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USA Gymnastics -
Should Texas Gymnastics Club Activities be Subject to the States Tax? Steps Toward Getting Clarity & Making a Change
John Valencia Wilke Fleury Law/Lobbying Firm 400 Capitol Mall, 22nd Floor Sacramento, CA 95814 (916) 441-2430 [email protected]
The Facts…And the Problem 1. Concise Statement of the Problem Caused by Texas
Comptroller Sales Tax Code Interpretations. →A number of TX Gymnastics Clubs have been subjected to audits by the TX Comptroller’s Office. They’ve been assessed state sales tax (8.5%) on non-core activities (e.g., BD parties, MNO/PNO events) based on auditor determination of “amusement” vs “instruction.” →“Taxable services” defined in TX Tax Code §151.0101 - a dizzying array of 17 broad categories of services sometimes taxable and sometimes not – like “instructions for any sport or musical discipline.” Texas clubs may need to rally to fend off the tax man. .
The Facts…And the Problem (cont.) ►Taxable - “Amusement services” = Entertainment, recreation, sport, pastime, diversion, or enjoyment that is a pleasurable occupation of the senses. Amusement services and places that offer amusement services include, but are not limited to, the following: (17 Categories of Services)…
The Facts…And the Problem (cont.) (D) participatory sports or games:
(i) athletic clubs (ii) bowling games (iii) court fees-tennis, racquet & handball (viii) health clubs-spas, admissions & memberships (xvi) physical fitness centers
The Facts…And the Problem (cont.) ►Non-Taxable - Nonamusement services--Activities that are primarily instructional in nature, or nontaxable personal services. Places, services, and clubs that the tax on amusement services does not cover include, but are not limited to: (B) instructions for any sport or musical discipline;
The Facts…And the Problem (cont.) ►Then, Again, Taxable - (3) Occasional sale--The sale of not more than 10 admissions for amusement services during a 12-month period by a person who does not hold himself out as engaging, or does not habitually engage, in the sale of amusement services.
What Changed? •Texas – Advertises itself as a low tax state when recruiting business; now copying the IRS, stepping up collections of those taxes it does assess. •Reportedly, current majority of TX State Tax Auditors have less than 3 years experience. Comptroller is losing many senior auditors to retirement, with many newer auditors electing to leave on their own. •Be aware that auditors compare sales tax returns for multiple years. In TX taxpayers labeled as “prior productive,” meaning their accounts yielded tax adjustments of more than $10,000 in previous audits, are likely to be audited in the year (or several) following an initial audit.
The Problem Today! →TX Comptroller has been auditing a small number of gymnastics instruction schools. The sales tax audit and assessment phenomenon appears not to have, yet, hit a larger number, let alone a majority of gymnastics instructional schools in the state. →Potential for inconsistent, unfair results. →Every club affected has to spend more for accounting (not taxable) and/or legal (not taxable) professional services.
Gain Clarity or Change the Policy 2. Objective: Persuade Elected TX Comptroller to Clarify Sales Tax Should Not Apply to “Non-Core” Sports Instruction Activities a. Secure Changes in Tax Publication 96-259 “Taxable Services”
b. Generate Numerous, Consistent General Information Letter Requests – Forcing TX Comptroller response to any written inquiry about the taxability of an item or transaction. Note: Advisory in nature. Not binding on comptroller for purposes of detrimental reliance under TX Taxpayer Bill of Rights.
c. Generate Numerous, Consistent Private Letter Ruling Requests -
TX Comptroller's written determination on the application of relevant tax laws, rules, and policies to a specific set of facts submitted in a properly completed private letter ruling request. Comptroller will not audit based on information provided in a request for a private letter ruling or general information letter.
Ensure Your Business is Properly Classified To provide TX taxpayers industry-specific information about how tax laws affect them TX Comptroller uses the North American Industry Classification System (NAICS). 2012 NAICS Definition -- 611620 Sports and Recreation Instruction This industry comprises establishments, such as camps and schools, primarily engaged in offering instruction in athletic activities to groups of individuals. Overnight and day sports instruction camps are included in this industry.
Illustrative Examples:
Camps, sports instruction Professional sports instructors (i.e., not participating in sporting events) Cheerleading instruction Riding instruction academies or schools Gymnastics instruction Sports (e.g., baseball, basketball, football, golf) instruction Martial arts instruction, camps or schools Swimming instruction
→Double check your classification with your CPA, tax preparer, or tax counsel.
Gain Clarity or Change the Policy (cont.) d. Private letter rulings: ▬Request(s) must be written, containing (a) identification of requestor(s), TX EIN, FED EIN, (b) signed by requestor(s) or agent(s), (c) a detailed statement of all relevant facts. ▬Include all relevant documentation. ▬Cannot related to requestor’s ongoing audit examination of any type, a refund request, or other current proceeding. ▬Statement of the private letter ruling (the decision) requested from the comptroller. ▬Statement of authorities supporting the requested ruling. ▬Statement of authorities contrary to the requested ruling. ▬Comptroller responds in writing by (i) issuing a private letter ruling, (ii) issuing a request for additional information, (iii) issuing a declination letter, or by (iv) issuing a general information letter. ▬Comptroller must consider the extent to which the ruling will promote voluntary compliance by the greatest number of taxpayers and provide information to other persons who have an interest in the subject matter. ▬Recipients of a private letter ruling may rely on the findings as a defense against TX Comptroller tax collection efforts.
or Change the Policy…
► If the TX Comptroller can’t (e.g., due to lack of adequate statutory authority), or won’t (i.e., no political will to do so), issue helpful, clarifying private & public guidance on which all TX USAGym clubs, & coalition members, may rely, it will probably be necessary to seek legislation that spells out what gymnastic services are / are not taxable.
Member Participation is KEY!
3. There IS Strength in Numbers… Every TX USAGym Member Should Participate!
→Why?
It’s Not a Matter of IF but WHEN the Tax Man Comes.
Activating Member List & Contacts 4. TX USAGym Member List and Contact Info is Invaluable. Start Communication Now.
→First Things First – Create an Inventory of Who Knows Who
in TX government. →Second – Expand the Coalition Statewide of all businesses
now affected by adverse TX tax policy. First secure max participation from TX USAG clubs, then link up with any sports or other instruction disciplines similarly affected. Build a critical mass that can’t be ignored.
→Third – Form a steering committee of volunteers who will marshal & coordinate efforts North/South/East/West!
TX USAGym Tactics & Tools 5. Once Organized –
a. Frame up a letter to the TX Comptroller. b. Ask for a meeting with a small number of the representatives of the broad
coalition now assembled on this issue. Include a “fact sheet” on what gymnastics clubs mean to the state of TX, and add the economic significance of all the coalition members from various sports and disciplines.
c. After a reasonable time, and calls to cement the appointment, make the letter public. Use social media and traditional media.
d. Copy every single member of the TX legislature, with an extra cover note to each legislator noting that if the TX Comptroller doesn’t help out small businesses (you) in their (the legislator’s) communities, note you’ll be in to ask for relief in the matter. Keep your local representatives informed each step of the way in effort to secure a change directly from Comptroller.
TX USAGym Tactics & Tools (cont.)
e. Eventually, copy every one of those legislator’s local papers in a guest op/ed, or series of letters to the Editor, urging the need for a change for small sports training businesses. Don’t stop there; publish in local Chamber of Commerce newsletters, community blogs, any publication your clients might read so they understand this is a tax on them and their kids’ sports-related activities. f. Make your district office appointment, ASAP, with each club legislator to begin the conversation about tax collection by audit and interpretation.
g. Keep it positive! Focus on audit inconsistency – real or potential – depending on which auditor is auditing, leaving some clubs to pay (taxes, lawyers & accountants) and others with no worries. Emphasize how clubs, and a larger coalition, will be working, first, with the Comptroller to try to resolve this program for Texas small business, including yours in his/her district. Keep them posted, and let them know you’ll be back if necessary.
TX USAGym Tactics & Tools (cont.) h. About that Meeting –
Glenn Allen Hegar, Jr. Texas Comptroller of Public Accounts
Lyndon B. Johnson State Office Building 111 East 17th Street Austin, Texas 78774
(512) 463-4444 [email protected] -45, attorney, former Rep. Member TX Senate & TX House for area west of Houston. Elected Comptroller Nov. 2014. “He believes a less-burdensome tax system will foster a better environment for job creation and business expansion, and a thus a healthier Texas economy.” http://comptroller.texas.gov/about/bio.php 6th gen. Texan farming land in his family since the mid-1800s. Texans for Lawsuit Reform the Civil Justice Leadership Award for justice system reform.
TX USAGym Tactics & Tools (cont.)
i. Don’t be surprised if the meeting doesn’t produce immediate movement in the form of a TX reinterpretation of “non-amusement services.” If not then, get a tight timeline for final decision-making from the Comptroller that the correct position of the Republic of Texas is that supervised sessions, including those that on their face may otherwise appear to be “free play,” because of creative marketing or advertising, are not and, therefore, shouldn’t be subject to TX sales tax as “amusement.” j. Consider working with Texas Small Business Association, with its considerable influence and orientation to TX USAGym member club sizes, then…plan on supporting legislation to make necessary changes.
Member Support is a MUST!
6. Support the Legislation a. Shoot for 100% member club participation via (i) letter writing in support a tax reform bill, (ii) meeting with every legislator within the vicinity of every TX USAGym club (i.e., at least 1 Senator and 1 Representative per club), (iii) ensure club & coalition representatives appear at every hearing scheduled for a tax reform bill working closely with the author selected to provide testimony and support activities, (iv) go on local radio, local television, social media and op-eds in traditional media, and (v) copy the governor’s legislative deputy responsible for advising on the proposed bill when it reaches him. b. Veto? Press hard for a veto override (that requires a 2/3 majority in each chamber) by having seen – in advance – as many members of the 181-member TX legislature (150 House/31 Senate) with follow-up in the days leading up to the override consideration.
Texas Taxpayer “Bill of Rights”
7. Use the Texas Taxpayer “Bills of Rights” to Its Fullest. a. Utilize the assistance of either the Customer Service Liaison
https://comptroller.texas.gov/cpahelp/, or call 1-888-334-4112. Be sure to exercise every option available to contest, appeal, or challenge application of the sales tax to club services.
b. The Texas Taxpayer Bill of Rights is summarized in a brochure produced by the state and can be viewed at http://comptroller.texas.gov/about/bill-of-rights.php
