risk of being too elementary, I have
also briefly outlined what is involved in an “aerobics” class. Lastly, I have described how customers pay
for aerobics instruction.
FACTUAL BACKGROUND
I. Instructor
Qualifications
The director of XXXXX is XXXXX. XXXXX has certifications from the preeminent
exercise associations, including certifications in aerobics instruction, step aerobics
and personal training from the Aerobic and Fitness Association of America
(“AFAA”) and the American Council on Exercise (“ACE”). XXXXX is the President of the Utah Fitness
Instructors Association and is a fitness expert who appears weekly on XXXXX
where she presents fitness instruction and advice. XXXXX is also a paid consultant for XXXXX and travels nationally
presenting continuing education lectures and workshops through ACE and AFAA. XXXXX has a bachelor degree in
education. All of the instructors at
XXXXX have been trained by XXXXX and each instructor has been certified through
ACE and/or AFAA. The certifications
test the instructor's knowledge of anatomy, kinesiology, exercise physiology,
nutrition, weight management and practical application.
II. Outline
of Aerobics Classes
The phrase “aerobics class” is somewhat of a
misnomer. The instruction provided by
XXXXX, and the industry in general, involves far more than a cardiovascular, or
“aerobic,” workout. All of XXXXX's classes
involve instruction in strength and endurance training. By way of example, XXXXX offers “circuit”
classes where students are instructed in a short cardiovascular workout,
followed immediately by a series of “stations” where the student receives instruction
in strength training using weights, exercise bands and other exercise
methods. XXXXX offers another class
which is exclusively strength training, without any cardiovascular exercise.
Classes are extremely structured in the sense that
the students are asked to follow each move of the instructor. Consequently, one
of the keys to being an effective instructor is to be able to provide
appropriate instruction for people of all fitness levels. At XXXXX, the instructors are constantly
demonstrating two or three different techniques to work the same muscle group
and to meet the varying fitness levels of the students. It is critical to safety that students not
feel compelled to do more than they are physically capable. Any perception that aerobics instructors
merely exercise on their own or go “guts out” is grossly mistaken. The objective of aerobics instruction is to
provide complete and competent instruction for every student throughout the
entire class. XXXXX's instructors also
provide information to students on a variety of fitness related subjects,
including diet, injury prevention, pregnancy and other special needs.
It is also important to understand why people seek
aerobics instruction from XXXXX and other professional programs. XXXXX's students are generally over 30 and
the range in age is from 20 to 65. Many
have never exercised on a regular basis.
Most have little or no experience in correct exercise technique. Students need to be instructed in how to do
a correct squat, for example, so as not to jeopardize their knees, or how to do
a correct bicep curl. Students are
taught proper exercise techniques such as working opposing muscle groups. In short, customers at XXXXX and elsewhere
receive instruction in exercise techniques, physiology and diet.
III. Payment
for Aerobics Instruction
XXXXX has no equipment which is made available to
its customers for their personal use.
The only thing XXXXX has to offer is aerobics instruction at scheduled
classes. The classes are held in XXXXX
of the XXXXX, a public building. The
room is empty except to the extent that steps, bands or hand held weights are
pulled out and distributed for use during scheduled classes.
XXXXX receives payment for only one thing: providing
aerobics instruction. Students pay a
fee to receive instruction at a one hour class and have the option to purchase
12 hourly classes in advance, at a reduced hourly rate. Students also have the option to purchase
all hourly classes offered by XXXXX by signing a contract and agreeing to pay
for such classes one month in advance.
The contract provides that the student's only right is to receive
aerobics instruction at scheduled classes. The contract states:
This agreement does not provide [Student] with the
right to use any exercise equipment or facility except that which is incidental
to the instruction provided in scheduled classes. This agreement does not provide [Student] with a right of
entrance to any facility or location, and instruction may be provided at more
than one location.
Agreement for Aerobics Instruction at Paragraph 9.
LEGAL ANALYSIS
I. Payment
for Aerobics Instruction is not an Admission or User Fee
It is my understanding that some members of the
compliance auditing division have taken the position that fees paid for
aerobics instruction are subject to tax under Utah Code Ann. §
59-12-103(f)(i). l That interpretation
is erroneous. The statute provides that the tax will be levied for an admission
or user fee for . . . sporting events . . . or any other amusement,
entertainment, recreation, exhibition, cultural or athletic activity.” Id.
(emphasis added). When a customer pays
to receive aerobics instruction at XXXXX, unlike other health spas which offer
workout facilities, the customer has no right to use anything. Nor is the payment an admission fee for
entrance to an athletic facility. These
issues are discussed in greater detail below.
A. XXXXX
Is Not Paid An "Admission Fee"
In 49th Street Galleria v. Tax Commission
Auditing Division, 860 P.2d 996 (Utah Ct. App. 1993), the Court was
required to determine whether under § 59-12-103 fees collected for use of
batting cages, a roller skating rink and laser tag equipment are subject to tax
as an “admission fee.” The Court first
noted that, consistent with what you told me recently, the audit division
itself has “for quite some time had questions about which activities come under
the definition of an admission.” Id. at 998 n.5. The Court stated that the Tax Commission's
interpretation of “admission” would be reviewed without deference and for
correctness. The Court, however, found
no significant difference between the Tax Commission's definition of
“admission” in the Utah Administrative Code R865-19-335(A) (1993) and Webster's
Third New International Dictionary (1976).
In each, the essence of the definition is a right to enter into a
place. Id. at 1000.
The Court reversed the Tax Commission's finding that
payment for use of that 49th Street Galleria's facilities were an “admission
fee.” The Court held that “[t]here is
simply no fee charged by the Galleria for admission to any place; there are
only fees charged to do particular things.” Id.
The Court's holding clearly applies to XXXXX. The aerobics instruction offered by XXXXX is
provided in the XXXXX, a public building and, on some occasions, classes are
held out of doors. No one is required
to pay a fee for admission to the building or XXXXX in particular. Potential customers are free to view and
have in fact viewed classes without paying any fee to enter the building or the
aerobics room. As in 49th Street
Galleria, XXXXX does not charge an “admission” fee to enter any place.
B. XXXXX
Is Not Paid A “Use Fee”
We are aware that Utah Code Ann. § 59-12-103 was
amended so that use of equipment, such as the batting cages, roller skating
rink and laser tag equipment in 49th Street Galleria, are now
subject to tax. That amendment to the
use tax, however, does not change the situation for XXXXX. The service offered by XXXXX is distinguishable
from the business of the 49th Street Galleria and other health clubs” in one
important respect. XXXXX, unlike the
Galleria and other studios, has no workout facilities or equipment that a
person pays to “use” on their own.
Although some light weights and exercise bands are used during scheduled
classes in accordance with precise instruction, XXXXX's customers have no right
to “own” or “lease” any equipment. See
Utah Code Ann. §59-12-102(5)(a) (defining “use”).
Further, the fact that XXXXX's customers use bands
or hand held weights during scheduled classes does not change the fundamental
nature of the service provided. The Tax
Commission has already recognized that other “athletic,” “recreation” or
“cultural” lessons offered by professionals are not subject to tax. The list of activities that the division has
determined are not subject to tax includes dance lessons, tennis lessons, golf
lessons, personal training, martial arts and piano lessons. In Tax Bulletin 15-94, the Tax Commission
expressly states that lessons, “professional or private,” are not subject to
sales or use tax. The Bulletin lists
golf lessons as an example. Id. It is clear, therefore, that such lessons do not lose their
essential nature because certain “equipment” or tangible property” is necessary
in order to provide the lesson.
Obviously, the capital investment in a tennis court, a golf driving
range or a piano, is far greater than the investment in an elastic band or hand
held weight used during aerobics instruction.
The fundamental character of the service remains: XXXXX charges a fee
for professional aerobic instruction.
Similar to the above activities, aerobics involves
professional instruction. As I
expressed to you in our meeting, the contrary view reflects either an ignorance
of what takes place during a professional aerobics class or a bias and
discrimination that cannot be justified.
Aerobics instructors such as those at XXXXX are highly trained
professionals. Those professionals
provide a service to customers including instruction in exercise techniques,
stress reduction and diet. The
instructors have qualifications which meet or exceed those of personal
trainers, tennis instructors or other professionals whose services are not
subject to tax.
Finally, it must also be emphasized that XXXXX's
service and method of charging for its service is distinct from the business of
other fitness facilities. Tax Bulletin
15-94 states that if a single charge is assessed for a golf lesson and a round
of golf, the entire amount is subject to tax.
That warning draws a rational line because in the hypothetical the
business failed to separate instruction from the use of its facilities. Some fitness studios may likewise charge a
single fee which entitles the customer to attend aerobic classes and to
generally use a facility on their own.
In that circumstance, the tax would apply. 2 However, that description does not apply to XXXXX.
XXXXX charges for only aerobics instruction and no
facilities are offered to its customers . 3
II. The
Compliance Department's Position Violates The Equal Protection Clause of
the U.S. Constitution
In addition to an erroneous reading of Utah Code
Ann. § 59-12-103, the compliance department's offered implementation of the
statute violates the Equal Protection Clause of the Fourteenth Amendment to the
U.S. Constitution. The United States
Supreme Court has recognized that it is a violation of Equal Protection for a
state to implement a tax in a way which “bears unequally on persons or property
of the same class.” Allegheny Pittsburgh
Coal Co. v. County Commission of Webster County, 488 U.S. 333, 343 (1989)
(quoting Charleston Fed. Sav.& Loan Ass'n v. Alderson, 324
U.S.182, 190 (1945)). Although the
legislature may properly impose different tax burdens, the law must be applied
“even handedly to all similarly situated [taxpayers].” Id. at 345. See also Edward Values,
Inc. v. Wake County, 451S.E. 2d 641 (N.C.Ct.App. 1995) (Equal Protection
Clause violated by implementation of an improper distinction between
taxpayers'). Consequently, the State
Tax Commission is empowered “merely to make rules and regulations, etc., in conformity with the [statute].” Western
Leather & Finding Co. v. State Tax Commission, 87 Utah 227, 48
P. 2d 526, 528 (1935). Here it is clear
that the department is proposing to implement Utah Code Ann. § 59-12-103(f)(i) in a manner which violates
Equal Protection.
As stated in 49th Street Galleria, it is the
admission or user fee which triggers tax: “[t]he meaning of ... 'amusement,
entertainment or recreation' becomes relevant only if the threshold
determination of an 'admission' [has been shown.” 860 P. 2d at 1000, n.
13. Thus, the division has correctly
taken the position that instruction provided pursuant to such things as dance
lessons, tennis lessons, martial arts, personal training and piano lessons are
not admission or user fees for ...
sporting events ... or any other
amusement, entertainment, recreation, exhibition, cultural or athletic
activity. “ The division has properly determined that although the activity in
each of those circumstances might be considered “athletic” or “cultural”, the
customer is not paying for use of equipment or to enter a facility. The customer is paying to receive
instruction.
Clearly no Constitutional distinction can be drawn
between the above activities and aerobics classes. In each instance the essence is that a person pays a fee to
receive professional instruction.
Aerobics instruction is not materially different from dance instruction,
tennis instruction or personal training in that regard.
The fact that the distinction being drawn by some in
the compliance audit division does not pass Constitutional scrutiny is
illustrated by the discord in the division itself. As you and I discussed, on XXXXX an attorney with XXXXX requested
the advice of XXXXX, an auditor in the Audit Department of the Utah State Tax
Commission, regarding XXXXX's business.
XXXXX confirmed that fees for aerobics instruction are not subject to
tax under § 59-12-103(f)(i) so long as the fee does not entitle the student to
use exercise facilities on their own outside of offered classes. That interpretation is consistent with Tax
Bulletin 15-94 and is the only interpretation which applies § 103(f)(i) in a
manner consistent with Equal Protection.
I hope you find the above letter helpful. I look forward to hearing from you.
Sincerely,
XXXXX
__________________________________________
1. You have explained
that the situation is “fluid” and the auditors are hoping to receive guidance
from the Utah State Tax Commission. In
stating that the “division” has taken a certain position, I realize the view is
not uniformly shared and may not reflect your personal view. In fact, as confirmed in my prior letter to
you, XXXXX has been instructed by the Tax Commission to not currently collect
tax. My reference to the “division's” position
is for ease of reference.
__________________________________________
________________________________________
2. To the
extent a fitness studio complies with Tax Bulletin 15-94 and separately charges
for aerobics instruction, those instruction fees should not be taxable.
________________________________________
______________________________________________
3. In our
meeting, you also raised the issue of whether the contract signed by some of
XXXXX's students could reasonably be construed as a “season pass” within the
meaning of Utah Code Ann. § 59-12-102(1)(a).
I believe the answer is clearly no.
First, aerobics instruction has no “season” within the ordinary meaning
of that word. See Morton
Internat'l Inc. v. Auditing Division of the Utah State Tax Commission, 814
P. 2d 581, 590 (Utah 1991) (A “term should be interpreted and applied according
to its usually accepted meaning.... “).
Second, the word “pass” connotes a payment for an “admission” which, as
discussed in detail above, XXXXX does not charge. Third, to the extent “season pass” is interpreted to mean any
payment in advance, without regard to what the payment is for, the statute is
thereby given a meaning which is “unreasonably confused, inoperable [and] in
blatant contradiction to the express purpose of the statute.” Id. Obviously, payment for professional services
are made in advance all the time without subjecting the payment to tax. For example, tuition, a legal retainer and
medical insurance premiums all represent payments in advance of professional
services. Those payments, like the
payments to XXXXX for future aerobics instruction, are not “season passes.”
_______________________________________________
TO: XXXXX
FROM: XXXXX
DATE: May
22, 1995
Re: Health
Club/Spa Project
As requested, the following is information you requested
on this project.
During the spring of 1994 I had a chance to review a
draft version of what I later think turned out to be our UTC Bulletin
(15-94). I made a mental note at the
time that I felt the activities as listed in the Bulletin included the
health/spa club industry even though they were not actually listed.
During the summer of this same year (1994) I was
assigned to do an audit of a Health Club in XXXXX called XXXXX. The information
that came with the assignment indicated that the owner had been bragging how
they had managed to acquire all their fitness equipment without paying any of
the required sales/use tax. Several
months passed before I was able to get all of the required paperwork from the
taxpayer but in September we filed an assessment of approximately $$$$$ which
included interest and penalty (XXXXX’).
They paid the entire audit.
While performing the above audit, I was concerned to
find that the taxpayer was surprised when I mentioned that they were subject to
the new sales tax on admissions/use fees.
Later, when I wondered if I might be wrong, I contacted XXXXX, Auditing,
who confirmed what I suspected.
When I reviewed the results of my audit of XXXXX
with XXXXX, I suggested and he agreed that I should begin to contact the industry. In terms of the sales tax on admissions/user
fees, XXXXX and I agreed that the focus of our effort should be one of
education. It was and has been my main
concern that a large portion of the tangible personal property subject to use
tax in this industry has escaped assessment.
The following is a list of taxpayer's that I
personally have been reviewing:
ADMISSIONS USE TAX
NAME ASSESSMENT REFUND ASSESSMENT
XXXXX
*Strictly aerobic centers (waiting UTC advisory
opinion)
**XXXXX has been
difficult through the audit process in that they are refusing to collect our
tax prior to XXXXX or XXXXX. It might
be more efficient to refer it to Auditing for an audit in XXXXX. XXXXX might also be referred to auditing
since they have been estimating their liability for use tax on each quarterly
return.
***XXXXX
owners acquired this entity in XXXXX and knowing they needed to collect the tax
began doing so in XXXXX. They were not
licensed until I made my field contact.
They were subsequently licensed and paid the tax plus XXXXX penalty.
****XXXXX
was found to be in bankruptcy. We
hurried to do an assessment to see that our interests were secured during the
process. We never expect to see much if
anything from the assessment. We will
amend the audit to zero in accordance with the agreement.
Re: Advisory
Opinion - Sales Tax Application to Charge for “Pure” Aerobics Instruction As
Described -XXXXX
Dear XXXXX:
You requested an advisory opinion as to whether
sales tax applies to your client's charges for “pure” aerobics instruction.
Our research indicates as follows:
1. Utah Code
Annotated Section 59-12-103(f)(I) imposes the sales tax on amounts paid or
charged for “admission or user fees for . . . sports activities, or any other
amusement, entertainment, recreation, exhibition, cultural, or athletic
activity.”
2.
Administrative Rule R865-19S-33, indicates that charges for “lessons,
public or private” are not charges for activities considered to be admission or
user fees.
3. The
aerobic instruction provided by XXXXX as described in your letter
would be considered a lesson, and charges for participation are exempt from
sales tax.
4. Any
charges to participants for use of facilities or equipment must be separately
stated and taxed.
5. Any
taxable charges should be recognized for sales tax purposes as the revenue is
recognized under generally accepted accounting principles.
This opinion is based upon the facts presented in
your letter. Obviously, if there are deviation
from these facts, the opinion may be negated.
If you do not agree with this determination, you may
appeal to the Tax Commission for a formal hearing. The results of that hearing would constitute a declaratory
judgement and be appealable to the Utah State Supreme Court. A Notice of Appeal Rights and a copy of the
Utah Taxpayer bill of Rights
Respectfully,
Alice Shearer
Commissioner