SoulCycle and the NYC Sales Tax on Fitness Clubs
Updated: Dec 27, 2019
by Brian Gordon, CPA
This article originally appeared in the September 2019 TaxStringer and is reprinted with permission from the New York State Society of Certified Public Accountants.
A hearing was held before Administrative Law Judge (ALJ) Barbara J. Russo in the matter or SoulCycle, Inc. vs. the NYS Division of Taxation. The determination was issued on May 23, 2019.
At issue was whether SoulCycle was a facility subject to the New York City (NYC) special sales tax under Section 11-2002 of the NYC Sales Tax Law, which imposes a local sales tax on sales of services by “health salons, gymnasiums”… among other services that may be considered to be related to health and appearance.
SoulCycle provides instructor-led indoor stationary cycling classes for a fee. The tax department considers that this type of business is a health or fitness club, and therefore their sales are subject to the NYC special sales tax on certain services. For the most part, NYC Sales Tax Law is a duplicate of New York State (NYS) Sales Tax law; however, this special sales tax on certain services is an exception. It applies to NYC Sales Tax only. The full section is shown below:
NYC Section 11-2002(a) of the Tax Law: Imposition of special sales taxes:
There are hereby imposed and there shall be paid sales taxes at the rate of 4.5% on receipts from every sale of the services of beauty, barbering, hair restoring, manicuring, pedicuring, electrolysis, massage service, and similar services, and every sale of services by weight control salons, health salons, gymnasiums, Turkish and sauna bath and similar establishments, and every charge for the use of such facilities but excluding services rendered by a physician, osteopath, dentist, nurse, physiotherapist, chiropractor, podiatrist, optometrist…
NYS does not have this section, but they do have another section § 1105(f)(1), which imposes a sales tax on admissions to places of amusement which seems to be conflicting. NYC follows that section of the law also. See full section below:
NYS Sales Tax Law § 1105(f)(1), imposes a sales tax on
“Any admission charge where such admission charge is in excess of ten cents to, or for the use of, any place of amusement in the state, except charges for admission to race tracks or combative sports which charges are taxed under any other law of this state, or dramatic or musical arts performances, or live circus performances, or motion picture theaters, and except charges to a patron for admission to, or use of, facilities for sporting activities in which such patron is to be a participant, such as bowling alleys and swimming pools”.
This section is intended to tax admission charges to events such as professional sporting events, amusement parks, museums, and many others. The confusion is caused because this section of the law specifically excludes admission to sporting facilities where the patron is a participant - as described in NYS Tax Bulletin ST-8—such as golf, bowling, swimming, or skiing. This apparently also exempts admission fees for use of health and fitness clubs. Tax Bulletin ST-329 states that dues or membership fees paid to health and fitness clubs are not subject to New York State sales tax.
So, we have a law that taxes the services offered by a health club and the use of the facilities, and we also have a law that exempts charges to a patron for admission to, or use of, facilities for participating in sporting activities which includes health clubs. So which one is it? Is it taxable or exempt?
In the current matter of SoulCycle, the taxpayer’s representative cited a case called Prospect Park Health and Racquet Associates, a tribunal case decided in 1997.
You may think that the ALJ that heard this case was King Solomon in the way she dissected these two conflicting laws. She opined that it would not make sense for the city to have two laws where one law negates the other, therefore she differentiated:
One law taxes health clubs and other facilities that focus on weight loss and body image. The other law gives exemption for facilities where one participates in sports. Therefore, she said if the health club only offered exercise equipment, exercise activities, and calisthenics solely for health or weight reduction purposes it would be taxable under the NYC special sales tax on services. On the other hand, if the health club offered participatory sports included in the fee, it would be exempt under the section as an admission fee for participatory sports.
Prospect Park offered tennis, racquetball, swimming, and other sports; therefore, they were found not to be taxable under the NYC special sales tax. With this as the backdrop, SoulCycle and their representatives argued that the stationary cycle classes were also a sport that their customers participated in; therefore, they were entitled to the exemption for participatory sports. One may think that this argument is a bit of a stretch, but personally I don’t have a problem with it. If swimming alone in a pool qualifies as a participatory sport, why wouldn’t stationary cycling? In essence, the purpose of participating in sports is primarily for exercise and physical fitness.
The ALJ pointed out that there was an amendment to the NYC Administrative Code in 2008 that eliminated the exemption for participatory sports under NYS §1105(f)(1). The Prospect Park case mentioned above was decided prior to this amendment, so obviously that decision no longer applies.
The 2008 amendment, effective August 1, 2008 in relevant part states:
§11-2001 (b)(3) [The NYC law] does not omit from the tax described in § 1105(f)(1) of the tax law, charges to a patron for admission to, or use of, facilities for sporting activities in which such patron is to be a participant, such as bowling alleys and swimming pools.
Based on this amendment, SoulCycle’s sales are subject to the NYC sales tax under NYC special sales tax on services § 11-2002. Since NYC took away the exemption for participatory sports under § 1105(f)(1), they would apparently be taxable under that section also.
Did neither the petitioner’s representatives nor the Audit Division know about the 2008 amendment? This was not made clear in the case. It seems like awareness of that amendment would have clearly resolved the issue in the city’s favor before the need to go to a hearing.
According to the ALJ:
“…the exclusion set forth in Tax Law § 1105(f)(1) does not apply to the sales at issue here. As a result of the amendment, there is no longer a participatory sports exclusion for New York City sales tax purposes" (emphasis added).
It seems the 2008 amendment was made to resolve the discrepancy in two separate sections of the NYC law, which seemed to say that use of health clubs were both taxable and nontaxable. However, by eliminating the exemption for participatory sports, they apparently also made bowling, swimming, golf, etc. taxable under § 1105(f)(1) for NYC purposes when it never was before. Was that their intention? I believe we have not heard the end of this case.