Policy letter; nonprofit org, charitable activity; Nov12, 1997

Topic Code: C091Charitable Activity - Contributions (I) N101Nonprofit Organization (ST)           Document Reference: 97300100

November 12, 1997

Redacted Content

Recently, the Department received your letter regarding whether a client that has a recreational facility and whose purpose is to provide a place in it community for recreational activities for the mentally handicapped as well as promote social interaction between such individuals and others in the community should collect Iowa sales tax on the various fees that are charged for use of this facility. The mission statement of the organization is "To provide programming and recreational facilities to be shared with the community that will allow and enhance social interaction. The organization is a non-profit operation under 501 (c)(3) of the Internal Revenue Code. The organization charges membership fees and daily use fees. Fees are also charged for exercise classes and swimming lessons offered to the public. The entire proceeds of the activities and fees are used for the organization's purpose by using the proceeds to pay expenses, utilities and wages of the staff.

Department rules have the force and effect of the law and are presumed valid. Hope Evangelical Lutheran Church v. Iowa Department of Revenue and Finance, 463 N.W.2d 76 (Iowa 1990); Richards v. Iowa Department of Revenue, 360 N.W.2d 830 (Iowa 1985). Department rule 701 IAC 26.24 imposes Iowa sales tax on the service of commercial recreation. The relevant portion of this rule states the following:

All 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 Iowa Code section 422.43. (emphasis added)

Based on the foregoing, the fees for membership and daily use would be subject to Iowa sales tax, unless there is an applicable exemption from Iowa use tax provided by law. Department rule 701 IAC 17.1 provides an exemption from sales tax to the extent that gross receipts are expended for educational, religious, and charitable purposes. This rule further defines what constitutes religious, educational and charitable under this exemption. The category relevant to this organization would be that of "charitable" activities. This rule defines "charitable" as follows:

The term "charitable" may be applied to almost anything that tends to promote well-doing and well-being for public good or public welfare with no pecuniary profit to the one performing the service or the giving of gifts by persons kindly disposed toward others, without obligation. An activity for the benefit of the public at large which includes relief of poverty, advancement of education or religion, promotion of health, providing a government or municipal service, and other activities, the purpose of which is to benefit the community, is considered charitable. Maintenance of public parks is a valid charitable purpose. Schools, Red Cross, Boy Scouts, and relief agencies are charitable. Profit-making organizations are not charitable, but may engage in charitable activities. An activity where net earnings go to the benefit of any private shareholder or individual sponsoring the activity is not charitable.

The promotion of physical fitness by providing such facilities and services as well as promoting social interaction between people with disabilities and the general public falls within the definition of charitable activities. The fact that the organization is non-profit and net earnings do not go to the benefit of any private shareholder or individual assures that it can meet the requirements for this exemption. Based on this rule, the fees for membership and daily use are exempt from Iowa sales tax to the extent that such proceeds are expended for these exempt activities.

In addition, the fees charged for the exercise classes and swimming lessons may be exempt from Iowa sales tax as well. Department rule 701 IAC 26.24 provides that fees charged for instruction in connection with recreational activities is not subject to Iowa sales tax. The relevant portion of this rule states the following:

If a person provides both facilities for recreation and instruction in recreational activities, charges for instruction in the recreational activities shall not be subject to tax if all of the following circumstances exist:

1.          The instruction charges are contracted for separately, separately billed, and reasonable in amount when compared to the taxable charges of providing facilities for recreation.

Example: An ice skating rink offers three membership plans. The first membership plan provides only instruction in the activity of ice skating. The second plan allows for the use of the rink's facilities, but provides for no instruction in ice skating. The third plan allows the customer to participate in a certain number of ice skating classes and also allows use of the rink's facilities without instruction. Customer charges for the first plan would not be subject to tax. Customer charges for the second plan would be subject to tax. Charges for the third plan would be subject to tax if billed in one lump-sum. If, under the third plan, charges to the customer for instruction and use are separately stated, and the charges for instruction are not unreasonable, the charges for instruction shall be exempt from tax. If it is necessary to pay for instruction to secure use of the facilities for recreation, charges for the instruction are a part of the gross receipts from commercial recreation and shall be subject to tax.

2.          The persons receiving the instruction must be under the guidance and direction of a person training them in how to perform the recreational activity. If the persons receiving what purports to be "instruction" are allowed any substantial amount of time to pursue recreational activities, no instruction is taking place. The instruction should be received in what would ordinarily be thought of as a "class" with a fixed time and place for meeting. The instruction need not be received in what would ordinarily be thought of as a "classroom," but the instructor and the persons receiving instruction should be segregated from persons engaging in recreational activity insofar as this is possible. Instruction may still occur if complete or partial segregation is impossible.

3.          The "instruction" must impart to the learner a level of knowledge or skill in the recreational activity which would not be known to the ordinary person engaging in the recreational activity without instruction. Also, the person providing the instruction must have received some special training in the recreational activity taught if charges for that person's instruction are to be exempt from tax. (emphasis added)

As a result, if the classes and lessons in which fees are charged meet the above three conditions, the fees would not be subject to Iowa sales tax. However, if the fees do not meet these three criteria, the gross receipts from the fees may be exempt under Department rule 701 IAC 17.1 to the extent that the gross receipts are expended for an educational purpose. To be exempt as an educational activity, the activity must meet the definition of "educational" provided in this rule. The definition of "educational" as provided in this rule states the following:

The acquisition of knowledge tending to develop and train the individual. An activity that has as its primary purpose to educate by teaching. An activity that has as its primary objective to give educational instruction. An activity where the educational process is not merely incidental. An activity where the purpose is systematic instruction. The term educational purpose is synonymous with educational undertaking, and therefore, it can also include recreational activities as well as an activity designed to offer culture to the public. Activities which are directly related to the educational process of such as intramural sports and tests given to students or prospective students to measure intelligence, ability, or aptitude are considered educational for purposes of the exemption found in Iowa Code subsection 422.45(3). Municipal or civic art and science centers and libraries are also considered educational for purposes of the exemption. (emphasis added)

If the instruction in the classes and lessons meet the criteria of being systematic instruction with the instruction being the primary objective and not merely incidental, then the fees charged would be exempt from Iowa sales tax to the extent that the proceeds from these fees are used for this exempt purpose.

In your letter, you also requested information regarding the taxability of handling charges. The facts provided in your letter state that there is a local clothing store that charges handling fees based on the percentage of sales to a dry-cleaner from another town for providing a drop-off site for clothes to be cleaned. The dry-cleaner pays sales tax on the dry-cleaning sales. And you wished to know if the handling fees charged by the clothing store would be subject to Iowa sales tax as well. The taxability of handling charges depends upon whether the handling charges are indicated as a separately itemized charge and are a mandatory charge in the transaction. For instance, when transportation charges and handling charges are billed in a lump sum amount, and the handling charge is a condition to the sale of the tangible personal property, the total charge is subject to Iowa sales tax. However, if handling charges are separately itemized and not a requisite of the transaction, then the fees for the handling charges can be excluded from Iowa sales tax.

I hope this information is of assistance to you. Please be advised that this is an informal opinion and does not bind the Department in any future action. If you have any additional questions or concerns, please do not hesitate to contact me.

Sincerely,

Jerri M.K. DeVries

Policy Section

Office: (515)281-3194

Fax: (515) 281-3756