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INSIGHT: Decision on Participatory Sports Exemption From NYC Sales Tax Leaves Heads Spinning

July 2, 2019, 7:00 AM

While group exercise classes led by instructors are especially popular these days, a recent decision subjects such classes to a special New York City sales tax. In a May 23, 2019, decision, a New York Administrative Law Judge (ALJ) determined that SoulCycle, Inc. indoor cycling classes were subject to a special New York City 4.5% sales tax. SoulCycle argued that the New York state exemption from state sales tax for “participatory sports” should extend to the city’s tax. The ALJ determined that the exemption did not apply to the city sales tax.


At its studios in New York City, SoulCycle offered its iconic indoor cycling classes that customers purchased individually or in a package. Each class averaged 45 minutes and was led by an instructor.

N.Y.C. Admin. Code Section 11-2002 imposes a “special sales tax” on receipts from “every sale of services by weight control salons, health salons, gymnasiums, Turkish and sauna bath and similar establishments.” For a two-month period, SoulCycle did not charge or collect the city special sales tax from its customers, but nonetheless remitted tax of over $480,000 and thereafter filed refund claims.

In support of its refund claims, SoulCycle argued that its sales were excluded from the city special sales tax because the charges were for “admission to, or use of, facilities for sporting activities” in which the customer participated, which charges are exempt from the separate state sales tax under N.Y. Tax Law Section 1105(f)(1). According to SoulCycle, the state sales tax exemption for participatory sports applies for purposes of the city special sales tax because the city administrative code expressly incorporates certain provisions of the state sales tax, “including the applicable definitions, transitional provisions, limitations, special provisions, exemptions, exclusions, refunds, credits and administrative provisions, so far as those provisions can be made applicable to the taxes imposed by this section.” N.Y.C. Admin. Code Section 11-2002(d).

The New York Division of Taxation, which administers the city special sales tax, denied SoulCycle’s refund claims. The division found that “the use of stationary bikes” did not constitute a “participatory sport” and therefore the classes were subject to the city special sales tax.

ALJ Determination

The ALJ did not need to determine whether SoulCycle classes are participatory sports because the ALJ found that the state exemption for participatory sports was not an available exemption from the city special sales tax. To support her reasoning the ALJ relied primarily on N.Y.C. Admin. Code Section 11-2001, which imposes a general sales tax of 4.5% that piggybacks off the state sales tax. The ALJ found that Section 11-2001(b)(3) conflicts with the state sales tax participatory sports exemption. Section 11-2001(b)(3) provides that the city general sales tax “does not omit from the tax described in [N.Y. Tax Law §1105(f)(1)] charges to a patron for admission to, or use of, facilities for sporting activities in which such patron is to be a participant, such as bowling alleys and swimming pools … .”

Shifting gears, the ALJ also found the city sales tax legislative history supported the conclusion that the “participatory sports” exclusion did not apply to the city special sales tax. In 2008, the city amended former N.Y.C. Admin. Code Section 11-2002 by repealing and replacing it with current N.Y.C. Admin. Code Sections 11-2001 and 11-2002. Former Section 11-2002(f) contained a participatory sports exemption that was eliminated in the amendments. According to the ALJ, “As a result of the amendment, there is no longer a participatory sports exclusion for New York city sales tax purposes.”

Eversheds Sutherland Observation

While the ALJ reasoned that the specific exclusion of the participatory sports exemption from the Administrative Code section imposing the city general sales tax supported the conclusion that there is no participatory sports exclusion from the city special sales tax, the analysis could have cut the other way. The express exclusion of the participatory sports exemption from the general sales tax imposed by Section 11-2001 suggests that had the city intended to omit the participatory sports exemption from the special sales tax imposed by Section 11-2002, it would have done so explicitly. Rather, the special sales tax generally incorporates the exemptions and exclusions of the state sales tax.

Also of interest is the manner in which SoulCycle challenged the division’s position by paying the city special sales tax out of its own pocket and not charging customers for the tax. Vendors that believe a previously taxed item or service may not be subject to sales tax should be aware that vendor sales tax refund claims present unique procedural considerations because the refund the vendor seeks is usually owed to the vendor’s customer that actually paid the tax. Had SoulCycle collected the tax from its customers and then sought a refund, it might have been procedurally barred from claiming a refund. N.Y. Tax Law Section 1139(a) provides that no refund shall be made to any taxpayer for tax collected from a customer until the taxpayer first establishes that the tax was repaid to the customer. The New York Division of Tax Appeals has previously dismissed refund claims for failure to comply with the statutory repayment requirement. See New Cingular Wireless PCS LLC, New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 825318 (Mar. 8, 2018) (remanding matter to the Division of Tax Appeals for consideration of the issue of whether the taxpayer’s funding of an escrow account for customer refunds constitutes repayment to customers as required by N.Y. Tax Law Section 1139(a)).

However, vendors seeking to challenge the applicability of sales tax also have to be careful not to run afoul of “exhaustion” requirements. A competitor of SoulCycle, Flywheel Sports, Inc. (Flywheel), also sought to challenge the imposition of city special sales tax on its cycling classes after receiving notice from the division that its cycling classes did not appear to qualify as exempt participatory sports. Rather than wait for an assessment or remit the tax and claim a refund, Flywheel sought a declaratory judgment that the city special sales tax did not apply to its cycling classes. Flywheel Sports, Inc. v. N.Y. Dep’t of Taxation and Fin., 60 Misc.3d 1201(A) (N.Y. Sup. Ct. 2018) (unpublished). The New York County Supreme Court granted the division’s motion to dismiss Flywheel’s complaint, finding that Flywheel failed to exhaust its administrative remedies.

See In the Matter of SoulCycle Inc., DTA Nos. 827689 and 827699 (May 23, 2019).

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Open Weaver Banks is counsel and Chelsea Marmor is an associate with Eversheds Sutherland in New York.