Tax oddities and challenges of compliance

An article in BloombergBusinessweek - "Yoga Gets Off the Mat to Fight New York's Tax Man" by Caroline Winter (4/4/12), is a reminder that when tax rules are odd, such as having narrow exemptions or complicated definitions of what is taxable and what is not, it can lead to compliance problems. For example, when some narrow category of items becomes subject to sales tax, those providing the service might not know and when a rule is odd, people would not logically think that the transaction is taxable.

The article notes that some yoga studios in New York City were not aware that since last April (2011) they have been subject to the city's sales tax. Per the article New York City decided "that yoga studios be categorized as fitness centers, instead of movement spaces, and thus subject to a sales tax rate of 4.5 percent. (Dance studios aren’t taxed.) The change isn’t very new—it went on the books last April—but New York studio owners say they were never notified. That is, not until auditors started showing up in January and fining studios for back taxes for as much as three years."

An April 2011 Tax Bulletin ST-329 (TB-ST-329) from the New York State Department of Finance and Taxation, is a great example of how peculiar and laughable a poorly designed tax system can be. For example, it states:

"New York State makes a distinction between health and fitness clubs and athletic clubs. New York State and local sales taxes are imposed on dues and membership fees paid to any athletic club in the state. An athletic club is any club or organization whose material purpose or activity is the practice, participation in, or promotion of any sports or athletics (for example, a Judo club or curling club). However, a facility that provides steam baths, saunas, rowing machines, or other exercise equipment, or that promotes exercising solely for health or weight reduction purposes, as contrasted to sports, is not considered to be an athletic club."

It seems a bit odd that both activities are described as a "club" and involve physical activity, yet taxed differently. 


So, it is not the state of New York that is taxing the yoga salons, but New York City.  Some states and their cities do not have the same sales tax base making compliance even more difficult for vendors!  Per the 2011 Tax Bulletin:


"New York City imposes its local sales tax on every sale of services by weight control salons, health salons, gymnasiums, Turkish and sauna baths, and similar facilities, including any charge for the use of these facilities. This tax does not apply to any of these facilities located outside of New York City. Therefore, dues, membership and initiation fees, and any charges paid for the use of these facilities located in New York City are subject to the New York City local sales tax. However, if a facility also provides access to participant sporting activities and facilities, such as a swimming pool or racquetball courts, to its members, the facility is not considered to be a weight control salon, health salon, gymnasium, or other establishment for New York City sales tax purposes"

Wow!

How to simplify?  Apply sales tax to all goods and services consumed by individuals as final consumers and lower the rate.  Perhaps some necessities should be exempt such as non-elective medical services.  I suggest taxing food and finding another way to provide relief to low-income individuals such as through a refundable income tax credit or provision of debit cards for use throughout the year (ideally attached to the cardholder's bank account including accounts paid for by the state). The reason is that higher income taxpayers spend a lot more on food so exempting it provides a big tax break to individuals who do not need it.  With this design changes, we would not have oddities of knowing whether a yoga class or health club dues are subject to tax - they would be because purchased by a consumer.

What do you think?

More - see 21st Century Taxation website - here.