The answer to the above question actually depends on what state you live in. However, there is no nationwide rule about how much sales tax you are to pay on the money you make at your dance studio. Some states in the United States collect a sales tax on memberships, but others do not.
Table of Content
- Sales Tax Exemption Based on Which State You are Located
- Sales Tax Exemption Based on Products or Services You Offer
- How to Form Your Dance Studio as a Non – Profit Business
Sales Tax Exemption Based on Which State You are Located
For instance, the state of New York presently does not charge a sales tax on memberships, but New York City mandates a 4.5 percent city sales tax for memberships, dues or initiations fees. Also, studios that offer yoga classes only — and no other type of fitness or hybrid class —are not subject to the New York City local sales tax. Other states that also charge sales tax include Connecticut, Florida, Missouri, New Jersey and Texas, plus Washington, D.C.
Howbeit, to make sure you are paying the right amount of taxes to your state each year, it is advisable you work with an experienced accountant to make sure he or she understands how your fees work and what types of services your members are paying for.
Sales Tax Exemption Based on Products or Services You Offer
Knowing what you owe on all the types of services you offer will help you understand what you should be charging clients. It is also necessary to explicitly communicate any sales tax that clients must pay at the point of sale. For instance, if you have online class registration and a client wants to renew for a $100 class package, you have to ensure you clearly say the fee will be $100 plus tax.
Also note that if your studio has a retail component, you are expected to be collecting sales tax on those purchases. But have it in mind that your State departments of taxation will most likely look at more than the taxes you are collecting and, subsequently, paying to them. They are also going to look at the taxes your studio is paying on the purchases you buy.
According to reports, E – commerce has given states increased ammo for performing audits on businesses. If your studio acquired equipment or supplies tax – free online or in another state, you are expected to pay tax on that purchase in your home state. It is called a use tax.
So instead of believing that you may be saving money by making purchases in states with no sales tax—and you claim that purchase as a business expense—the chances are unbelievably high that your state department of taxation could come after you to pay that tax.
Reports also have it that 45 states have a use tax, but only 1.6 percent of the taxpayers in those states actually pay the use tax. Also when it comes to sales and use tax, the laws are somehow complex.
Howbeit, to protect your business from a state audit, penalties or fees, it is ideal to be proactive about managing these taxes. Talk with an experienced accountant and create a plan for not only charging and paying the tax appropriately but documenting sales and purchases correctly as well.
How to Make Your Dance Studio Fully Sales Tax Exempt
Nonetheless, the only way to make your dance studio sales tax exempt is to run it as a non – profit dance studio. Although depending on your goals, funding opportunities and community needs, operating a non – profit dance studio may be the only way to have a sales tax exempt dance studio.
As a non – profit, your dance studio can qualify for exemption from income, sales and property taxes, allowing you to put more of your money towards fulfilling your mission. In the same vein, non – profit status may qualify you for some types of government funding. Getting set up as a nonprofit business can, however, require a good deal of work.
How to Form Your Dance Studio as a Non – Profit Business
A nonprofit is generally classified as a “charitable” or 501© (3) organization. Note that to be recognized by the Internal Revenue Service, nonprofits are expected demonstrate that they are not just operating for the financial gain of its owners, but instead exists to serve and improve the community.
Note that the first step is to create a well detailed and researched business plan to guide your business. To register with the IRS, non – profit dance studios must submit a mission statement that guides their cooperation. This dance studio business plan will be the document that lays out your business goals and how you plan to achieve them. It will set a solid foundation for your studio for years to come. Your business plan should cover the following sections, at a minimum:
- Executive summary
- Company description
- Market analysis
- Products and services
- Financial projections
- Marketing overview
After you must have figured out how your business will run and what your financial situation is, you can start looking for your studio. Ensure to do it in this order so you know how much you have for rent and extra costs that will come with the location you decide on.
Remember that a dance studio has its own unique requirements. So first ask yourself how much space you will need? Do you want one room or multiple studios in your facility? You will also consider the need for:
- A lobby
- An office
- Retail space
- A waiting room for parents
3. Business Organization
You will need a board of directors for your non – profit dance studio. Each state has a specific number of required board members, but three is a common number. Remember that your board members should be trustworthy and capable of bringing something to the non – profit such as an interest in dance talent for organization fund – raising and program development.
Once you have selected your board of directors, file articles of incorporation to make the dance studio a separate entity from you and then create bylaws to stipulate how your organization will run.
4. 501©(3) Status
At this point file for non – profit status, also called 501© (3) status, with the Internal Revenue Service. You will have to download and complete IRS Form 1023 Application for Recognition of Exemption. You can find instructions for the form in IRS publication 557.
Consisting of more than 20 pages, this form can be daunting and will most likely include many complicated terms and questions. Note that you will also be expected to provide financial data for your dance studio, information about any compensation your board of directors will receive and details about your plans for fund – raising efforts.
5. Tax Exemption and Mailing Permits
Once you have formed a non – profit organization, you will qualify for state and local tax exemptions in addition to federal exemptions. Have it in mind that some states and localities will grant exemption based on your federal non – profit status alone while others will require you to complete an application process.
It is advisable you contact your state’s Department of Revenue and your city or county’s tax agency for details about the application process. Also, you might want a non – profit mailing permit, which makes your dance studio eligible for cheaper second – and third – class rates for bulk mail. Contact your local post office and request information Publication 417 to learn about mail permits.
6. Develop Your Systems And Processes
It is time to make a plan for running your studio once it opens. Note that this is separate and more detailed than your business plan, but it is just as important. Also note that the more organized you make your processes and systems at the beginning, the fewer people you will need to hire to carry them out.
This is why so many dance studio owners use dance studio management software. This software not only offer a guide to carry out their management duties and market their studio, but it also allows for a smaller staff and lower labour costs.
If all of this sounds confusing, then it will be ideal to find a knowledgeable accountant who can help you get your taxes done right. Once you find an accountant who is a good fit for your needs, don’t be afraid to seek advice for matters other than taxes. Chances are that he or she can help you work toward your other business goals.