Policy letter: commercial amusement; Aug21,2006

Topic Code: C206Commercial Amusement -           Document Reference: 06300066

          MEMORANDUM

          TO:                    Mark Kacere, Greg Stokke
Taxpayer Services

          FROM:                    Jerri DeVries
                    Policy Section

          DATE:                    August 21, 2006

          RE:                    Commercial Recreation and Amusements

          AUTHORITY: 701 IAC 26.24 and 16.30

          You wish to know the sales tax consequences of the following three scenarios:

          1. A groom hires and pays a musical group to play at his wedding, or a disc-jockey to perform at his wedding reception for invited guests. There is not an admission charged to guests to hear the group or disc-jockey. Is the musical group or disc-jockey required to charge tax to the groom?

          Department rule 701 IAC 26.24 governs the taxability of “commercial recreation” and it states the following:

          701—26.24(422) Golf and country clubs and all commercial recreation. 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.

          Dance schools are the only schools the services of which are taxable under Iowa Code subsection 422.43(9). See rule 26.14(422) on dance schools and dance studios. The gross receipts from any school providing training services in any activity pursued for pleasure or recreation shall not be subject to tax, unless the school is a dance school.

          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.

          Example: A golf pro offers instruction to students on a golf course. The students cannot circulate around the golf course in a group with the golf pro because this would slow the play of golfers following such a group and lead to complaints. The students circulate on the course individually, and the golf pro observes the play of each student and comments upon it. Even though no segregation of the individual students into any sort of a class is possible, the students are receiving instruction from the golf pro and, therefore, no taxable event occurs.

          Example: A retailer maintains a golf driving range. There are separate tee–off positions for each customer to practice driving golf balls. There is also an instructor in driving present. The instructor cannot reserve individual tee–off positions for instruction of students because the positions are filled on a first–come–first–served basis. When students come for instruction, the instructor must make use of whatever tee–off positions are available. Even though segregation of students from other customers is impossible, instruction exists and, therefore, no taxable event occurs.

          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.

          The groom is not paying for commercial recreation. He is paying for a band to perform at his wedding. He is not paying for access to a business venue that provides a form of entertainment or sport as described in the above-rule. As a result, the band would not charge tax to the groom on the fees for the band to perform under this service.

          Department rule 701 IAC 16.26 governs the taxability of admission charges to various types of amusements. This rule states the following:

          701—16.26(422) Admissions to amusements, athletic events, commercial amusement enterprises, fairs, and games.

          16.26(1) Taxable admissions. The gross receipts from amusements of every kind and character and from games of every kind and character shall be taxable, unless exempt under rule 16.26(422), 16.39(422) or 701—17.1(422).

          a. Taxable amusement shall include but not be limited to the following:

          (1) Fortune telling, fortune tellers, and psychics.

          (2) Concessions at a fair, carnival, or like place when the charge is made or a voluntary contribution taken by the person operating the concession.

          (3) Games of skill, games of chance, raffles, and bingo.

          (4) Activities operated by private entities.

          (5) Admissions to a fair not operated by a county or city.

          (6) Athletic events occurring in Iowa sponsored by educational institutions except when sponsored by elementary and secondary educational institutions.

          b. Tax shall apply to both legal and illegal amusements. The collection of tax or the issuance of a permit shall not be construed to condone or legalize any games of skill or chance or slot–operated device prohibited by law.

          c.          Gross receipts shall include all money taken in by the operator of any amusement, game, or device in the state of Iowa.

          16.26(2) Nontaxable amusements. The following is a nonexclusive list of amusements, the gross receipts of which are exempt from sales tax:

          a. Amusements, fairs, and athletic events of elementary and secondary educational institutions.

          b. Certain fees paid to a city or county for participating in an athletic sport. See rule 701—18.39(422,423).

          c. Admissions to a fair operated by a county or a city.

          d. For periods beginning on or after July 1, 1996, the gross receipts from sales or services rendered, furnished, or performed by the state fair organized under Iowa Code chapter 173 or a county, district, or fair society organized under Iowa Code chapter 174. This exemption does not apply to individuals, entities, or others that sell tangible personal property or provide taxable enumerated services at the state, county, district fair, or fair societies organized under Iowa Code chapters 173 and 174. (deleted examples)

          16.26(3) Fees for participation in games or other amusements.

          Beginning July 1, 1993, an entry fee at a place of amusement, fair, or athletic event is not subject to tax when the sales of tickets or admission charges for observing the activity are taxable. If there is no admission but only an entry fee, the entry fee is subject to sales tax whether or not the entry fee is used for prizes. A fee shall mean and include, but not be limited to, entry fees, registration fees, or other charges made by the operator or sponsor of a game or other form of amusement for the right to participate in such game or amusement. Game or other form of amusement shall mean and include, but not be limited to, such events as golf tournaments, bowling tournaments, car races, motorcycle races, bridge tournaments, rodeos, animal shows, fishing contests, balloon races, and trap shoots.

          Prior to July 1, 1993, fees which are specifically designated as prize money, whether or not paid to the operator or sponsor of the game or other form of amusement, and which are in fact returned to the participants in the form of cash for merchandise prizes, are not subject to tax if the amount or percentage designated as prize money is separately stated to the participant at the time the participation fee is established and if sales or use tax is paid on the merchandise prizes to be distributed to the participants. If the amount designated as prize money is not separately stated to the participant, the tax shall apply to the total fee, even though some of the fee may be used for prizes. The tax applies whether the fee is to cover a single event or numerous events.

          Educational, religious, and charitable organizations may be exempt from the tax on the receipts from the fees charged for participation in any game or other form of amusement if exempt pursuant to Iowa Code section 422.45(3) and rule 701—17.1(422).

          Department rule 701 IAC 16.30 governs commercial amusement enterprises after May 31, 1984. This rule states:

          701—16.30(422) Commercial amusement enterprises—companies or persons which contract to furnish show for fixed fee. Sales by commercial amusement enterprises occurring on or after May 31, 1984, shall not be subject to tax.

          The fees charged to the groom are not the type of fees at issue in department rule 701 IAC 16.26. The fees at issue in 701 IAC 16.26 are admission charges. The fees at issue regarding the groom and the band are contract fees charged by the band to the groom for the performance of the band at the wedding. As a result, the rule set forth in 701 IAC 16.30 is applicable. This rule provides, that such contract fees are not subject to tax as long as the fees are set fees established between the parties that are entering into the contract.

          2. A new bar owner hires and pays a musical group to play music for one night at his bar to attract new customers. There are no admission or cover charges to hear the group perform. Should the band charge sales tax on the fee set by the band in the agreement to the bar owner?

          Again, the issue is not the taxability of admission or cover charges, but is the taxability of the fees paid by the bar owner to have the band perform. As a result, department rule 701 IAC 16.30 would apply. This would result, as long as they are fixed fees set between the parties, in the fees not being subject to Iowa sales tax.

          3. A shopping mall hires a small carnival or petting zoo to set up in their parking lot for a day to attract customers. No charge is made to the patrons of the carnival or the petting zoo. Will the carnival or zoo add sales tax to their fee when billing the mall?

          The result is the same. The issue is not the taxability of admissions because no admissions are required by the mall. Consequently department rule 16.26 is not applicable. Instead, the issue is the fees charged to the mall by the carnival or petting zoo. As a result of department rule 16.30, no tax is imposed on those fees as long as they are fixed and set forth between the contracting parties.

          Mark and Greg, I hope this answers any questions you may have regarding these issues. If you have any further questions or concerns, please do not hesitate to contact me.