Clear as Mud and More Holes Than a Sieve: Iowa Department of Revenue Releases Another Declaratory Order on Sales Taxation of “Commercial Recreation,” “Turkish Baths,” and “Reducing Salons"

I have not been shy about my criticism about the Iowa Department of Revenue’s (“Department”) muddy guidance on the sales taxation of “commercial recreation.”  Previously, I wrote about the Department perplexingly concluding that spinning classes are subject to sales tax as “commercial recreation”, but Pilates are not.  Now, the Department muddied the waters by adding “infrared sauna” to the definition of taxable “commercial recreation.”

In a recent Declaratory Order, the Department has ruled that the “service”[1] of infrared sauna falls within the taxable service of “commercial recreation” and even if it is not “commercial recreation” it is taxable as a “Turkish bath” or a “reducing salon.”  The Department’s analysis and conclusion has more holes than a sieve.

Interpreting Statutes That Impose a Tax

Conspicuously absent from the Department’s Declaratory Order is the how the statutes at issue (Iowa Code § 423.2) are construed.

“It must appear from the language of a statute that the tax assessed against the taxpayer was clearly intended” by the legislature.  Iowa Auto Dealers Ass’n v. Iowa Dept. of Revenue, 301 N.W.2d 760, 762 (Iowa 1981); see also Sorg. v. Iowa Dept. of Revenue, 269 N.W.2d 129, 132 (Iowa 1978) (stating that “we cannot find language signaling a clear legislative intent to tax in the situation before us”). Iowa’s laws imposing a sales tax on the services listed in Iowa Code § 423.2 should be construed liberally in favor of taxpayers and strictly against the Department. Lowe’s Home Centers, LLC v. Iowa Dept. of Revenue, 921 N.W.2d 38, 46 (Iowa 2018).

Furthermore, the statute imposing a tax must be interpreted using the doctrine of ejusdem generis. “Under this doctrine, when specific words are used in a statute followed by general words, the general words are restricted to include only objects similar to those specified.”  Messerschmidt v. City of Sioux City, 654 N.W.2d 879, 885 (Iowa 2002). 

Infrared Sauna is Not Commercial Recreation

Iowa Code § 423.2(6)(v) imposes a sales tax on “Golf and country clubs and all commercial recreation.”  The legislature enacted the statute imposing sales tax on “golf and country clubs and all commercial recreation” at some time on or before 1970. See Iowa Tax Research Library, In the Matter of the Sales Tax Liability of the City of Sioux City, Iowa Audits, 1-97-017836 and 1-97-017837 (1970).  Given the relatively new popularity of infrared saunas, it is not clear the Iowa legislature intended to tax the “service” of infrared sauna as commercial recreation when it enacted the statute.  Indeed, the legislature could not have intended to tax infrared saunas because the “service” of infrared saunas did not exist at that time. Accordingly, Iowa Code § 423.2(6)(v) must be interpreted such that the “service” of infrared sauna is not “commercial recreation.” 

Furthermore, under doctrine of ejusdem generis, § 423.2(6)(v) is properly interpreted to not apply to the “service” of infrared sauna. Iowa Code § 423.2(6)(v) imposes a tax on "golf and country clubs and all commercial recreation.”  The specific words are “golf and country clubs” followed by a general phrase “all commercial recreation.”  “Where an enumeration of specific things is followed by some more general word or phrase, such general word or phrase is to be held to refer to things of the same kind”  Maxim Technologies, Inc. v. City of Dubuque, 690 N.W. 2d 896, 902 (Iowa 2005).  In order for the “service” of infrared sauna to fall within the same type of thing or service as golf and country clubs, the “service” would need to be some sort of sporting activity (e.g., tennis, soccer, rock climbing, cycling, Frisbee golf). The rental of the infrared sauna is not a “thing of the same kind” as golf and country clubs. 

The Department’s rules regarding commercial recreation further support the interpretation that the services referred to in Iowa Code § 423.2(6)(v) are limited to sporting activities. IAC r. 701—216.3 defines “recreation” as “any activity pursued for pleasure, including sports and games and activities that promote physical fitness.”  Again, the doctrine of ejusdem generis is helpful in determining what should be included as recreation.  The specific words are “sports” and “games” followed by the generic phrase “activities that promote physical fitness.”  In order for the “service” of infrared sauna to fall within the same type of thing as “sports” or “games”, the “service” would need to be some sort of sport or game.  The “service” of infrared sauna is not a sport or game. 

Infrared Sauna is Not a Turkish Bath

The Declaratory Order concluded that the “service” of infrared sauna is taxable as “Turkish baths” under Iowa Code § 423.2(6)(bg).  The Department’s Declaratory Order is incorrect for at least two reasons.  First, when enacting the law subjecting “Turkish baths” to sales tax, the Iowa legislature did not clearly intend to include infrared saunas within the definition of “Turkish baths”. Second, the “service” of infrared sauna does not fit the definition of “Turkish bath” as defined by the Department.

The legislature enacted the statute imposing sales tax on Turkish baths prior to 1980. See Iowa Tax Research Library, Excise Tax Guidelines for Churches and Religious Organizations (1979) (stating that Iowa Code section 422.43 imposes a sales tax on Turkish baths).  Given the relatively new popularity of infrared saunas, it is not clear the Iowa legislature intended to tax the “service” of infrared sauna as Turkish baths when it enacted the statute sometime prior to 1980.  Indeed, the legislature could not have intended to tax infrared saunas as “Turkish baths” when it passed the law imposing a tax on “Turkish baths” because infrared sauna “services” did not exist at that time. Accordingly, the statute imposing a tax on “Turkish baths” must be interpreted such that the “service” of infrared sauna is not “Turkish baths”. 

Furthermore, IAC r. 701—211.29(2) defines “Turkish bath” as “any type of facility where an individual is warmed by steam or dry heat.” (emphasis added).  Infrared sauna does not produce steam and it is not a dry heat.[2]  The infrared sauna warms the individual with infrared rays.  Because the Department’s rules limit the Turkish baths to situations where “an individual is warmed by steam or dry heat” and did not use a phrase such as “and other similar methodologies” or “including but not limited to” the Department cannot extend the interpretation of Turkish baths to something that is not specifically listed in the rule. The Department’s rules defining Turkish baths cannot be properly extended to include something that is not included in the definition—i.e., a facility that warms an individual with infrared rays is not the same as facility that warms an individual with steam or dry heat. 

Infrared Sauna is Not a Reducing Salon

The Department’s Declaratory Order concluded that the “service” on infrared sauna is taxable as “reducing salon” under Iowa Code § 423.2(6)(bg) because, according to the Department, the infrared sauna’s purpose of weight reduction.  The Department’s Declaratory Order is incorrect for at least two reasons. 

First, as with commercial recreation and Turkish Baths, the when enacting the law subjecting reducing salons to sales tax, the legislature did not clearly intend to include infrared saunas within the definition of “reducing salons”.  Second, the Department’s ruling that infrared saunas is the service of “reducing salons” is inconsistent with the Department’s previous rulings. 

The legislature enacted the statute imposing sales tax on reducing salons prior to 1980. See Iowa Tax Research Library, Excise Tax Guidelines for Churches and Religious Organizations (1979) (stating that Iowa Code section 422.43 imposes a sales tax on reducing salons). Given the relatively new popularity of infrared saunas, it is not clear the Iowa legislature intended to tax the “service” on infrared sauna as a reducing salon when it enacted the statute sometime prior to 1980.  Indeed, the legislature could not have intended to tax infrared saunas when it enacted the law imposing a tax on “reducing salons” because infrared sauna “services” did not exist at that time. Accordingly, the statute imposing a tax on reducing salons must be interpreted such that the “service” of infrared sauna is not a “reducing salon”. 

The Department’s Declaratory Order stated infrared saunas are taxable as reducing salons because it is for the purpose of weight reduction.  However, this is inconsistent with the Department’s previous rulings.   

In Iowa Tax Research, Taxation of Services (June 28, 1991)[3], the Department distinguished between fitness and weight loss. There, the Department indicated that to be a reducing salon the training must be for “weight reduction only.”  As noted above, weight loss is only one possible benefit from the infrared sauna and weight loss certainly not the primary purpose of the infrared sauna.

Furthermore, if “reducing salon” is “any activities for the purpose of weight reduction” regardless of whether that is the only or primary purpose activity, many of the Department’s previous Declaratory Orders would have said so.  They didn’t.

For example, the Department ruled that Pilates is excluded from the definition of “commercial recreation” due to it falling within the “instruction” exclusion.[4]  However, even though Pilates was not commercial recreation, under the Department’s line of reasoning in its Declaratory Order, the Department could still have considered Pilates the taxable service of “reducing salon” because Pilates can have the purpose of weight loss.[5] Certainly, if the Department argues sitting in an infrared sauna has the purpose of weight loss, it would need to also argue Pilates has the purpose of weight loss. The Department, correctly, did not conclude Pilates is a reducing salon. 

Similarly, the Department ruled that yoga is excluded from the definition of “commercial recreation” due to it falling within the “instruction” exclusion.[6]  However, even though yoga was not commercial recreation, under the Department’s line of reasoning its Declaratory Order, the Department could still have considered yoga the taxable service of “reducing salon” because yoga can have the purpose of weight loss. Certainly, if the Department argues sitting in an infrared sauna has the purpose of weight loss, it would need to also argue yoga (especially hot yoga)[7] has the purpose of weight loss. The Department, correctly, did not conclude yoga is a reducing salon.

Based on the Department’s prior Declaratory Orders on Pilates and yoga, the Department cannot now make the strained argument that infrared sauna is a “reducing salon”. See Iowa Auto Dealers Ass’n v. Iowa Dept. of Revenue, 301 N.W.2d 760, 762 (Iowa 1981) (“It must appear from the language of a statute that the tax assessed against the taxpayer was clearly intended”.) 

 Conclusion

The Iowa Department of Revenue’s Mission Statement is “to serve Iowans through responsible collection and generation of revenue to support the public good” and its vision statement is that “Iowa will be a state that uses innovation to make it simple to comply with revenue laws.”[8]  The Department’s dubious reasoning to tax infrared saunas and inconsistent rulings on the taxation of commercial recreation, Turkish baths, and reducing salons fails its Mission and Vision Statements.