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Friday, August 19, 2011

Neighbours Nightclub Threatens to Sue State Over Dance Tax

Posted by on Fri, Aug 19, 2011 at 3:26 PM

Earlier this week, we broke the news that state auditors were demanding at least three bars in Seattle to retroactively pay a nine percent sales tax simply because they had a dance floor. Bar owners contended the state hasn't attempted to collect this tax before, but they refused to be identified or explain how widespread the tax was.

Now there's more to the story.

Attorneys for Neighbours Nightclub—a dance club and gay institution on Capitol Hill—are going on the record to say they have found at least 25 other music venues in the Seattle area recently hit with an "opportunity to dance" tax by the state's Department of Revenue (DOR). Mark Kimball of MDK Law Associates says Neighbours is preparing to fight the DOR's "bald-face money grab" and contest the club's new tax bill by taking the DOR to court.

"We hope to bar [the DOR] from taxing clubs such as Neighbours in the way they’re doing now," says Kimball. He says Neighbours currently owes a "six-figure-plus amount," but hastens to add that paying it "won't put the club out of business—unlike many others." Kimball anticipates filing a lawsuit in King County or Thurston County within the next six months.

At issue is a 50-year-old old tax law that was amended in the 1990s to include physical fitness (but the DOR says its been collecting the tax from dance clubs as far back as the 1970s). The state argues that dance clubs should be paying sales tax on all cover charges and ticket sales for "events that promote dancing," says DOR spokesman Mike Gowrylow. But not every event that features dancing must pay. "If you go to the Gorge," Gowrylow explains, "you're paying $50 to watch a concert. You don't go to dance so the sales tax wouldn't apply, even though there’s an open area where people dance. It's because dancing's not the primary purpose, it’s to watch a concert."

Tickets and cover charges to live music are classified as "entertainment" and are exempt from the tax, which is why, according to the DOR, the sales tax applies to dance venues like Neighbours but not established concert venues like the Showbox SODO, Key Arena, or the Gorge Amphitheater. People paying to see DJs are paying to dance, Gowrylow explains, so venues with DJs are expected to pay the dance tax.

"It seems pretty simple to us," Gowrylow says.

"Taxing the 'opportunity to dance' while exempting concerts is a twisted bit of logic," counters James Ware, another lawyer representing Neighbours.

"If they’re taking the position that a live band is different from a DJ, which they appear to be doing, they can’t," adds Kimball. "They’re not allowed to favor one live performance over another. It's unconstitutional."

Kimball also contends that the state is arbitrarily trying to collect back taxes. For example, late last year, the state audited Neighbours and said the owners had to pay the tax for the first time, even though the club had been audited at least twice before (since it opened in 1983) and the state had never even mentioned the tax.

Auditors on both of those occasions "found no problems at all," Kimball says. "It isn’t fair to go back and say, 'Retroactively we’re going to treat you differently than we have for the last 20 or 30 years,' when the statute hasn’t changed. The legislature can make that distinction but they haven’t done so."

But Gowrylow says that state auditors have been trained to audit for this tax for the last 15 years, at least. He didn't have numbers on how many clubs have been audited for the new tax in the past year or decade, but says there's precedent. "We looked and we found court cases going back to the '70s that said that if you’re marketing your place of business as a place to dance, the sales tax applies."

The end result, as Seattle club owners are experiencing, is a massive addition to their bottom line. In some cases, a six-figure burden. And what's worse, club owners can be held personally liable. "Under the statute, the DOR can get personal liability for unpaid taxes against owners sand managers of businesses," Ware explains. "It’s draconian."


Comments (18) RSS

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Banna 1
Where is Kevin Bacon when you need him?
Posted by Banna on August 19, 2011 at 3:41 PM · Report this
MacCrocodile 2
"...if you’re marketing your place of business as a place to dance, the sales tax applies."

Simple: stop advertising as a dance venue. Neighbours now has a "Socialization Floor".
Posted by MacCrocodile on August 19, 2011 at 3:43 PM · Report this
Banna 3
@2 or call it what it really is: a "simulated sex exhibition space".
Posted by Banna on August 19, 2011 at 4:06 PM · Report this
What a crock of shit. So Gowrylow- explain to me why the Gorge is exempt during the Identity festival, when it will host all DJs and electronic music?

Not to mention, under your faulty logic bars could also argue that patrons are there primarily to drink, and dancing is not the "primary purpose" for their patronage.
Posted by UNPAID COMMENTER on August 19, 2011 at 4:52 PM · Report this
the DOR has been looking for any opportunity to maximize their revenue in the last year or two. On the one hand, I don't blame them - the state is broke, and if the law is there, it's an opportunity to collect money. But this is a dick move and an absurd law. The law needs to be changed, because the line between fitness/dance/opportunity to dance/main purpose of the event is ridiculous.
Posted by genevieve on August 19, 2011 at 5:29 PM · Report this
This all sounds perfectly in line with how ASCAP and BMI, the national Performance Rights Organizations (PRO's) determine the license fees for all businesses. If you have live music, it's a rate, if you have more than two people performing at a time (i.e. a 'band') it's a higher rate. If there is ever any dancing at all, the rate goes up. If you charge cover, the rate goes up. If there's a DJ, the rate is about half what it is for live music (these are all cumulative, by the way). The more nights you have musical entertainment, the more expensive it is. The higher the capacity of the club, the higher the rate. If you play the radio, TV or CD's during business hours, it costs the same as a DJ.

See BMI's worksheet for calculating all this:…
Posted by tiktok on August 19, 2011 at 5:54 PM · Report this
michael strangeways 7
Well, since many/most clubs and venues use promoters to book events and the money collected at the door goes to pay the promoters and the talent, and venues in this town DON'T give a piece of the bar to the promoters, the upshot is, promoters and talent will get even more screwed than they are now, if this dumb law sticks.
Posted by michael strangeways on August 19, 2011 at 6:16 PM · Report this
michael strangeways 8
They get "dance-y" at a lot of evangelical churches...start taxing them.
Posted by michael strangeways on August 19, 2011 at 6:17 PM · Report this
It's not just music venues that are coming under the scrutiny of DOR; basically, they're upending just about any old couch cushion they come across that might have some spare change buried under it. My non-profit just got dinged because we received a grant from WA Dept. of L&I, which DOR has decided, almost three years after the fact, requires us to pay B&O tax.

The State is desperate for revenue, so good luck to the folks at Neighbors, but my guess is we haven't seen the last of this.
Posted by COMTE on August 19, 2011 at 6:47 PM · Report this
Free Lunch 10
I hope McGinn doesn't chime in his support for the bars - then they'll lose for sure.
Posted by Free Lunch on August 19, 2011 at 7:14 PM · Report this
This "We'll sue!" approach may feel good and be all edgey but, it could also backfire. The one thing the Goverments get dead serious about is their share. The 16th amendment is kind of a clue here. If Neighbors proves the State right in court all of the other "Dance" places will have to fork over back taxes pronto.
Posted by Zander on August 19, 2011 at 7:30 PM · Report this
Joe Szilagyi 12
@11 they could all team up, chip in money, and get a bitching legal team. Just a thought.
Posted by Joe Szilagyi on August 19, 2011 at 9:52 PM · Report this
Ain't so damn funny when you're the ones coughing the tax money, now is it bitches?


The Rich.
Posted by delbert on August 19, 2011 at 10:11 PM · Report this
Catalina Vel-DuRay 14
Well, there's a difference, isn't there, Delbert dear? A progressive state income tax makes perfect sense - particularly since the rich have been the states biggest welfare recipients since the whole thing began. Taxing dance halls is just a desparate attempt to keep things afloat, and appease the leaches at the top.

Maybe the answer is a birth tax on the wealthy. Everytime they squeeze one out, they owe us say 100k, just as a down payment on all the things we're going to have to underwrite for them.
Posted by Catalina Vel-DuRay on August 20, 2011 at 8:12 AM · Report this
svensken 15
Dear Derbert,

Get your head out of your ass and realize that the owner of the club is most likely a rich man.
Posted by svensken on August 21, 2011 at 10:47 AM · Report this
the idiot formerly known as kk 16
This is an issue for the Legislature to fix. DOR just tries to interpret their statutes as best they can. Call Olympia and tell them that you want the law changed pronto, with retroactive relief.
Posted by the idiot formerly known as kk on August 22, 2011 at 8:06 AM · Report this
It is a sad day when the gov enforces a tax on dancing... Is that air you're breathing? Perhaps they will tax that too.... Afterall the gov ownes our right to dance, the air we breath and everything in between right???
Posted by readysetgo on November 22, 2011 at 4:32 PM · Report this
@15 Do you know of a rich club owner. I know 3 people that own clubs and all are struggling because of crap like this. I heard the Century Ballroom owes over $50k on this tax too and some of your favorite band venues like Tractor Tavern. Neighbors are just stepping forward as their bill is probably north of 100k.
Posted by Captothehill206 on November 23, 2011 at 2:54 PM · Report this

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