Questions have arisen regarding the applicability of certain tax provisions contained HB 366 & HB 487 and, in particular, the potential sales tax consequences of the amendments to KRS 139.010(1) contained in Section 36 of both House Bills related to admissions fees paid for certain rights of entrance and privileges to use facilities or participate in events or activities owned or operated by not-for-profits entities, such as tax exempt organizations under Internal Revenue Code of 1986, as amended (“Code”) Section 501(c)(3), (6) & (7). These Memorandum seeks to address those questions.[1]

Section 36 of HB 366/HB 487 amends KRS 139.010(1), inter alia, to expand the definition of “Admissions” to include fees paid for:

• The right of entrance to a display, program, sporting event, music concert, performance, play, show, movie, exhibit, fair, or other entertainment or amusement event or venue; and
• The privilege of using facilities or participating in an event or activity, including but not limited to:
  • Bowling centers;
  • Skating rinks;
  • Health spas;
  • Swimming pools;
  • Tennis courts;
  • Weight training facilities;
  • Fitness and recreational sports centers; and
  • Golf courses, both public and private; regardless of whether the fee paid is per use or in any other form, including but not limited to an initiation fee, monthly fee, membership fee, or combination thereof.

HB 366, HB 487, § 36, inclusive.

As an initial comment, Kentucky Courts follow “the universally-recognized rule … that exemptions from taxation are to be strictly construed.” Finance & Administration Cabinet v. Interstate Gas Supply, Inc., Case No. 2016-SC-000281-DG (Ky., Mar. 22, 2018) [citing City of Louisville v. Cromwell, 27 S.W.2d 377, 379 (Ky. 1930) (The “rule of strict construction [is] applicable to rights of exemption from taxation.”); Gray v. Methodist Episcopal Church S., Widows & Orphans Home, 114 S.W.2d 1141, 1143 (Ky. 1938) (Tax exemptions are “to be strictly construed as against the one claiming the exemption.”); Hancock v. Prestonsburg Indus. Corp., 365 S.W.3d 199, 201 (Ky. 2012) (“[P]rovisions granting tax exemption must be strictly construed, as it is a well-settled principle that taxation is the rule and exemption the exception.”)].

Kentucky Constitution Section 170 exempts from taxation public property used for public purposes. The provision provides, in pertinent part:

There shall be exempt from taxation public property used for public purposes; places of burial not held for private or corporate profit; real property owned and occupied by, and personal property both tangible and intangible owned by, institutions of religion; institutions of purely public charity, and institutions of education not used or employed for gain by any person or corporation, and the income of which is devoted solely to the cause of education, public libraries, their endowments, and the income of such property as is used exclusively for their maintenance….

Ky. Const. § 170 (emphasis added).

Only just recently, the Kentucky Supreme Court reaffirmed an earlier decision, in holding “that the tax exemption accorded to ‘institutions of purely public charity’ in Ky. Const. § 170 is limited to property taxes and thus not applicable to sales and use taxes.” Interstate Gas, supra.

KRS 139.495 was enacted in 1976 by the Kentucky General Assembly. The provision stated that, the “sales tax does not apply to sales of tangible personal property … to [religious, charitable, and educational institutions] provided the tangible personal property … is to be used solely in this state within the educational, charitable, or religious function.” KRS 139.495(2) (emphasis & [ ] added). However, KRS 139.495 made abundantly clear that religious, charitable, and educational institutions, when acting as a vendor, must collect and pay the sales and use tax levied under Chapter 139 of the Kentucky Revised Statutes. See Kennedy Bookstore, Inc. and Wallace’s Bookstore, Inc. et al v. Department of Revenue, KBTA File Nos. K-72-R-2, K-72-R-3, K-72-R-4, and K-72-R-1, Order No. K-5204 (KBTA, 1978).

The “present day” version of KRS 139.495(8), provides that:

All other sales made by nonprofit educational, charitable, or religious institutions or limited liability companies described in subsection (1) of this section are taxable and the tax may be passed on to the customer as provided in KRS 139.210.

KRS 139.495(8).

Therefore, when applying the most recent provisions of HB 366 & HB 487 regarding “admissions,” absent a specific exemption, any such fees are subject to sales tax notwithstanding that a charitable, religious, or educational institution is the vendor.

“Taxing laws should be plain and precise, for they impose a burden upon the people. That imposition should be explicitly and distinctly revealed.” George v. Scent, et al., 346 S.W.2d 784, 789 (Ky. 1961). “All words and phrases in a statute shall be construed according to the common and approved usage of language such as found in a common dictionary.” KRS 446.080(4); Louisville & N. R. Co. v. Dep’t of Revenue, 551 S.W.2d 259, 261 (Ky. App. 1977).

In light of the above authorities, we have provided a list of Frequently Asked Questions (“FAQs”) to guide your organization in managing and assessing your sales tax obligations. It should be noted that while the Department of Revenue has provided some guidance related to admissions, we anticipate additional guidance to follow. In the interim, we have provided our analysis of how the sales tax ought to be applied by reviewing the treatment of similar activities in States, like Florida, which have taxed admissions for numerous years. The goal is to give some guidance based on certain presumptions, etc. and other relevant guidance that is generally available. It is not possible to anticipate every scenario.

Country Clubs and other Membership organizations not exempt under 501(c)(3)

Membership dues – Taxable [see HB 366/HB 487, § 36(1)(b)]. Please note, if the membership dues encompass other, perhaps non-taxable services, then such other non-taxable services should be separately stated. Otherwise, the entire amount would likely be subject to sales tax.

Prepays of membership dues before 7/1/2018 – Exempt [see HB 366/HB 487, § 143 (“Sections 36 to 51 apply to transactions occurring on or after July 1, 2018”).

Country Club guest fees – Taxable [see HB 366/HB 487, § 36 (1)(b) (“privilege of using facilities ….” is taxable)].

Restaurant minimums – Uncertain at this time, but there is a reasonable reporting position that such fees ought to be Exempt.

See Technical Assistance Advisement, No. 09A-019, Fla. Dep’t of Rev., Apr. 9, 2009 (Holding that mandatory monthly food and beverage fees imposed by a property owners’ association to its members as a condition of ownership or occupancy of real property are not admission charges and are not subject to Florida sales tax. As such, the payments are not taxable admissions).

Locker Fees – Taxable (rental of tangible personal property).

Initiation Fees – Taxable [HB 366/HB 487, § 36 (admissions are taxable “regardless of whether the fee paid is per use or in any other form including but not limited to an initiation fee, monthly fee, membership fee, or combination thereof)].

Capital assessments (Monthly or Annual Charges) – Uncertain at this time, but there is a reasonably reporting position that such assessments should likely be Exempt.

In Kentucky, the proper tax treatment of mixed transactions, that is, transactions involving taxable services and tangible property and non-taxable services, is determined by application of a test referred to as the “essence of the transaction” or “true object” test. See 103 KAR 28:051, Consolidated Broadcasting Co. v. Revenue Cabinet, KBTA File No. K86-R-21, Order No. K-11677 (June 11, 1987); and Woodward, Hobson & Fulton v. Revenue Cabinet, Ky. App., 69 S.W.3d 476 (2002).)

The test attempts to determine the “essence of the transaction.” With regard to capital assessments, the “true object” is not to pay for admissions, but rather to fund capital construction projects. This is not the intent of the admissions fee. Although not specifically addressed by the Department of Revenue to date, other States, such as Florida are in accord. In re Petition of Pass-A-Grille Yacht Club, No. 05-1-DS, Fla. Dep’t of Rev., Nov. 14, 2005, a monthly fee paid by members of a yacht club for the construction of a new clubhouse was a capital assessment and, as such, was not subject to Florida sales tax. The fee was separately stated from the members’ regular dues and was assessed only until the clubhouse was paid for in full.

Swimming Pool Admission – Taxable [see HB 366/HB 487, § 36 (1)(b) (“privilege of using facilities ….” is taxable)].

Swimming Lessons – Exempt as instructional and/or educational services based upon informal guidance from the Department of Revenue.

As discussed above, the taxability of mixed transactions, is determined by application of “true object” test. With regard to swim lessons requiring instruction, the “true object” is education and instruction, not “access” or “admission” to the pool. Since swim lessons or other instructional or educational lessons are not an enumerated service, then the proper treatment would be to deem such lessons as “exempt”. A recent determination from Florida is in accord. See, e.g., Technical Assistance Advisement, No. 18A-002, Fla. Dep’t of Rev., Jan. 19, 2018 (Holding that fees receive by a gym from its members for hourly instructional classes would not be subject to Florida sales tax because the members would have access to the gym facilities only during the instructional class period).

Swim Teams – Taxable [HB 366/HB 487, § 36(1)(b) (“The privilege of using facilities or participating in an event or activity….”).

Tennis Lessons – See “Swimming Lessons” above.

Public Charities exempt under 501(c)(3)

Membership dues – Taxable (see above), unless non-taxable services are included, in which case, the non-taxable services should be separately stated from the taxable admissions, etc.

Prepays of membership dues before 7/1/2018 – Exempt (see above).

Summer Camps – Exempt based on informal guidance from the Department of Revenue as educational/instructional services.

Daycare – Exempt, if separately stated. Daycare services are not specifically enumerated as a taxable service and thus, should be exempt.

Theatre admissions – Taxable [HB 366/HB 487, § 36 (“The right of entrance to a … “music concert, performance, play, show …” is taxable)].

Museum admissions – Taxable (see Theatre admissions above).

Art Exhibit admissions – Taxable (see Theatre admissions above).

Admission to entertainment events – Taxable (see Theatre admissions above).

Other admissions to public charities – Taxable, unless specific exemption applies such as the “historic sites” exemption under KRS 139.482.

Historical sites – Exempt pursuant to KRS 139.482.

Fees to participate in team sports – Taxable [HB 366/HB487, § 36(1)(b) (“The privilege of using facilities or participating in an event or activity,” which includes but is not limited to several sporting facilities)].

Should you have any questions regarding the above, please feel free to contact Tax Partner Mike Grim, JD via phone (502.882.4510) or e-mail to discuss.

[1] This material is intended for general information purposes only and does not constitute legal advice. For legal issues that arise, the reader should consult legal counsel.