Physical Fitness is Taxing: Washington Issues Guidance Distinguishing Fitness from Instruction

January 6, 2017

Subtle distinctions in a service can cause its classification for sales and use tax purposes to change, as one fitness facility operator in Washington recently found out.

By Denisse Beldin, SALT associate

Over the years, in an effort by states to increase tax revenues, the sales tax base has been expanded to include many types of services. One of the difficulties for taxpayers and practitioners as a result of this trend is figuring out how to classify a particular service. When states just taxed tangible personal property, it didn’t matter whether the item was a television or a computer; if it was tangible personal property, it was subject to sales tax unless an exemption applied. With services, however, subtle distinctions do matter, and this requires taxpayers and their advisors to work together to understand the nature of the service being provided and to properly apply that to the available state guidance.

On Feb. 29, 2016, the Washington Department of Revenue issued a Tax Determination (“Determination”) addressing the distinction between “physical fitness services” and “instructional lessons.” [1] If a service is considered a “physical fitness service,” it is subject to sales tax as well as business and occupation tax under the retailing classification; if a service is considered to be “instructional lessons,” then it is subject only to the business and occupation tax under the services and other activities classification. [2]

In that Determination, the taxpayer in question operated a fitness and training facility designed for athletic performance enhancement. He specialized in providing speed and agility training, but he did not consider himself a “personal trainer.” The taxpayer provided group and individual training sessions designed to meet the needs of clients, a majority of whom are athletes. The taxpayer’s training sessions were meant to supplement strength coaching programs in which the athletes are already participating.

The state assessed the taxpayer for sales tax, claiming that he was providing physical fitness services, and the taxpayer contested under the theory that he was providing instruction. Under the Washington tax rules, physical fitness services encompass many activities including the act of “providing personal trainers (i.e. a person who assesses an individual’s workout needs and tailors a physical fitness workout program to meet those individual needs).” [3]

Additionally, providing one-on-one personal training services to “assess the individual workout needs and/or tailor a physical workout program to meet those individual needs” also falls under physical fitness services. These services may or may not involve a specialized exercise or conditioning program. In many cases, physical fitness services involve some varying degree of instruction or guidance. Instructional lessons, however, serve to educate, and physical fitness is not the primary intent in providing these services (e.g., yoga classes). Ultimately, “instructional lessons” can be distinguished from “exercise classes” based on the primary focus or purpose, and each can contain some elements of the other.

All factors considered, the state determined that the taxpayer’s services were considered to be physical fitness services since the primary purpose was to improve running and movement. The inclusion of some level of instruction in these training sessions does not outweigh the primary purpose of these services, and therefore, the taxpayer was subject to retail sales tax.

While this ruling has only limited applicability to those that provide physical fitness services in Washington, it serves as a reminder generally to all service providers that subtle distinctions in a service can cause its classification to change, thereby impacting taxability. Even more important is that how a business labels its service may not be relevant when it comes to determining classification under state sales and use tax rules, and it’s those rules that will determine taxability. Therefore, it is important to consider the potential sales tax implications when providing services. Aprio’s SALT Team is experienced at assisting service providers in determining if they should be collecting and remitting sales and use tax.

Contact Denisse Beldin, SALT associate, at [email protected] or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at [email protected] for more information.

This article was featured in the April 2016 SALT Newsletter. To view the newsletter, click here.

[1] Det. No. 14-0195, 35 WTD 46 (2016).

[2] WAC 458-20-183(3).

[3] WAC 458-20-183 (Rule 183).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.