United States

Washington: Cross-Training Classes Subject to Retail Sales Tax and Retailing B&O Tax

Oct 12, 2015
From KPMG TaxWatch

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The Washington State Department of Revenue recently addressed whether a taxpayer’s services were (a) instructional lessons taxable under the service and other activities B&O tax classification, or (b) physical fitness services taxable under the retailing B&O tax classification and subject to retail sales tax. The taxpayer derived the majority of its revenue from providing cross-training classes to members. Historically, the taxpayer reported membership fee receipts under the service and other activities B&O tax classification. During the last quarter of 2012, the taxpayer inadvertently reported its receipts under the retailing B&O tax classification and treated its receipts from membership fees as subject to retail sales tax. After the taxpayer filed an amended return to reclassify the receipts, the Department commenced an audit. On audit, the Department reclassified the taxpayer’s membership fee receipts as retail sales subject to retail sales tax and the retailing B&O tax classification.

Under Washington law, services that meet the definition of retail sales, including physical fitness services, are subject to retail sales tax, as well as the retailing B&O tax classification. Services not otherwise classified for B&O tax purposes are subject to service and the other activities B&O classification and are not subject to sales tax.  Per a regulation, “physical fitness services” do not include instructional lessons, such as those for self-defense, martial arts, yoga, tennis and golf. Instructional lessons are generally distinguished from exercise classes in that instruction is the primary focus of the former and exercise is the primary focus of the latter. Earlier departmental guidance indicated that instruction is generally characterized by having a specific curriculum that includes a study of the underlying philosophy of the activity. However, if the class is primarily to improve flexibility, strength or general fitness, the charge for participation will generally be considered a retail sale. The taxpayer submitted materials emphasizing the instructional component of its activities. However, the ALJ concluded, consistent with a previous determination, that the primary purpose of the cross-training program was exercise. Therefore, the taxpayer’s membership fees were subject to retail sales tax and the retailing B&O tax classification. For more information on Washington Det. No. 15-0039, 34 WTD 406 (Feb. 19, 2015), please contact Michele Baisler at 206-913-4117.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.