Saturday, March 03, 2012

Adventures in Sales Tax: Spas

Zombie Squad II

If you follow my Twitter feed, you may have noticed that I have a weird interest in tweeting about sales tax violations that result in felony charges.  The vision of someone doing the "perp walk" because of sales tax is a strangely intriguing one to me.  These situations usually occur because a small business has collected sales tax and failed to remit it to the state.  The business has charged the customer tax, but not remitted it.  That's defrauding the customer.  That's a pretty clear and "perp-walkable" crime to me.  And they failed to pay the money to the state, which really ticks off the revenuers.

Today I came across this article about a couple of massage parlors getting busted in Columbus, Indiana.  There were the obvious charges that you would associated with such a business.  But there were over $350,000 in sales tax assessments!

I tweeted the article, but then thought about it.  Some states impose a tax on massage services.  Not many, but some do.  I knew that Indiana didn't impose such a tax (they don't generally tax services).  What could the assessment be for?  Yeah, they might sell a bottle of oil once in a while, but not enough to get to that kind of liability.  And if these places really are being used for what the criminal complaint describes, who buys oil?

So I opened up my trusty sales tax database.  I confirmed that there was no tax on massage services.  Then I searched Indiana for "spa."  Nothing.  Then I searched for "massage."  Bingo! 
Under Ind. Code § 6-2.5-4-4 (which is the section of lodging, accommodations and hotel rooms):

(a) A person is a retail merchant making a retail transaction when the person rents or furnishes rooms, lodgings, or other accommodations, such as booths, display spaces, banquet facilities, and cubicles or spaces used for adult relaxation, massage, modeling, dancing, or other entertainment to another person: (1) if those rooms, lodgings, or accommodations are rented or furnished for periods of less than thirty (30) days; and (2) if the rooms, lodgings, and accommodations are located in a hotel, motel, inn, tourist camp, tourist cabin, gymnasium, hall, coliseum, or other place, where rooms, lodgings, or accommodations are regularly furnished for consideration.
Those sneaky sons of guns in Indianapolis.  They nailed 'em on a section of the tax law I didn't expect...hotel rooms.  Now, nobody would ever think the business of a massage parlor is renting cubicles - it's incidental to the "service" being performed.  But if you're looking for a way to tax this kind of activity, and your state doesn't tax services, this will do quite nicely.  Everyone taxes hotels, just slide this extra "booth" clause in there.

What a great way to nail the bad guy.  Create a tax he would never have thought of and nail him with it just as the SWAT team bursts in!  (OK, I'm making that up).

So I learned something new today about Indiana.  And I'm going to be looking at those lodging statutes a little more carefully in the future.  And if you operate a massage parlor, you probably should as well.  Before those guys with the bullet-proof vests knock on your door.

The Sales Tax Guy

See the disclaimer - this is for education only.  Research these issues thoroughly before making decisions.  Remember: there are details that haven't been discussed, and every state is different.  Here's more information

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Anonymous said...

Will this sales tax crime really have a chance to be held
Up in a. Court of law? The massage therapist do not rent out rooms. And the law seems to only account for 30 days.
There has never been a massage parlor in the history of indiana. Who has paid sales tax. This was certainly a " perp walk ". I live in columbus and I am watching this non sense
The case keeps getting post poned due to lack of evidence
I Do not know how long our city will keep riding this dead horse.
They have set up for a law suite
They have paraded the women thru the news papers as guilty. I do not think this case will hold up in any state court
Or federal court. Thank you Tax Guy. For pointing out how
Stupid the charges and this case is.
What a waste of tax payers dollars

Anonymous said...

This trick will never work . If every thing you wrote is true.
They would have to arrest every massage girl in Indiana.
Not only massage girls. Every doctor , lawyer, barber, salon owner,
Anyone that has a room for any service in Indiana.
I can not wait To see the out. Come of this case.
For sure people will be angry about this trick.
Who ever put this idea together never thought it threw.
Anyone. Can see this is "Abuse of Process "