Missouri Sales Tax Amendment-Amusement and Recreation or Educational?
Over the last several years, certain Missouri business owners that provided instructional information and coaching to their customers that the State of Missouri never taxed as sales before, are getting notices and knocks on the door from the Missouri Department of Revenue Sales Tax Unit informing them that their business activities are now sales taxable. However, the Missouri sales tax statute has not changed in decades. Why then are Missouri business owners, like my client, Xtreme Gymnastics and Trampoline in Lee’s Summit, Missouri, being audited and sent notices for sales tax assessments going back to 2008 and for hundreds of thousands of dollars?
The Missouri Sales Tax statute taxing amusement and recreation, RSMo. 144.020.1(2), is, for a tax statute, very cut and dried and simple to read.
Here is the statute, in pertinent part. 144.020. 1. A tax is hereby levied and imposed for the privilege of titling new and used motor vehicles, trailers, boats, and outboard motors purchased or acquired for use on the highways or waters of this state which are required to be titled under the laws of the state of Missouri and, except as provided in subdivision (9) of this subsection, upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state. The rate of tax shall be as follows:
(1) Upon every retail sale in this state of tangible personal property, excluding motor vehicles, trailers, motorcycles, mopeds, motortricycles, boats and outboard motors required to be titled under the laws of the state of Missouri and subject to tax under subdivision (9) of this subsection, a tax equivalent to four percent of the purchase price paid or charged, or in case such sale involves the exchange of property, a tax equivalent to four percent of the consideration paid or charged, including the fair market value of the property exchanged at the time and place of the exchange, except as otherwise provided in section 144.025;
(2) A tax equivalent to four percent of the amount paid for admission and seating accommodations, or fees paid to, or in any place of amusement, entertainment or recreation, games and athletic events;
Since the beginning of time, or since 1821 when Missouri joined the Union, people who provided information instruction in sports we commonly see at the Olympics, such as gymnastics, martial arts, tennis, swimming, etc., were not assessed a sales tax for their activities by the State of Missouri. Since at least 1939, Missouri has charged sales taxes for activities which are considered amusement and recreation. For instance, tickets to see a Royals or Chiefs game or to attend the Big 12 Conference Basketball Tournament or a concert at Sprint Center or join a Gold’s Gym or 24-Hour Fitness gym/workout facility.
A major shift on the Missouri Department of Revenue’s position on taxing instructional/educational activities occurred in the 2008 Missouri Supreme Court case, Michael Jaudes Fitness Edge v. Director of Revenue, 248 S.W.3rd 606 (Mo. Banc 2008). Mr. Jaudes was a fitness instructor, providing educational information, such as dietary and nutritional information, and exercise instruction to his clients. Mr. Jaudes was akin to a Richard Simmons. Mr. Jaudes would meet his clients at their gym or workout facility (the clients were already paying sales taxes on the gym memberships) and Mr. Jaudes would assist his clients during their workouts. At some point, Mr. Jaudes developed a clientele large enough he felt the need to open his own facility so that his clients could come to him for his services. This put Mr. Jaudes less in the realm of Richard Simmons and more in the realm of Gold’s Gym. The Missouri Supreme Court agreed with the Missouri Department of Revenue that the activities and services provided by Mr. Jaudes constituted amusement and recreation. Therefore, those activities are sales taxable services under RSMo. 144.020.1(2).
Subsequent to the opinion being handed down in Michael Jaudes, a Missouri business owner sought a letter ruling from the Director to determine if the fees collected by the subject business from its members for swimming lessons, tennis lessons, rock climbing instruction, karate instruction and dance instruction were subject to Missouri sales tax. In LR 4912, dated July 17, 2008, the Director stated that “no, fees the Applicant charges its members for swimming lessons, tennis lessons, rock climbing instruction, karate instruction and dance instruction are not subject to sales tax”, citing Michael Jaudes and Kanakum-Kanakomo Kamps, Inc. v. Director of Revenue, 8 S.W.3rd 94 (Mo. banc 1999). Further, the Director wrote in LR 4912 that “Although Applicant is a place of amusement, the fees Applicant charges its members for supervised lessons…are not subject to sales tax”.
In 2012, the Missouri Department of Revenue informed Xtreme Gymnastics that it would be coming to the business to conduct a field audit. Not long after the DOR arrived and commenced the field audit, it became clear the DOR was auditing the numbers for sales tax assessments. The owner of Xtreme Gymnastics provided a copy of LR 4912 to Joel Houtz, an auditor for and an agent of the Missouri Department of Revenue, during the October 2012 field audit of his business and the Mr. Houtz told Petitioner that the “rules changed”, citing LR 6029.
In 2009, another Missouri business owner asked the Missouri Department of Revenue to instruct him on whether the martial arts instruction he provided to his clients was sales taxable. In LR 6029, dated December 24, 2009, the Director reversed herself and, citing Michael Jaudes, stated that the Applicant’s fees for martial arts instruction were now subject to Missouri sales tax. RSMo. 144.020.1(2) didn’t change between July 17, 2008 and Christmas Eve, 2009. From 2001 to the present, there have been no amendments to the statute imposing sales tax on fees paid to places of amusement, nor has there been any change in the Missouri Supreme Court’s interpretation of the statute that is pertinent to the issues in this case. With respect to the imposition of sales tax on fees paid to places of amusement, the statute and the Missouri Supreme Court’s interpretation of the statute have not changed during this time period. The only change during this time period was the Director of Revenue’s interpretation of a sales tax statute that has not changed, as demonstrated by her arbitrary reversal of herself in her letter rulings between July 17, 2008 and Christmas Eve 2009.
The only other significant change between Summer 2008 and Christmas 2009 was the global collapse of the world economy which crippled the treasuries of the various states, including the State of Missouri. Missouri, like the other states, needed to raise revenues. However, Gov. Jay Nixon promised during his 2010 re-election campaign he would not raise income taxes on the citizens of Missouri. Therefore, the Missouri Department of Revenue and the Governor got creative and re-interpreted the sales tax statutes and started auditing a handful of the gymnastics instruction schools in the state. These business owners then received notices for 5 years of unpaid sales taxes and demand for the payment of the same. Troubling, though is the fact that the Missouri Department of Revenue did not audit and bill each and every one of the gymnastics instructional schools in Missouri. Therefore, a handful were faced with tens of thousands or hundreds of thousands in unpaid sales tax assessments while the majority of gymnastics instructional schools were not audited and not sent notices for sales tax assessments.
The owner of Xtreme Gymnastics fought back. We traveled to Jefferson City to meet with state senators and state representatives. TJ Rehak, the owner of Xtreme Gymnastics, testified before a Missouri Senate Committee on taxation at the behest of Missouri State Senator Will Krause (R-Lee’s Summit). Three different bills were introduced in the chambers of the Missouri legislature in 2014 designed to: (1) re-write the Missouri sales tax statute to exempt from sales tax those Missouri business owners engaged in teaching and instructing their customers in the martial arts, swimming, golf and gymnastics; (2) to require the Missouri Department of Revenue to send out notice to Missouri business owners when the Missouri Department of Revenue changes its interpretation of a tax statute and makes taxable that which has never been taxed before; and (3) to shift to the Department of Revenue the factual burden of proof in establishing taxpayer’s liability if the taxpayer was able to establish that a reasonable dispute exists with respect to the taxpayer’s liability and provided the Department with adequate records and reasonable access to those records. The Department of Revenue will also bear the burden of proof in tax exemption cases. SB 829, 2014 session, September 10, 2014, overriding Governor’s veto, amending RS Mo § 136.300, effective October 10, 2014.
All three aforementioned bills passed the Missouri House and the Missouri Senate with veto-proof margins. However, Gov. Nixon acted on his promise to veto these three bills in May 2014. My client and I traveled to Jefferson City during the veto session of the Missouri Legislature in September 2014. Despite votes to override the Governor’s veto on the three bills in the Senate, Gov. Nixon was able to pressure enough members of his caucus in the House to change their votes and the amended sales tax bill and the requirement that the Missouri Department of Revenue send business owners notice of a change in the interpretation of a tax statute failed to override the veto. Only the third bill to shift the burden of proof passed in the veto session.
Emboldened by its previous actions, in 2014, the Missouri Department of Revenue continued to find new sources of sales tax revenue, including declaring that walking dogs is amusement and recreation for the dogs and the humans and Missouri business owners that provide a place for people to walk their dogs are now responsible for charging and collecting sales taxes from Fido’s owner and remitting the sales taxes to the State of Missouri.
Following the cases decided in favor of imposing sales tax on fees paid to health clubs and exercise facilities for humans, the AHC decided that membership fees to use a dog walking facility are subject to sales tax. Amusement and recreation as defined at RSMo § 144.020.1(2) trumps health benefits. Hubb v. DOR, MO AHC No. 13-0231 RS (February 26, 2014). RS Mo §144.020.1(2) imposes sales tax on amounts paid for admission and seating and fees paid to or in places of amusement, entertainment or recreation, games or athletic events.
Moreover, according to the Missouri DOR, the tax applies to vendor booth sponsorships and title sponsorships (without separately stating vendor booth costs) paid to a fitness facility for special competition events but it does not apply to regular sponsorships (banner hangings). Former includes the right to sell or demonstrate products as part of the fee paid and thus is part of the fee paid to a place of amusement whereas the latter is advertising, a nontaxable service. LR 7333 (December 12, 2013).
Once the 2015 Missouri Legislature Session was convened, Missouri senators in Lee’s Summit and Independence wasted little time in drafting new legislation aimed at curbing what appears to be a Missouri Department of Revenue with a voracious appetite for sales tax revenues at the expense of Missouri business owners and Missouri citizens.
Currently pending are Missouri Senate Bill 15 to create a Tax-Payer Advocate and a Watch-Dog commission to monitor the Missouri Department of Revenue, and Missouri Senate Bill 57 which endeavors to create a state and local sales and use tax exemption for the amounts paid for classes or membership at a fitness facility, gymnasium, or dance studio. This provision takes effect January 1, 2016.
