If a bowling center signs a contract with a charitable bowling association agreeing not to collect sales tax on league fees, does that make the fees exempt?

Plain-English summary

A bowling center owner had signed a "Sponsorship Agreement" with the Utah State Bowling Association (USBA), a recognized 501(c)(3) charity, and had stopped collecting sales tax on amateur bowling league fees since January 1 of that year based on that agreement. Before filing the quarter's sales tax return, the owner asked the Commission to confirm the practice was fine.

It wasn't. The Commission held that sales tax is due on all charges a bowling facility makes to league members -- whether for tangible personal property or for use of the bowling lanes -- and that the Utah Code Ann. § 59-12-104(9) exemption for sales "made to or by" a charitable institution did not apply. Even though USBA is a genuine 501(c)(3) charity, the actual transaction here was between the bowling facility and individual league members -- not a sale to or by USBA itself. A private contract in which the facility agreed not to collect tax "does not negate" the underlying statutory obligation.

The Commission illustrated the point with a church/bookstore analogy: if a church contracts with a bookstore to sell its members religious books tax-free, the sale is still a taxable transaction between the individual church member and the bookstore -- not a purchase "to or by" the church -- regardless of what the contract says.

The Commission also distinguished this from a different, earlier advisory opinion the taxpayer had submitted as support, where sign-up fees for a charitable athletic event that covered the charity's own event costs were held nontaxable under case law. Two key differences here: (1) USBA incurred little or no costs for the leagues' activities at this bowling facility -- there was no actual "charitable athletic event" whose costs the fees were covering; and (2) USBA's regular business is providing an organizational structure to promote bowling, not conducting fundraising athletic events -- it's the individual leagues, not USBA, that run the bowling events.

What this means for you

Businesses that contract with a nonprofit to skip sales tax collection

A contract with a charity -- even a legitimate one -- doesn't create a sales tax exemption on its own. What matters is who is actually selling to whom. If your business is the seller and an individual customer is the buyer, the sale is taxable regardless of any side agreement referencing a tax-exempt third party.

Nonprofit organizations that sponsor member activities at for-profit venues

If your organization's role is purely organizational/promotional rather than actually running and paying for the event, sales made by the venue to your members generally stay taxable. The "sign-up fees that cover the charity's own event costs" exception is narrow and fact-specific.

Accountants and tax professionals

This is a clean, citable example distinguishing "sale to or by a charity" from "sale to a member of a charity," and a useful companion/contrast to the earlier charitable-athletic-event advisory opinion discussed in the letter (sign-up fees covering the charity's own costs of a fundraising event it runs) -- worth cross-referencing if that specific opinion surfaces separately in this backlog.

Common questions

Q: Can a business and a charity agree by contract to make sales to the charity's members tax-free?
A: No. A private contract can't override the statutory sales tax obligation. The exemption only applies to sales actually made "to or by" the charitable institution itself, not to sales the venue makes to individual members.

Q: Are charitable fundraising event sign-up fees always exempt?
A: No -- only in the narrower situation (per a separate advisory opinion referenced here) where the fees are used to cover the charitable organization's own costs of conducting the event as a fundraiser. That didn't apply to these bowling league fees.

Q: Does this ruling apply to my business?
A: No. It binds the Commission only for the requesting taxpayer and the facts described. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes:

• § 59-12-104(9) (exemption for sales made to or by a charitable institution)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/98-027.htm

Original ruling text

98-027

Response
April 14, 1998

March
25, 1998

Dear
Jeff:

Some
time ago I entered into an agreement with the Utah State Bowling Association to
sponsor

amateur
bowling leagues at our center. Based upon their agreement, I have not collected
sales

tax
on the league bowling covered by their agreement since January 1, based upon
administrative

rule
R865-19S-33. I would like to make sure that there are no issues concerning this
before I file

my
sales tax return for this quarter.

For
your information, I enclose a copy of their 501(C) (3) ruling, a copy of an
advisory opinion

issued
from your office, and a copy of our agreement with them.

I
appreciate your help. Should you have any questions, please call me.

Sincerely,

NAME

April
14, 1998

NAME

ADDRESS

CITY
STATE ZIP

RE - Advisory
Opinion - Sales Tax on Fees Paid by Bowling Leagues

Dear
NAME,

We have received your request for an
advisory opinion concerning the collection of sales tax on fees charged by
bowling facilities to bowling leagues.
We have also reviewed the items you submitted with your request,
specifically the Amateur Bowling Sponsorship Agreement (�Sponsorship Agreement�)
between NAME and the Utah State Bowling Association (�USBA�); the XXXXX,
advisory opinion issued to NAME, CPA; and Letter 1045, issued from the Internal
Revenue Service to USBA.

In your letter, you state that, since
January 1st of this year, you have not been collecting sales tax on fees that
your facility charges to bowling league members. As will be explained, your actions are contrary to Utah law. Utah law requires that sales tax be
collected on fees charged to bowling league members for purchases or leases at
a bowling facility or for use of bowling lanes. Moreover, these fees are not exempted under Utah Code Ann.
�59-12-104(9), which includes an exemption for sales �made to or by� a
charitable institution. Though the USBA
is recognized as a charitable 501(C)(3) organization, your sales to the league
members are not sales made to or by the USTA.

As evidenced by the Sponsorship
Agreement you submitted, your facility has signed a contract that provides, in
part, that you will not collect sales tax on fees charged to league members,
all members of the USBA. However, when
league members pay their fees to you, this transaction is not a sale made to or
by the USBA. It is a sale made by your
bowling facility to a league member.
That you have a contract in which you agree to actions contrary to Utah
law does not negate that law. You are
still responsible for sales tax on the fees you collected from league
members.

This situation can be compared to
one in which a church, a similarly exempt entity, asks its members to buy
religious books from a particular bookstore.
Assume that the church has entered into a contract with the bookstore
providing that the bookstore will not charge sales tax to members of that church. When a church member goes to the bookstore
and purchases books, it is a taxable transaction between the church member and
the bookstore. It is not a purchase
made to or by the church. Just because
a tax exempt entity encourages the purchase and signs a contract with the
bookstore not to collect the sales tax from its members does not convert the
transaction from a taxable one to a nontaxable one.

Nor is this situation the same as
the one that was addressed in the advisory opinion to NAME. In his request, NAME asked about a situation
where the admission or user fees are used to cover all costs of the charitable
organization to sponsor the athletic event.
Court decisions have upheld that sign up fees charged for a charitable
athletic event and used to cover the costs of the event are not taxable. However, the bowling fees you ask about are
not used to cover the costs of a charitable organization event; here, the
charitable organization (USBA) has incurred little or no costs associated with
the leagues� activities at your bowling facility. Basically, there has been no charitable athletic event.

Second, the regular conduct of the
charitable organization detailed in NAME� request was to hold athletic events
as a fundraiser where sign up fees were used to cover costs. We do not believe the USBA�s regular conduct
consists of conducting fundraising athletic events. Instead, it appears that the USBA�s regular conduct is to provide
an organizational basis for the promotion of bowling. It is the leagues that conduct the bowling events, and moreover,
the events do not appear to be for fundraising purposes. Both these distinctions produce a different
result than the one produced by the facts supplied by NAME.

In conclusion, sales tax is due on
all charges made by your facility to league members either for purchases or
leases of tangible personal property or for charges to use your bowling
lanes. Accordingly, your sales tax
return for the first quarter of 1998 should reflect these charges as taxable.

Please contact us if you have any
other questions.

For
the Commission,

Joe
B. Pacheco

Commissioner

^^