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."