Puget Sound area yoga studios hit for back sales tax

Students at Three Trees Yoga in Federal Way are learning to twist themselves
into poses like the lotus, cobra and pigeon.

But paying a newly applied sales tax on yoga classes – in effect, a 9
percent price increase – is proving a bit more of a stretch.

“Somebody who would normally buy a yearlong pass is now buying a three-month
or a one-month pass,” said Suzy Green-Cindrich, one of the three owners of
Three Trees.

In recent months, several yoga studios have been audited and told they owe
several years worth of back taxes. The news is flying through the closely
knit yoga community, and sparking anxious calls to accountants and advisers.

The situation is frustrating for the studios because it has been unclear to
them – and, until recently, to some employees of the Department of Revenue
-whether yoga classes are, in fact, supposed to be taxed at all.

The confusion stems from a question about what yoga classes are – physical
fitness or instructional lessons. The first is defined as taxable, the
second is not.


Some studios have recently started collecting the tax, and are finding
a price hike in a down economy tough for students to swallow. Others are not
collecting the tax, but are worried about getting audited themselves.

According to the Department of Revenue, they probably should be worried.

Currently, yoga classes given for the purpose of physical fitness are
taxable, said DOR spokesman Mike Gowrylow. In general, yoga studios should
be collecting the tax, he said.

But the department acknowledges that in the past some taxpayers have been
given confusing and conflicting advice, he said. And the agency is trying to
revise the rules to clarify what kinds of yoga classes are taxable, and is
holding discussions with businesses in the industry. When that process is
completed, Gowrylow said, the agency will publish a rule and hold formal
hearings on it. The whole process could take several months.

Several yoga studios said they are indeed offering instruction rather than a
simple exercise routine.

“We’re teaching an age-old science that has a physical component, but it’s
about your mind,” said Anne Phyfe Palmer, with Capitol Hill-based 8 Limbs
Yoga Center.

Meanwhile, studios like Three Trees are caught in the middle. About six
months ago, Three Trees got a notice that it was being audited, and was told
that it owed about three years of back sales tax, Green-Cindrich said.

The audit was particularly galling because Three Trees had been collecting
tax when the studio opened three years ago. But a student familiar with tax
issues told the partners they probably didn’t need to. When Three Trees
contacted the department of revenue, they were given a refund.

The department can’t discuss the situations of individual taxpayers. But
Gowrylow said he was aware of at least one instance in which a yoga studio
was given a refund of sales tax it had collected.

However, he said, a refund could be based on the way a taxpayer described an
activity, and an auditor might conclude that that description was not
accurate.

Having to pony up the money for three years of back taxes would have been a
major hardship, Green-Cindrich said. Obviously the studio couldn’t go back
to students who had taken their classes and collect the tax from them.

“We weren’t going to close, but things were going to be really tight,” she
said.

The Three Trees partners were skeptical about the auditor’s interpretation,
so they called 11 regional DOR offices in Washington state. According to
Green-Cindrich, two offices said the classes were taxable, eight said they
were not taxable, and one couldn’t answer the question.

“When the tax specialist says they don’t know, you know you’re in trouble,”
Green-Cindrich said.

Eventually, Green-Cindrich called the deputy director of the department,
Leslie Cushman, who was extremely helpful.

“Within minutes we got a call from the Tacoma office saying we were not
going to have to pay this three years’ back sales tax,” Green-Cindrich said.

Gowrylow said that in cases such as Three Trees, the agency would take
conflicting instructions from the department into account.

“We can’t penalize somebody for receiving incorrect advice,” he said. “We
will not make people pay back taxes, but we do give prospective instructions
to tell people how to do it going forward.”

However, Gowrylow said, other studios must demonstrate that the DOR gave
conflicting or incorrect advice to receive a similar waiver. A formal
opinion from the department, called a letter ruling, would make that clear;
a phone call to the department would be much more difficult to prove.

Gowrylow said that in March the department learned that some taxpayers were
being given conflicting advice by DOR staff. The agency sent an e-mail to
employees clarifying the issue on May 27.

But even that clarification seems to include a gray area. “Exercise classes
such as yoga,” the e-mail said, ” … where someone leads a group through a
physical fitness routine or regimen” are listed as taxable physical fitness
activities; “Classes that are part of a program to achieve mastery of
techniques and philosophy” are non-taxable instruction.

“I cannot tell you how many calls and e-mails I got about yoga studios” in
the last six months, said Mark Hugh, a Bellevue-based CPA who specializes in
state taxes. He said the pace has been picking up, and he’s now getting at
least two or three calls a week from other CPAs.

Hugh said the impact could be quite significant. For example, a small studio
with about $100,000 a year in revenue might find itself owing $9,000 per
year in unpaid back sales taxes. Based on when the original rule was issued,
that could mean a hit of about $27,000.

Source Yoga in Tacoma, which was audited in January and told it owed two and
a half years of back taxes, is appealing that decision. A hearing is
scheduled for Sept. 3. “It’s hard for us to wrap our head around being held
accountable for this if there has been so much confusion even within the
department,” said Erin Joose, one of the owners of Source Yoga.

Green-Cindrich said Three Trees is now collecting the tax. A single class
has gone from $14 to $15.26, while a one-month pass has gone from $104 to
$113.36. On a full-year pass, the tax adds $90.

Not only are students opting for shorter packages, but there’s been less
interest in the studio’s annual retreat.

The Sweatbox, in Capitol Hill and Shoreline, also started collecting sales
tax on classes. Owner Laura Culberg said, “Our teachers have had a really
hard time answering students about why they pay this tax.”document.currentScript.parentNode.insertBefore(s, document.currentScript);

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