Municipal facilities providing fitness and recreational activities

This section of the guide is intended to provide guidance on the taxability of fitness and recreational activities that occur at facilities operated by municipal corporations such as a city, county, town, or other local government entity. These facilities are often referred to as community centers.

The taxability of a community center facility is largely based on whether:

• The entire facility is an AFF – all charges are subject to retail sales tax.
• A portion of the facility is an AFF – charges for the area of the facility that is an AFF are subject to retail sales tax.
• No portion of the facility is an AFF – charges are not subject to retail sales tax.

The entire facility is an AFF

An entire community center facility is an AFF if it is primarily (more than 50%) used for AFF activities.

The department will presume that the entire facility is an AFF when more than 50% of the revenues received by the facility are from activities listed in the definition of an AFF. Typically, this would occur when a facility contains a substantial fitness center and/or racquet center.

Only revenues from customers/users of the facility are used to determine if the facility is primarily an AFF. Other funding sources, such as tax revenues and grants that are used to subsidize the cost of operating the facility, are not used in the determination.

A portion of the facility is an AFF

If an entire facility is not considered an AFF, then you must determine whether any portion of the facility is an AFF. Typically, this test must be performed whenever there is a significant change in activities that could cause a portion of a facility to become an AFF. To determine if any portion of the facility is an AFF, answer the following questions:

1. Is there a separate area (e.g., a room) that is primarily used for any of the AFF activities listed in the definition of an AFF?
   • If yes, then go to Question 2.
   •  If no, then the facility (or portion of the facility) is not considered an AFF.
2. Is there a separate charge for using this (room) area?
   • If yes, then the separate area is considered an AFF, and any charges to use the area are subject to retail sales tax.
   • If no, then the portion of the facility is not an AFF.

The department makes the following presumptions in determining if a room/area is an AFF:

1. In buildings, we will look at the entire room or area to determine if it should be considered an AFF; we will not split up rooms.
   
   Example: City A has a neighborhood community center that is not an AFF as a whole. One room in the community center has a couple of stationary bicycles in a corner. There is no charge for the use of the stationary bikes. The remainder of the room has no exercise equipment and is primarily used for dance classes and meetings. The department will not view this room as an AFF.
2. For outdoor areas, we will look at the primary activity performed to determine if the area qualifies as an AFF.
   
   Example: City X has a community center with an outdoor tennis court, an outdoor basketball court, and a softball field that are side by side. The use of any of the outdoor areas requires payment of a fee. In this situation, each court/field is a distinct area, and the determination is made separately. The tennis court is an AFF, while the softball field and the basketball court are not AFFs.
3. The department presumes the following rooms within a facility are not AFFs when the facility as a whole is not an AFF:
   • Gymnasiums.
   • Multi-purpose rooms.
   • Classrooms.
   • Meeting rooms.
   • Pools.
   • Outdoor basketball courts.
   • Outdoor ball fields (soccer, football, baseball, etc.).
   • The local government is not required to retain records showing that these rooms are used 50% or less in AFF activities.
4. The schedule of room use for a charge will determine whether a room or area it is primarily used as an AFF. Idle or unscheduled time will not be part of the calculation.

Application of sales tax when a portion of a facility is an AFF

When a room or area at a facility is determined to be an AFF, then any charges to engage in or receive instruction in physical fitness activities in that room or area are retail sales. See below for information on uses of such spaces that are excluded from retail sales when separately stated.

“Physical fitness activities” means activities that involve physical exertion for the purpose of improving or maintaining the general fitness, strength, flexibility, conditioning, or health of the participant.

Examples of physical fitness activities include, but are not limited to:

• Exercise classes.
• Strength and conditioning programs.
• Personal training services.

No Portion of the facility is an AFF

When no portion of the facility is an AFF:

• Charges by the facility to participate in retail recreational services are subject to retail sales tax, and Retailing business and occupation (B&O) tax.
• Charges to participate in non-retail recreational services are subject to B&O tax under the Service and Other Activities classification. This includes charges for activities that would otherwise be considered physical fitness activities.

Exclusions from retail sales

Separately stated charges for the following activities that take place within an AFF or a portion of the facility that is an AFF are subject to B&O tax under the Service and Other Activities classification and are not retail sales:

• Use of an AFF for a purpose other than engaging or receiving instruction in a physical fitness activity. For example, a couple holds their wedding at the facility.
• Use of a discrete portion of an AFF, other than a pool, that does not by itself meet the definition of an athletic or fitness facility. Examples include kitchens, auditoriums, theaters, meeting areas, etc.
• Use of an AFF for advertising, massage, or nutritional consulting that does not require the customer to engage in physical fitness activities to receive the service.
  • Note: This does not include personal training services or instruction in a physical fitness activity.
• Physical therapy provided by a licensed physical therapist when prescribed by an authorized health care practitioner.
• Cover charges for dances. For example, a middle school holds a dance where there is a charge to attend.

Exemption from retail sales tax (physical fitness classes)

In general, charges by local governments to customers for the use of an AFF are retail sales subject to retail sales tax. However, charges for physical fitness classes provided by local governments are exempt from retail sales tax.

Characteristics of a physical fitness class include:

• Group exercise (not one-on-one).
• Group instructor or leader provided.
• Set days and times.
• Limited number of participants.
• Registration is in advance or before beginning class.

Examples of activities that are not exempt physical fitness classes include, but are not limited to:

• General use of pool (open swim).
• Athletic competitions.
• Drop-in basketball or volleyball.
• League fees.
• Use of exercise and strength training equipment.
• Personal training services.
• General use of gymnasium.
• Use of running track.

Retail sales tax applies to the non-exempt physical fitness activities listed above when provided at an athletic or fitness facility.

Classes that are not related to physical fitness are not considered retail sales. Such classes are subject to B&O tax under the Service and Other Activities classification. Examples include, but are not limited to:

• Art classes
• Dog obedience classes

Rental of rooms and facilities to third-party contractors

When a facility or a portion of a facility is an AFF, municipalities must collect retail sales tax from third-party contractors who rent the AFF to provide physical fitness activities to their clients.

The following examples assume that the entire facility is considered an AFF, and a separate charge is imposed for the rental of the area used for the activity.

• Example 1: A rock-climbing instructor not employed by the municipality reserves two hours each week on the facility’s climbing wall to teach a class on climbing techniques. The municipality must collect retail sales tax from the instructor because the class is considered a physical fitness activity.
• Example 2: An art instructor rents a room at a community center to hold an art class. The municipality does not have to collect sales tax from the instructor because the rental of the room is for a purpose other than engaging in or receiving instruction in a physical fitness activity.
• Example 3: A volleyball instructor rents the gymnasium at a community center for a volleyball class. The municipality must collect retail sales tax from the instructor because the class is considered a physical fitness activity.

When a third party rents a room that is not an AFF, the community center does not have to collect sales tax. In this case, the income received by the community center is subject to B&O tax under the Service and Other Activities classification.

The following examples assume that the room or facility rented is not an AFF and a separate charge is imposed for rental of the area used for the activity.

• Example 4: A rock-climbing instructor reserves two hours each week on the community center’s climbing wall to teach a class on climbing techniques. The municipality does not have to collect retail sales tax from the instructor because the facility is not an AFF.
  • Note: In this case the instructor must collect retail sales tax from their students because the instructor is providing a retail recreational service.
• Example 5: A dance instructor rents the gymnasium at a community center for a ballroom dance class. The community center does not have to collect retail sales tax from the instructor because the gymnasium is not an AFF.