State & Local Tax Alert

State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP ________________________________________________________ Re...
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State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP ________________________________________________________

Release date May 4, 2015

District of Columbia Issues Sales Tax Regulations on Taxable Services, Including Health Clubs and Household Goods Storage

States District of Columbia

The District of Columbia Office of Tax and Revenue (OTR) recently has promulgated sales and use tax regulations to provide guidance on the taxation of certain services.1 Last year, the District enacted legislation imposing tax on the following services beginning on October 1, 2014: (i) bottled water delivery; (ii) storage of household goods; (iii) carpet and upholstery cleaning; (iv) health clubs or tanning; (v) car washing; and (vi) bowling alleys or billiard parlors.2 The new regulations include all of these services, but the taxation of health club services and household goods storage services has garnered the greatest attention. As discussed below, the regulations are consistent with and expand upon initial guidance previously issued by the OTR.3 Health Club and Tanning Services

The District imposes sales and use taxes on the sale of health club and tanning studio sales or charges.4 A “health club” is defined as a fitness club, fitness center or gym for the purpose of which is physical exercise, and includes the use of, access to, or membership to, an athletic club, fitness center, gym, recreational sports facilities featuring exercise and other active physical fitness conditioning or recreational sports activities including swimming, skating or racquet sports, or other facility for the purpose of physical exercise.5 Charges for health club services include any amounts paid to participate, enter, use, or access the health club, including but not limited to membership dues, drop-in fees and entrance fees.6 However, tax does not apply to charges for the use of facilities for nonfitness-related purposes, including room rentals, or for other services or charges covered by a separate contract with the user, such as a lease or occupancy agreement.7 Because sales for nonprofit organizations are not granted a general sales tax exemption, sales of health club services by nonprofit organizations are subject to tax unless the purchaser holds a valid exemption or resale certificate.8

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D.C. MUN. REGS. tit. 9, §§ 423-429, effective April 17, 2015. D.C. CODE ANN. § 47-2001(n)(1)(V)-(AA), added by Act 20-424 (D.C.B. 20-750), Laws 2014, applicable Oct. 1, 2014. 3 OTR Notice 2014-09, Aug. 29, 2014; Press Release, District of Columbia Office of Tax and Revenue, Sep. 25, 2014. 4 D.C. CODE ANN. § 47-2001(n)(1)(Y). 5 D.C. MUN. REGS. tit. 9, § 427.2. 6 D.C. MUN. REGS. tit. 9, § 427.3. 7 D.C. MUN. REGS. tit. 9, § 427.4. 8 D.C. MUN. REGS. tit. 9, § 427.5. 2

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Issue/Topic Sales and Use Tax

Contact details Gary Rosen McLean T 703.637.4070 E [email protected] Joel Waterfield McLean T 703.847.7595 E [email protected] Jeremy Jester McLean T 703.847.7505 E [email protected] Jamie C. Yesnowitz Washington, DC T 202.521.1504 E [email protected] Chuck Jones Chicago T 312.602.8517 E [email protected] Lori Stolly Cincinnati T 513.345.4540 E [email protected]

www.GrantThornton.com/SALT

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Examples of taxable charges for health cub services include, but are not limited to: • • • • • •

A monthly membership to a fitness center to use and access the fitness center’s strength training equipment; A daily entrance fee to a tennis club for access to the club’s tennis courts; A charge for a multi-lesson pass to a yoga studio for access to the classes with the studio’s yoga instructors; A gate charge to a recreational center for use of the rock climbing area; A drop-in charge at a gymnasium for participation in a group fitness class; and A charge by a fitness center for personal training services performed at the fitness center by an employee of the fitness center.9

The following are examples of services that are not taxable as health club services: • • •

A business organizes a “Get Fit Challenge” for its employees, charging each participating employee dues; A gym charges fees for a lounge pool membership, where the membership is not for physical exercise; and A spa charges clients for services which are not fitness-related.10

If a personal trainer is hired by an individual to perform fitness-related services outside of a health club, the fees collected are not taxable.11 In contrast, when a personal trainer (as an employee or independent contractor) is hired to perform fitness-related services at a health club, the fees collected are subject to tax.12 The entire bundled charge for a transaction that includes both taxable health club services and nontaxable services is presumed to be taxable if a primary purpose of the transaction is the sale of the taxable health club services.13 This presumption may be overcome by the health club services provider at the time of the transaction by separately stating to the customer a reasonable charge for the taxable services. The service provider’s books must support the apportionment between taxable and nontaxable services based on the cost of providing the service or on a comparison to the normal charge for each service if provided alone. If the charge for nontaxable services is unreasonable, the taxpayer will be assessed additional tax, penalty and interest on the taxable services. With respect to tanning studio sales or charges taxable under the enacting statute, the OTR regulation actually references tanning services as being taxable.14 Under the regulation, a tanning service is defined in the same manner as the statutory definition of a tanning studio, which is a business that provides individuals with a manmade tan, including sun tanning salons and spray tanning salons.15 The tanning service is taxable 9

D.C. MUN. REGS. tit. 9, § 427.6. D.C. MUN. REGS. tit. 9, § 427.7. 11 D.C. MUN. REGS. tit. 9, § 427.8. 12 D.C. MUN. REGS. tit. 9, § 427.9. 13 D.C. MUN. REGS. tit. 9, § 427.10. 14 D.C. CODE ANN. § 47-2001(n)(1)(Y); D.C. MUN. REGS. tit. 9, § 429.1. 15 D.C. MUN. REGS. tit. 9, § 429.2. 10

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whether or not assisted by an employee of the tanning business. Charges for tanning services include any amounts paid for the tanning service, including but not limited to monthly membership fees and appointment fees.16 Household Goods Storage Service

Sales and use tax applies to the service of storing household goods through renting or leasing space for self-storage, including rooms, compartments, lockers, containers or outdoor space, except general merchandise warehousing and coin-operated lockers.17 The total amount charged for providing the service of storing household goods is subject to tax.18 Charges associated with the cost of the service such as utilities, insurance, pick-up, delivery, locks or keys, are part of the taxable purchase price. However, charges that the facility incurs as a result of a tenant who fails to pay including, but not limited to, auction fees and cut-lock fees, are not part of the taxable purchase price. A security deposit is not part of the taxable purchase price unless it is converted into a rental payment. “Household goods” means tangible personal property, including goods and products, used within households.19 The regulation includes examples of the taxable storage of household goods. For example, the tax applies to the rental of storage lockers or storage units in apartment complexes if the locker or unit is used at the option of a tenant upon the payment of a fee in addition to the apartment rental.20 Similarly, the tax applies to the rental of a storage unit for the purpose of storing household goods in which the consumer customarily stores and removes the household goods on a self-service basis. The regulation also provides examples of services that are not considered to be the taxable storage of household goods. For example, the tax does not apply to general warehousing and storage, where the warehouse is engaged in the operation of receiving, handling and storing property for others using the warehouse’s staff and equipment, and does not allow the consumer separate access to the storage area.21 Also, monthly rental amounts for indoor storage of a boat during winter months is not a taxable service. Other Taxable Services

The regulations also provide guidance on other taxable services. The service of delivering bottled water by the gallon generally for use with and to be dispensed from a water cooler or similar type of dispenser is subject to sales tax.22 Carpet and upholstery cleaning services, including the cleaning or dyeing of used rugs, carpets, or upholstery, or for rug repair also are subject to sales tax.23 Sales tax also applies to the service of car washing,

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D.C. MUN. REGS. tit. 9, § 429.3. D.C. CODE ANN. § 47-2001(n)(1)(W); D.C. MUN. REGS. tit. 9, § 428.1. 18 D.C. MUN. REGS. tit. 9, § 428.2. 19 D.C. MUN. REGS. tit. 9, § 428.3. The term includes, but is not limited to, consumer electronics, appliances, tools, housewares and home furnishings. 20 D.C. MUN. REGS. tit. 9, § 428.4. 21 D.C. MUN. REGS. tit. 9, § 428.5. 22 D.C. CODE ANN. § 47-2001(n)(1)(V); D.C. MUN. REGS. tit. 9, § 423. While a bottled water delivery service business must report and pay sales tax on a gross proceeds basis, note that a security deposit is not part of the taxable purchase price. 23 D.C. CODE ANN. § 47-2001(n)(1)(X); D.C. MUN. REGS. tit. 9, § 426. While a carpet and upholstery cleaning business must report and pay sales tax on a gross proceeds basis, materials such as thread and yarn which become an integral part of the item subject cleaning are exempt from tax 17

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including cleaning, washing, waxing, polishing or detailing an automobile, but excludes self-service car washing.24 Finally, sales tax is imposed on a bowling alley or billiard parlor service.25 Commentary

The District began taxing a variety of services on October 1, 2014, but the legislation did not provide much guidance concerning the application of the tax. In August 2014, the OTR issued a notice providing initial guidance on the taxation of the services.26 In September 2014, the OTR issued a press release that provided substantially similar guidance, though an additional example of a taxable health club service charge was inserted into the press release. This example, “a charge for a multi-lesson pass to a yoga studio for access to classes with the studio’s yoga instructor,” confirmed concerns by many District residents that a “yoga tax” was being enacted, and that such adoption was a poor choice from a public policy perspective.27 The new regulations, while generally consistent with the prior guidance, provide further clarity in response to taxpayer feedback. For example, the health club services regulation was expanded to clarify the taxability of services provided by personal trainers and to add further examples of taxable and nontaxable services. Furthermore, the bundled charge regulation was expanded to provide that if the charge for nontaxable services is unreasonable, additional tax, penalty and interest may be assessed on the taxable services. Also, the regulation on the taxation of household goods storage services was revised to provide a definition of “household goods” as well as examples of taxable and nontaxable services. Some of the other regulations were similarly expanded.

________________________________________________________ The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that when sold to the cleaners as sales for resale. However, materials such as detergents and other consumable supplies used in connection with the cleaning service are subject to sales tax, and the tax should be paid by the cleaners purchasing the items. If sales tax is not paid at the time of purchase, use tax must be paid. 24 D.C. CODE ANN. § 47-2001(n)(1)(Z); D.C. MUN. REGS. tit. 9, § 425. While a car washing business must report and pay sales tax on a gross proceeds basis, materials such cleaning fluids and other consumable supplies used in connection with the car washing service are subject to sales tax, and the tax should be paid by the car wash purchasing the items. If sales tax is not paid at the time of purchase, use tax must be paid. 25 D.C. CODE ANN. § 47-2001(n)(1)(AA); D.C. MUN. REGS. tit. 9, § 424. The total amount charged for bowling is subject to tax. Taxable receipts include all fees or charges, including entry fees and league fees. Bowling balls, shoes and other equipment are exempt from tax when sold as sales for resale to the provider of the bowling alley service. The total amount charged for billiards is subject to tax, including charges for coin-operated pool tables. Bundled services are treated in a manner similar to the bundled health club services discussed above. 26 OTR Notice 2014-09, Aug. 29, 2014. 27 Press Release, District of Columbia Office of Tax and Revenue, Sep. 25, 2014.

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