Is the Missouri Sales Tax Being Eroded? Examining a Conflict Among the Executive, Legislative, and Judicial Branches in Missouri.

AuthorLock, Courtney
PositionNOTE

Miss Dianna's Sch. of Dance, Inc. v. Dir. of Revenue, 478 S.W.3d 405 (Mo. 2016)

  1. INTRODUCTION

    Miss Dianna's School of Dance, Inc. ("the School") teaches dance lessons and instructs students on various dance techniques. (1) The School has been in business for forty-three years. (2) In January of 2016, the Supreme Court of Missouri determined that it was a place of "amusement, entertainment, or recreation" (3) for purposes of section 144.020.1(2) of the Missouri Revised Statutes. (4) This resulted in the School owing a significant amount of unpaid taxes. (5) Over time, the State of Missouri has applied several different tests to determine whether businesses are considered places of "amusement, entertainment, or recreation" for purposes of the statute, which holds businesses liable for sales tax. (6) The two principle tests are the primary purpose test and the de minimis test, which are explored in greater detail in this Note.

    This case and the legislative enactments that followed it raise more questions than they answer. While courts struggle to determine the proper scope of the statute, the legislative branch recently enacted an amendment excluding places of instruction from the scope of section 144.020. (7) Although Governor Jay W. Nixon vetoed this legislation, the legislature overrode the veto in September of 2016, and the amendment became law on October 14, 2016. (8)

    This Note examines the Supreme Court of Missouri's holding in Miss Dianna's School of Dance, Inc. v. Director of Revenue, ascertains the holding's scope in light of recent statutory amendments, and explores whether Missouri sales tax is at a precipice going forward. Part II discusses the facts and holding of Miss Dianna's School of Dance. Part III explores the Supreme Court of Missouri's fluctuating interpretations of the statute. Part IV provides an indepth analysis of the Supreme Court of Missouri's reasoning in Miss Dianna's School of Dance and its relevance to the interpretation of the statute going forward, including an examination of Judge George W. Draper III's dissent. Finally, Part V discusses the effect of recent statutory amendments, both on Miss Dianna's School of Dance and on future cases involving amusement, entertainment, and recreation. This Note argues that both the court's decision in Miss Dianna's School of Dance and the subsequent statutory amendments to section 144.020 leave businesses in a more difficult position regarding whether to impose sales tax. Ultimately, this Note concludes that the future of the Missouri sales tax remains in doubt because of the ambiguity of the statutory enactment.

  2. FACTS AND HOLDING

    The School, located in Kansas City, Missouri, offers dance classes in tap, ballet, jazz, acrobats, lyrical, hip-hop, and pom-pon for all ages. (9) Prior to being audited in 2012, the School did not file any sales tax returns because it does not sell retail merchandise. (10) Rather, it relied on a 2008 Missouri Department of Revenue letter ruling, addressed to a different business, (11) stating that fees charged by that business for dance lessons were not subject to sales tax. (12) However, the Director of Revenue determined that the School owed $73,276.21 in unpaid taxes and interest. (13)

    Section 144.020.1(2) of the Missouri Revised Statutes imposes a sales tax "equivalent to four percent of the amount paid for admission and seating accommodations, or fees paid to, or in any place of amusement, entertainment or recreation, games and athletic events." (14) The School argued that it was not a place of amusement, entertainment, or recreation because its main purpose was to teach students how to dance and that, therefore, the tax should not apply. (15)

    Although the School's website portrayed that the classes involved skill, learning, and technique, it also included various statements emphasizing the fun and enjoyment that the classes offered. (16) The website stated, "We are confident you can find a class that will make you and your family happy!" (17) Further, the website described various youth classes as "fun classes to add variety to your dancer's week!" and invited adults to "[t]ake a little 'Me Time' and have some fun with us!" (18) It also advertised a tap class where adults "will be amazed at how fun and athletic tap exercises can be" and promoted a day camp where "dancers will also be doing crafts and decorating their dance camp shirts." (19) In addition, at the Administrative Hearing Commission hearing, the School's founder admitted that participants "get recreation" from the dance classes and that she wanted the participants to have fun while learning to dance. (20)

    The Administrative Hearing Commission held that the School was subject to sales tax under section 144.020.1(2). (21) The Commission noted that the entertainment, amusement, and recreation were not a de minimis component of the School's dance lessons and ruled that the School was liable for $23,984.93 in unpaid taxes. (22) The School petitioned to the Supreme Court of Missouri for review and challenged the imposition of liability for sales tax. (23) The sole issue before the Supreme Court of Missouri (24) was whether the School was a place of "amusement, entertainment, or recreation" for purposes of section 144.040.1(2), thus subjecting the School to sales tax liability. (25) The Supreme Court of Missouri held that the School was subject to sales tax under section 144.020.1(2) because it charged a fee, which was paid in part for "amusement," "entertainment," and "recreation," and the amusement or recreational activities comprised more than a de minimis portion of the School's business activities. (26)

  3. LEGAL BACKGROUND

    Section 144.020.1(2) of the Missouri Revised Statutes (27) imposes a sales tax "equivalent to four percent of the amount paid for admission and seating accommodations, or fees paid to, or in any place of amusement, entertainment or recreation, games and athletic events." (28) Over time, the Supreme Court of Missouri has applied several tests to determine whether a business is subject to sales tax under section 144.020.1(2). (29) This Part outlines the history of the two primary tests used by the court: the de minimis test and the primary purpose test.

    1. The De Minimis Test as Applied in Spudich

      Prior to 1998, the Supreme Court of Missouri utilized a de minimis test when applying section 144.020.1(2). (30) Under the de minimis test, the court considered three factors to determine whether a business was a place of amusement, entertainment, or recreation. (31) First, the court considered whether the manner in which the business held itself out to the public inferred that it was a place of amusement, entertainment or recreation. (32) Second, the court considered whether the revenue generated by amusement or recreational activities was considered a significant amount. (33) Lastly, the court examined whether the amusement and recreational activities were pervasive. (34)

      These three factors originated in Spudich v. Director of Revenue in 1988. (35) In Spudich, Robert Spudich, the plaintiff and sole proprietor of Columbia Billiard Center and Spudich Supply Co., operated and maintained billiard tables and coin-operated game devices and sold food, beverages, and billiard supplies. (36) Although only about twenty-five percent of Spudich's sales were derived from billiard charges and coin-operated amusements, the court found that the billiard center was a "place of amusement" within the meaning of section 144.020.1(2). (37) The conclusion was based, in part, on the fact that Spudich portrayed itself as a billiard center and access to the center attracted patrons. (38)

      The court also recognized that a business could have two purposes. (39) The fact that the majority of Spudich's sales were from food, beverages, equipment, and repair did not preclude the billiard center from being a place of amusement and entertainment. (40) The court noted that if a place "provides something edifying or educational in addition to enjoyment... it is no less a place of amusement." (41)

      However, the court in Spudich noted that each case should be considered based on its own specific facts. (42) These factors were not exhaustive, (43) and other factors could be considered to determine whether a place should be deemed a place of amusement and subject to sales tax under section 144.020.1(2); however, the court did not comment on these other factors and did not allude to why it limited its analysis to the above three factors. (44)

    2. The Primary Purpose Test

      In 1998, the Supreme Court of Missouri applied the primary purpose test, instead of the de minimis test, to determine the applicability of section 144.020.1(2). (45) Under the primary purpose test, section 144.020.1(2) turned on the primary purpose of the facility involved: "[i]f the primary purpose of a facility is to facilitate diversion or entertainment, then the facility is a place of recreation and is subject to assessment of sales tax under section 144.020.1(2)." (46)

      In Columbia Athletic Club v. Director of Revenue, the court applied the primary purpose test and held that a physical fitness center membership was not subject to sales tax. (47) Although the Columbia Athletic Club offered activities such as aerobics, strength training, and nutrition/weight control services, it did not offer facilities for tennis, racquetball, basketball, or swimming. (48) The court held that because the center's primary purpose was to facilitate exercise to provide health benefits, it was not considered a place of "amusement, entertainment, or recreation," and Columbia Athletic Club therefore was not liable for sales tax. (49)

      The Supreme Court of Missouri did not mention the de minimis test in Columbia Athletic Club, and did not indicate its reason for using the primary purpose test instead. (50) However, its lack of mentioning of the de minimis test was not due to oversight, as the court cited to Spudich in...

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