Clearing the Air: Updates on the "Dance Tax"
What's more fun than drudging through tax law? Dancing, obviously. But right now, both are at issue: whether bars that offer dancing are subject to retail sales tax on their cover charges, whether it's fair that bars are being charged these back taxes now, and if they should've been paying these taxes in the first place.
Last week, we detailed what's on the books, and why bar and club owners might get justifiably confused about what taxes to pay. This week, we talked to two key players in this debate: Mike Gowrylow, spokesman for the Washington State Department of Revenue, and Mark Kimball, who is Capitol Hill dance spot Neighbours's lawyer. Neighbours was one of the bars that was audited recently for not charging retail sales tax on admission -- to a six-figure tune.
"This law's been on the books for 50 years," says Gowrylow of the Washington state code in question. Originally it was a factual error that "opportunity to dance" was listed as part of the 1993 athletic club additions, he says -- that part's been law since 1961, and he's "not sure that's the case" that the law hasn't been enforced in recent years the same way. "It just so happened that this time they audited a business... that wasn't paying."
Gowrylow even adds that there's a case from 1971*, Drayton Beverage, Inc and Crossroads Enterprises, Inc vs. the Department of Revenue. "According to the Drayton Beverage court decision," he explains, "'opportunity to dance' has been taxable as an “amusement and recreation” activity subject to (retail sales tax) since 1961."
"It wasn't like we didn't emphasize it," he adds.
Kimball disagrees that there's any sort of precedent, and says that other court decisions have been "inconsistent." There's a much more recent case -- a tax appeal from 1987 -- that comes to an entirely different conclusion, and even cites the 1971 case.
At issue with the 1987 case is whether a bar that charges a cover for multiple activities, including dancing, without making a distinction between them, is subject to the tax. The "disco" in question had a dance floor, but it took up 6% of the bar, and less than 20% of patrons use it. The case was ruled in the venue's favor because of its difference from the 1971 case, where dancing was clearly the primary activity, and was clearly advertised -- whereas in the case of the 1987 case, it was just one of many available activities.
When asked whether a business would be subject to it even if they didn't advertise or even encourage a dance floor (as with one situation with an anonymous bar mentioned in the original Stranger piece), he asked, "Then why are you imposing a cover charge?"
Some cases and appeals ruled in the DOR's favor, however, have popped up as recently as 2009. In the 2009 case specifically, a bar argued that because their primary draw was not dancing -- they were just furnished with a small dance floor, despite most of their space being taken up by tables and chairs -- that their clientele were paying to be spectators. The bar's petition was denied.
Regardless, though, Kimball says there's a "general consensus" among Seattle business owners, specifically those on a listserv he belogs to, that the tax hasn't been enforced this way. "It just hasn't been enforced, at least from what we can tell."
In fact, Kimball says, Neighbours has been audited a few times since he first became their lawyer in 1983 -- and they never asked for this tax until now. The situation now, he says, is "inconsistent" with the way the law has been applied. "What the Department of Revenue is doing now by focusing on the tax... is a level of activity that is much higher than in the past."
Gowrylow says that sometimes the DOR conducts a limited-scope audit -- they're only looking for certain kinds of taxes. "They don't check every last thing," he says. In the same vein, it's not out of the question to say that the DOR has been focusing on this more heavily -- they emphasize different kinds of taxes at different times, and right now that could be retail sales tax on cover charges.
Naturally, if they find something odd they'll say something, but they're not always looking at the full spectrum of taxes someone should be paying. But, he clarifies, the business is still obligated to pay those taxes, even if they're not found in an audit.
When asked about this, Kimball reiterated: during multiple audits on the club, Neighbours has never been found at fault for not paying this tax.
"What else should we do," asked Gowrylow. "Should we ignore the law? In order to have a healthy tax system," he says, the DOR needs to charge taxes where taxes are due -- no matter whether or not a business has paid it before.
Some businesses have paid. In fact, most of the businesses audited for the tax paid retail sales on their admissions. Rough data from the DOR shows that out of a small sample, over half of bars audited at least made an attempt. A few bars "had not been reporting cover charges as taxable retail sales and were assessed back taxes," said Gowrylow. (The Seattle Times has some "preliminary" numbers from the DOR, with a bit of a wider scope than the ballpark we were given.)
So most bars knew they were subject to the tax, and made a best effort to pay them. It's a relatively small sample, but at least this would imply that the law is not entirely clandestine.
While Kimball was hesitant to speak to an active case, he said there is an active appeal between Neighbours and the DOR. "They know our position," he said, "And we know theirs."
Looking at all the conflicting information in previous cases, it seems like this case could go a myriad of different directions -- but it seems the case would be hardly groundbreaking. Whatever the outcome, we hope there's some clarification to our state's tax law, and not just another conflicting appeal ruling on an increasingly more daunting pile of paperwork.
* The 1971 case also refers to live music, which apparently is not subject to the tax.
