Supreme Court extends Sales Tax to Dance Classes

Jan 16, 2016 by

Last week, the Missouri Supreme Court determined that dance classes were subject to state sales tax because they are fun, as well as educational. Will this open the door for taxing yoga classes or karate classes? And what does that mean for local governments who also impose sales taxes?

In the case, Miss Dianna’s School of Dance v. Director of Revenue (SC95102), the Supreme Court agreed with the State Director of Revenue and instructed the dance school to pay over $18,000 for past due sales taxes from 2007 to 2009. Under Missouri law, the state imposes a 4% sales tax on admission charges or fees paid to any place of amusement, entertainment or recreation, and the Director of Revenue determined that that tax included dance classes.

The state law has an exception for educational classes, and for years, Miss Dianna’s School claimed their classes were primarily educational, and therefore, not subject to tax. However, the Supreme Court decided that because fun and diversion were a substantial part of the dance classes, they were subject to tax under Missouri law. The Court looked at three factors, but the top consideration was how the company held itself out to the public. In Miss Dianna’s case, the school often advertised that their classes were “full of energy, fun and structure.” These words helped subject the school to the sales tax.

This case could bring significant changes to the businesses which will be required to collect sales taxes as part of their classes. The taekwondo dojang that advertises its classes as fun and focused could now be mandated to collect sales tax, and if it fails to do so, the Director of Revenue could impose fines and interest upon the amount that should be collected. Likewise for the yoga program that promotes itself as a relaxing method to live healthier.

Places of amusement have always been subject to this particular sales tax, but the new decision by the Supreme Court will require businesses to reconsider whether the programs they offer are solely educational, or if they have a component of fun and diversion. If they are fun, program managers should strongly consider whether they should start collecting sales taxes on their program fees.

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