KIM'S NAUTILUS GYM CENTER, INC. (1984)(F)(ST)(2 cases)

Topic Code: C216Commercial Recreation (ST), I344Itemized Billings, U066Use Tax (ST)          Document Reference:

RE: KIM'S NAUTILUS GYM CENTER, INC. Docket No. 83-63-6B-A KIM'S NAUTILUS GYM CENTER, INC. Docket No. 83-64-6A-A KIM'S ACADEMY OF TAE KWON-DO, INC. Docket No. 83-65-6A-A KIM'S ACADEMY OF TAE KWON-DO, INC. Docket No. 83- 66-6A-A

David J. Isaacson

Isaacson, Clarke, Vernon & Hodge, P.C.

3730 Ingersoll Avenue

Des Moines, IA 50312

Dear Mr. Isaacson:

The Tax Review Committee of the Iowa Department of Revenue has met with regard to the above Protest and herby issues its Findings.

The audit period for all of the above Protests, except Docket No. 83-66- 6A-A, is from July 1, 1977 through June 30, 1982. The audit period for Docket No. 83-66-6A-A is from July 1, 1977 through June 30, 1980.

All of the above corporations involved with the sales tax assessments have a similar function and are or were owned by the same individual. Each corporation offered a variety of services to prospective customers for a set membership fee. One type of membership was exclusively for the instruction and training in the martial arts form of Tae Kwon-do. These membership fees were not valid for any other services offered by the Protestors.

The other type of membership fees were for the exclusive use of nautilus equipment, gym equipment and other gym facilities. These memberships included some initial instruction in the use of the nautilus equipment, if needed, by the new member. However, after any initial instruction, the members were free to use the equipment and facilities at their leisure or at their own pace. There were no formalized instruction or classes for these memberships.

The final type of membership was a combination of the above two. That is, the member paid for the Tae Kwon-do instruction and had the use of the nautilus and gym facilities. The fee for this membership was higher than either of the individual memberships but there was no breakdown or itemization regarding the individual memberships.

The issue in these Protests is whether or not the fees for the Tae Kwon- do instruction are taxable. It is the position of the Committee that fees paid exclusively for Tae Kwon-do instruction would not be taxable as an enumerated service under Iowa Code § 422.43.

Iowa Code § 422.43 imposes a sales tax upon the services provided by "golf and country clubs and all commercial recreation." Departmental rule 730-26.24(422), IAC, provides that: "[a]ll fees, dues or charges paid to golf and country clubs are subject to tax. 'Country clubs' shall include all clubs or clubhouses providing golf and other athletic sports for members. Persons providing facilities for recreation for a charge are rendering, furnishing or performing a service the gross receipts from which are subject to tax. 'Recreation' shall include all activities pursued for pleasure, including sports, games and activities which promote physical fitness, but shall not include admissions otherwise taxed under section 422.43." According to departmental rule 730-16.28(422) IAC "[r]eceipts from fees charged for participation in any game or other form of amusement shall be taxable."

The Committee holds that the service of providing the Tae Kwon-do lessons to be in the nature of education or instruction rather than recreation. As such, fees for the exclusive membership for Tae Kwon-do instruction are not subject to sales tax under the present rules.

The same is not true, however, for the other memberships. It cannot be said that the nautilus and gym membership is in the nature of education or instruction. Such a membership would clearly fall under the definition of recreation as set out in rule 26.24. The combination membership would also be taxable since the Tae Kwon-do instruction was not separately itemized from the nautilus and gym use. A service which has not been billed or contracted for separately at the time of the transaction cannot later be excluded from tax for being an exempt service. Clarion Ready Mixed Concrete co. v. Iowa State Tax Com'n., 252 Iowa 500, 107 N.W.2d 553 (1961).

The membership fees for the exclusive Tae Kwon-do lessons will be excluded from the sales tax Protests where they can readily be identified. With regard to Docket No. 83-66-6A-A, it would appear that the only activity which took place at this location was Tae Kwon-do instruction. Therefore, the assessment involving this Protest will be cancelled.

With regard to Docket No. 83-64-6A-A, a combination of services were first offered as of October 1, 1979. Prior to that time, only Tae Kwon-do instruction took place. With regard to Docket No. 83-65-6A-A, Tae Kwon-do instruction was offered exclusively up to January 1, 1981. At that time a combination of services were offered. The Protestors have provided numerous records in an attempt to show an accurate breakdown of the various types of membership fees during which a combination of services were offered. It would appear that approximately one-third of all memberships sold were exclusively Tae Kwon-do instruction. Based upon this information, the assessment for Docket No. 83-64-6A-A will be reduced by $35,871.63, and the assessment for Docket No. 83-65-6A-A will be reduced by $34,605.92.

The final Protest regarding Docket No. 83-63-6B-A does not involve various membership fees. Rather, it involves the out-of-state purchase of nautilus and gym equipment. Protestor merely disputes that an error was made involving the purchase price of the equipment. Based upon records provided by the Protestor, the actual equipment purchases were substantially less than originally estimated. As a result, the assessment for this Protest will be reduced by $3,353.49 Please advise me of your position in light of the enclosed Findings within thirty days of the date of this letter. If you agree, or choose not to pursue the Protest, please inform me in writing. That letter and receipt of the amount due, directed to my attention, will serve as authority for the hearing officer to close the Protests. The amount due through May 31, 1984, for each Protest is as follows:

•          Kim's Nautilus Gym Center, Inc., Docket No. 83-63-6B-A: $1,570.39, with interest accruing at $6.53 per month.

•          Kim's Nautilus Gym Center, Inc., Docket No. 83-64-6A-A: $7,328.56, with interest accruing at $45.10 per month.

•          Kim's Academy of Tae Kwon-Do, Inc., Docket No. 83-65-6A-A: $5,902.00, with interest accruing at $39.05 per month.

If the Protestor is in disagreement with the Findings and chooses to pursue the Protest, the Department will file an Answer to the Protest pursuant to rule 730-7.12(17A), IAC, thereby initiating contested case proceedings. The hearing officer of the Department will then notify all parties of a time and place for an evidentiary hearing to be held on this matter. If no response is received within thirty (30) days of the date of this letter, the Committee will construe this inaction as failure to pursue the Protest and will request dismissal of the Protest pursuant to department rule 730-7.11(2).

If you have any questions with regard to this matter, please do not hesitate to contact me.

Sincerely, James D. Miller Appeals Section 515/281-5998