DES MOINES, IA — The Iowa Department of Revenue notified dozens of Iowa Curves franchise owners that they owed state sales taxes from years past, and 18 of the notified franchisees are fighting the assessment that could cost them more than $500,000.
In Iowa, sales tax is charged for all commercial recreation, including health clubs and country clubs, said Dave Casey, policy manager for the Iowa Department of Revenue. However, Iowa sales tax is not charged if customers are paying additional fees for instruction. According to court documents, one test case brought by an Ames, IA, Curves argues that the women-only facility's activities should not be considered commercial recreation because members “receive instruction under the guidance and direction of instructors on how to perform the Curves workout. Ordinary persons cannot perform the activity without instruction, and the instructors have received special training.”
Casey disagrees. “If Curves had a special class they charged for, then [the Iowa Department of Revenue] would not tax those activities,” he said.
Besides, Curves franchise owners had written to the department two and a half years ago with informal questions about the tax, Casey said.
“We said they would be taxable,” he said. “We met with the business and they showed us what they did. It didn't change our mind.”
Heather Palmer, a Des Moines attorney representing a group of Curves owners challenging the tax, could not comment due to pending litigation.
Becky Frusher, communications manager for Curves International, advised “franchisees to comply with all applicable state and local laws, as well as to secure their own attorney and tax advisor.”
The case is in its first step, an administrative hearing. Next will come a director's hearing with appeal rights if applicable. If the issue were to go to the state Supreme Court, it could take three years to go to court, Casey said. If the court rules to uphold the state tax assessment, Curves owners will owe the state the uncollected sales tax, plus a penalty of 10 percent of the unpaid tax and interest of 0.7 percent a month on the unpaid tax. Because the tax wasn't collected from customers, the money will most likely come out of the owners' pockets, Casey said.
Casey also said taxing services is not common in other states, but he urged facilities to check into their state laws.