Columbia Athletic Club v. Director of Revenue

LIMBAUGH, Judge.

This case involves a dispute over the assessment of sales tax under section 144.020, RSMo,1 for basic membership dues at a physical fitness center. Section 144.020.1(2) provides that a sales tax is due for “the amount paid for admission and seating accommodations, or fees paid to, or in any place of amusement, entertainment or recreation, games and athletic events.” The sole issue for determination in this case is wheth*807er Appellant’s fitness center is a “place of amusement, entertainment or recreation, games and athletic events.” The Administrative Hearing Commission (AHC) decided this issue against the appellant, which then appealed to this Court. Because this case involves construction of the revenue laws, this Court has jurisdiction. Mo. Const, art. V, sec. 3. The decision of the AHC is reversed and remanded for further proceedings consistent with this opinion.

I.

Columbia Athletic Club (“Appellant”) is a corporation that operates a fitness center under the name of “Gold’s Gym” in Columbia, Missouri. The fitness center offers facilities for noncompetitive activities including aerobics, strength training, cardiovascular training, and nutrition/weight control training, but it does not offer facilities for tennis, raequetball, basketball, or swimming. The fitness center is located in a four story building with equipment for different activities located on each floor. The top floor contains circuit training equipment that is designed to strengthen different muscle groups, as well as equipment intended to improve the body’s cardiovascular system. The third floor has strength training equipment similar to that available on the top floor, but the equipment is not arranged in organized circuits. The third floor also has an area for use of free weights. The second floor contains the front desk, pro shop, membership offices, and an aerobics center in which various aerobics classes are held. The bottom floor contains locker rooms, child care facilities, offices for a nutritional program called APEX, and tanning rooms. Each of the locker rooms contains a hot tub, sauna, cold tub and showers.

Appellant’s fitness center has a certified training staff that assists members in implementing their individual exercise programs. New members typically meet with a membership coordinator who completes a personal performance analysis of the member and helps the member develop an exercise plan that is formulated to meet that member’s specific goals and objectives. The training staff is also available to assist members during their workouts and they offer encouragement and motivation to members to increase the frequency and intensity of their workouts.

Appellant’s fitness center is designed to emphasize five primary components of fitness: muscular strength, muscular endurance, flexibility, cardiovascular fitness, and body composition. Appellant’s stated philosophy in operating the fitness center is to emphasize health and personal improvement through exercise. At least a substantial percentage of members are referred to the fitness center by a physician for health reasons, and some members even receive reimbursement from their health insurers for the cost of the program.

The fitness center does not operate as a social club. Instead, members generally work out on an individual basis in a noncompetitive atmosphere. The fitness center does play upbeat background music in an attempt to motivate its members and provides television monitors in the cardiovascular area to occupy members during long-term stationary exercises. However, the music and television monitors constitute only a minor component of the entire fitness center. The fitness center’s major focus is on improving health through physical exercise.

Membership in Appellant’s fitness center can be purchased for any period from one month to one year. The basic membership dues entitle a member to access to the facilities and equipment, including aerobics classes and the assistance of the staff. Members pay extra fees for personal trainers, tanning rooms, towel service, child care, and participation in the APEX nutritional program.

The current dispute began when Appellant received a letter from the Department of Revenue stating that the Department intended to collect sales tax on health club memberships. The Director of Revenue (“Director”) conducted an audit of Appellant’s fitness center for the tax period from April 1991 through March 1994 and issued assessments for that period. On May 1, 1995, Appellant entered an agreement with the Director providing that Appellant could amend its return for November 1994 and pay sales tax, additions, and interest under pro*808test. Per the agreement, Appellant filed a refund claim for the taxes paid under protest, and the Director issued a decision denying the claim. The parties also agreed that Appellant could appeal the Director’s decision to the AHC, and that the AHC’s decision would be binding as to the audit period and all subsequent periods up to the date of the AHC’s decision. The AHC held that Appellant’s, fitness center was a place of recreation and, consequently, was subject to sales tax for membership fees under section 144.020.1(2). This case is a petition for review of the AHC’s decision.

II.

The language of section 144.020.1(2) indicates that a facility is subject to sales tax when three elements are present: (1) an amount is paid for admission and seating, or fees are paid; (2) the amount or fee is paid to or in a “place”; and (3) the place is one “of amusement, entertainment or recreation, games and athletic events.” The first and second elements are not at issue in this case, and the sole question is whether Appellant’s fitness center is a “place of amusement, entertainment or recreation, games and athletic events.” Although the terms in this clause are of common usage, one must look closely to understand the meaning of the clause as a whole.2 The use of conjunctions and placement of commas within the clause are critical. As a matter of proper grammar, the five terms — amusement, entertainment, recreation, games and athletic events — are effectively grouped together in three categories: 1) places of amusement; 2) places of entertainment; and 3) places of recreation, games and athletic events. It is uncontested that Appellant’s fitness center is neither a place of amusement nor a place of entertainment. As to the third category, the use of the conjunction “and” requires that all three elements — recreation, games and athletic events — must be present, and it is not sufficient to determine only whether the facility is a place of recreation. Because the fitness center does not offer games or athletic events, it cannot be characterized as a place of recreation, games and athletic events.

In the several prior cases interpreting this clause, this Court has never focused on the manner in which the conjunctions and commas are used. Instead, the words “amusement, entertainment or recreation” have been grouped as a single category and generally treated synonymously without regard to the remaining words “games” and “athletic events.” See Moon Shadow, Inc. v. Director of Revenue, 945 S.W.2d 436, 437 (Mo. banc 1997) (referring interchangeably to “placets] of amusement, entertainment or recreation” and to “placets] of amusement”); High Adventure Game Ranch, Inc. v. Director of Revenue, 824 S.W.2d 905, 906 (Mo. banc 1992) (referring to “placets] of amusement, entertainment or recreation”); Fostaire Harbor, Inc. v. Director of Revenue, 679 S.W.2d 272, 273 (Mo. banc 1984) (referring interchangeably to “placets] of amusement, entertainment or recreation” and to “placets] of amusement”); L & R Distributing Co. v. Dept. of Revenue, 648 S.W.2d 91, 94-95 (Mo. banc 1983) (“L & R Distributing II ”) (referring to “places of amusement, etc.”); Spudich v. Director of Revenue, 745 S.W.2d 677 (Mo. banc 1988) (referring to the terms “amusement,” “entertainment” and “recreation,” and focusing on the term “amusement”); Blue Springs Bowl v. Spradling, 551 S.W.2d 596, 598-99 (Mo. banc 1977) (referring interchangeably to “placets] of amusement, entertainment or recreation” and to “placets] of amusement, etc.”); L & R Distributing, Inc. v. Dept. of Revenue, 529 S.W.2d 375, 378 (Mo. banc 1975) (“L & R Distributing I”) (referring interchangeably to “placets] of amusement or entertainment,” to “placets] of amusement,” and to “placets] of amusement, etc.”). The analysis used in these cases further indicates a tendency to mix and match these terms. Moon Shadow, *809945 S.W.2d at 437 (concluding that a budding was not a “place of amusement” because it did not offer “amusement, entertainment or recreation activities”); Fostaire, 679 S.W.2d at 273 (concluding that helicopter tours were “places of amusement” because they were “entertaining and recreational”). None of these cases have focused solely on the meaning of the term “recreation.” That the words “games and athletic events” have been ignored can possibly be explained by the fact that no prior case involved a place where games and athletic events were offered. In any event, the word “recreation” is more properly viewed as the first word in the separate category of “recreation, games and athletic events.”

Arguably, the statute is ambiguous despite its grammatical structure because “recreation” is in a sense synonymous with or at least overlaps with the words “amusement” and “entertainment.” In the internal context of the clause, the words fit well together. On the other hand, “recreation” fits just as well with “games and athletic events,” which are, in fact, important types of recreation that the legislature may well have intended to emphasize. Even if the clause is somehow ambiguous, this Court abides by the rule of construction that statutes imposing taxes are to be construed against the taxing authority and in favor of the taxpayer. Old Warson Country Club v. Director of Revenue, 933 S.W.2d 400, 403 (Mo. banc 1996); Delta Air Lines, Inc. v. Director of Revenue, 908 S.W.2d 353, 356 (Mo. banc 1995). Utilizing this rule, any ambiguity must be resolved by rejecting the notion that “amusement, entertainment or recreation” is a single category for purposes of taxation.

We hold that the pertinent category for taxation under section 144.020.1(2) is “recreation, games and athletic events.” Because it is uneontested that the fitness center does not offer games and athletic events, it is not subject to the sales tax.

III.

The dissent argues that section 144.020.1(2) should be viewed as designating three categories of places that are subject to sales tax, one of which is the category of amusement, entertainment or recreation. Under this theory, if the facility in question falls within the scope of any one of these three terms, then it is subject to sales tax. However, even if this court accepts the statutory construction proposed by the dissent, Appellant’s fitness center is still not subject to sales tax. It is uneontested that Appellant’s fitness center is not a place of amusement or entertainment, and the facts in this ease do not establish that the fitness center is a place of recreation.

The term “recreation” is not statutorily defined. Thus, this Court must consider standard canons of statutory construction in determining whether the fitness center at issue falls within the scope of this term. Spudich, 745 S.W.2d at 680. “The purpose of statutory construction is to seek the intent of the legislature.” Id. In examining the legislature’s intent, we assume that the legislature did not intend a strained construction of the term “recreation.” Moon Shadow, Inc., 945 S.W.2d at 437. And, once again, we are guided by the general rule that statutes imposing taxes are to be construed against the taxing authority and in favor of the taxpayer. Old Warson Country Club, 933 S.W.2d at 403; Delta Air Lines, Inc., 908 S.W.2d at 356. Moreover, absent a statutory definition, the words used in the statute will be given their plain and ordinary meaning as derived from the dictionary. Moon Shadow, 945 S.W.2d at 437; Spudich, 745 S.W.2d at 680.

In the Spudich decision, this Court recognized the common dictionary definition of recreation: “Recreation” is “a means of getting diversion or entertainment.” Spudich, 745 S.W.2d at 680 (citing to Webster’s Third New International Dictionary, 1899 (1966)). This Court has also considered the meaning of the term “place,” and has found that “[a] ‘place’ is ‘a building or locality used for a special purpose’.... Webster’s Third New International Dictionary 1727 (1976).” Moon Shadow, 945 S.W.2d at 437. Thus, in the context of section 144.020.1(2), a place of recreation is a budding or locality that has as its special purpose, the facilitation of diversion or entertainment. The focus of the analysis, when applying section 144.020.1(2), *810is necessarily on that special purpose, or more accurately, on the primary purpose of the facility involved. If the primary purpose of a facility is to facilitate diversion or entertainment, then the facility is a place of recre^ ation and is subject to assessment of sales tax under section 144.020.1(2).

Having determined that application of section 144.020.1(2) turns on the primary purpose of the facility involved, this Court must now consider the primary purpose of Appellant’s fitness center. Appellant contends that his fitness center operates with a primary purpose of allowing members to improve their health through a program of physical exercise. In contrast, the Director contends that the fitness center provides members with a pleasant diversion and enjoyment through physical exercise. In essence, the parties agree that Appellant’s fitness center facilitates exercise, but they disagree regarding the purpose of the exercise that is facilitated. The problem is that the term exercise connotes activity that has both health-related aspects and recreation-related aspects. The dual nature of exercise poses a dilemma when attempting to determine whether an exercise facility is subject to sales tax under section 144.020.1(2).

This Court has previously recognized that a facility may have a dual nature in that it provides both recreational and non-recreational benefits. Spudich, 745 S.W.2d at 680-81; Fostaire Harbor, Inc., 679 S.W.2d at 273. In that regard, the mere fact that minor recreational activities occur in a certain facility does not make that facility a place of recreation. L & R Distributing I, 529 S.W.2d at 378. When considering facilities that have a dual nature consisting of recreational and non-recreational elements,, this Court must identify the primary purpose of that facility, and in that process consider how the facility would be viewed “within normal contemplation.” Spudich, 745 S.W.2d at 681; L & R Distributing II, 648 S.W.2d at 94. Indeed, even the comparative amounts of revenue derived from recreational and non-recreational sources are not dis-positive on the issue of whether a facility is viewed as being a place of recreation. Spu-dich, 745 S.W.2d at 681 (holding that a billiard center was- a recreational facility despite the fact that it took in more revenue from non-recreational activities than it did from recreational activities).

The critical issue in this case is whether the primary purpose of Appellant’s fitness center in facilitating exercise is to provide health benefits or to provide recreation. In other words, are the recreational aspects of the exercise that is facilitated incidental to the health benefits, or are the health benefits incidental to the recreational aspects? This is a fine line. The primary and incidental purposes of exercise vary greatly depending on the nature of the exercise involved. Some types of exercise, such as racquetball or tennis, would be commonly viewed as primarily recreational activities, although they undeniably provide a health benefit to the participants. Other types of exercise, such as pushups and situps, would be commonly viewed as activities engaged in primarily for health benefits. To resolve this case, we must determine whether the particular types of exercise facilitated by Appellant’s fitness center, and the surroundings and circumstances in which that exercise is facilitated, have a primary purpose of providing health benefits or recreational benefits.

As indicated above, there is a fine line between exercise that is primarily focused on health benefits and exercise that is primarily focused on recreation. Determining the type of exercise involved in a particular ease is a process that depends on the evidence provided in each individual case. In the present case, the Director provided virtually no evidence to refute Appellant’s proof that the primary focus of his fitness center is to facilitate improved health through physical exercise. Based on the evidence presented, we conclude that Appellant’s fitness center operates with a primary purpose of allowing members to improve their health through a program of physical exercise. As stated, the fitness center is divided into different areas designed to address different aspects of health improvement. It does not, on the other hand, accommodate a variety of activities that are traditionally considered recreational such as tennis, swimming, racquetball *811and basketball. The focus of Appellant’s fitness center is on improving health, and not on pursuing diversion or entertainment.

It is certainly true that some aspects of Appellant’s fitness center, such as the background music, the televisions in the cardiovascular section, and the hot tubs and saunas, may be viewed as diverting or entertaining activities. But, these elements constitute a minimal component of Appellant’s fitness center. As was the case in L & R Distributing I, the presence of these diverting and entertaining elements does not act to convert Appellant’s entire fitness center into a place of recreation. It may also be true that some members of Appellant’s fitness center find the use of the exercise equipment to be pleasant and enjoyable, in addition to being of benefit to their health. However, the analysis under section 144.020.1(2) focuses on -the basic purpose of the facility involved and not on the subjective interests of certain members of that facility. The basic purpose of Appellant’s fitness center is clearly improvement of health through physical exercise.

IV.

Because Appellant’s fitness center is not a place of “recreation, games and athletic events,” we hold that the basic membership dues for the fitness center are not subject to sales tax under section 144.020.1(2). Furthermore, even if the statute focused solely on places of recreation, Appellant’s fitness center would still not be subject to sales tax because under the evidence it does not constitute a place of recreation. For these reasons, the decision of the AHC is reversed, and the ease is remanded.

ROBERTSON, J., concurs. COVINGTON, J., concurs in part III only. WHITE, J., concurs in part III and concurs in result in separate opinion filed. BENTON, C.J., dissents in separate opinion filed. PRICE and HOLSTEIN, JJ., concur in opinion of BENTON, C.J.

. All statutory references are to RSMo 1994 unless otherwise indicated.

. Inexplicably, the legislature has used similar but inconsistent language at various points in the sales tax provisions. Section 144.020.1(2) refers to places of “amusement, entertainment or recreation, games and athletic events.” Section 144.020.1(8) drops the phrase "games and athletic events,” and merely refers to places of "amusement, entertainment or recreation.” Section 144.010.1(9)(a), RSMo Supp.1997, is virtually identical to section 144.020.1(2), but changes the word "or” to "and” so that the phrase refers to places of "amusement, entertainment and recreation, games and athletic events.”