NC tax changes mean new admission charges for arts and sporting events

by David Ranii, News and Observer, November 24, 2013.

When Ambassador Entertainment raises the ticket prices at its four Raleigh movie theaters in January – its first price hike in four years – moviegoers will receive leaflets blaming the increase on state legislators and Gov. Pat McCrory.

“I plan to put responsibility where responsibility is due,” said Bill Peebles, president of Ambassador, whose theaters include the Rialto and Mission Valley Cinema.

The upcoming expansion of the state sales tax to a broad range of admissions charges – including movies, college and professional sporting events, concerts, plays and museums – means that arts patrons and sports fans alike will probably pay more to enjoy their favorite pastimes.

Some arts organizations fret that attendance could suffer as a result, but legislators who supported the expansion of the sales tax say the tax isn’t large enough to be a deterrent.

The new sales tax structure goes into effect Jan. 1. Because of a peculiarity in the law, its impact won’t be felt until months later at many venues. However, movie theaters are responsible for the sales tax – which ranges from 6.75 percent to 7.5 percent, depending on the county – from Day One.

“The losers here are the general public,” Peebles said. “I’m passing the full 6.75 percent on to the public. ... I can’t absorb that. I have to make money. I have to pay bills.”

Peebles said he hasn’t yet determined how much he’ll raise prices, but the $8 admission price at Ambassador’s theaters will probably climb 50 cents or 75 cents.

The expansion of the sales tax to admission tickets that previously were exempt is one of the revenue-raising tradeoffs that came with the Republican-led legislature’s decision to cut personal and corporate income tax rates. The theory is that aligning income taxes to the lowest levels of neighboring states will boost the overall economy by spurring job creation and putting more money in people’s pockets and in corporate coffers.

“We need to (tax) in a simpler way, a fairer way,” said Sen. Bob Rucho, R-Mecklenburg County, who co-sponsored the sweeping tax bill passed by the legislature this year and signed into law by McCrory. “We tried it the other way. It doesn’t work.”

Passing it on

Many organizations that will be subject to the sales tax for the first time – including the N.C. Symphony, the UNC athletics department, Playmakers Repertory Company, Marbles Kids Museum and the Carolina Hurricanes – haven’t yet determined how the the new tax will affect ticket prices.

“It is obviously a large change, and we want to take the time to evaluate our options,” said William Traurig, the Hurricanes’ senior vice president and general counsel.

But it would be difficult for venues to avoid passing the increase on to ticket buyers one way or another.

“I don’t know of a single organization that could absorb a 7 percent or 7.5 percent increase in their expenses,” said Karen Wells, executive director of Arts North Carolina, an advocacy group for 250 nonprofit arts groups.

“I think most of our performing arts organizations work on very narrow margins,” said Roger Krupa, who runs the Progress Energy Center for the Performing Arts – home to organizations such as Broadway Series South and the N.C. Symphony – as director of the Raleigh Convention Center. “It wouldn’t surprise me that (the sales tax) will be reflected in ticket prices somewhere down the line.”

But any impact on ticket prices will be delayed well beyond Jan. 1 for many events. The Department of Revenue has concluded that tickets that initially go on sale before Jan. 1 are not subject to the new tax – even when someone purchases those tickets in 2014.

In other words, if tickets are on sale today for a play that is scheduled to be performed in April, the sales tax does not apply – regardless of whether you buy the tickets tomorrow or on the day of the show next spring.

Since sports teams and arts groups typically put their tickets on sale well in advance, it will be business as usual for the short-term.

The earliest Hurricanes tickets would be affected, for example, is if the team makes the playoffs in April. If that doesn’t happen, the impact would be delayed until next season’s tickets go on sale.

Movie theaters, however, are slated to begin collecting the tax on Jan. 1.

Replaces existing taxes

Some of the affected groups already are paying a different tax tied to their receipts, but at a lower rate. Movie theaters pay a 1 percent gross receipts tax, and many sporting events are subject to a 3 percent gross receipts tax. These taxes would be supplanted by the new sales tax.

Nonprofit arts groups currently don’t pay any gross receipts tax.

Rucho, the state senator, said eliminating the old gross receipts tax will diminish the impact of the new sales tax for many patrons. For example, movie theaters in a county like Wake, where the sales tax totals 6.75 percent, actually face a net increase of 5.75 percent when you account for the end of the gross receipts tax.

“What that really means is, on a $10 movie ticket, it’s a 57-cent increase,” Rucho said.

The sales tax on admissions should not pose an administrative burden, given that many organizations already pay sales taxes on concessions, he said.

“You look at your your receipts that you have that are taxable, you multiply by the percent, and there’s your number,” Rucho said. “It’s not that hard.”

Arts N.C.’s Wells agrees that someone considering buying a $25 ticket to a play or concert isn’t likely to be dissuaded by a tax that amounts to less than $2. But what about a PTA that is buying concert or theater tickets for hundreds of schoolchildren?

“That 7 percent becomes pretty significant for that PTA,” she said.

The possibility of another wave of venues being subjected to the sales tax also looms on the horizon.

More changes proposed

In an effort to eliminate confusion, a draft bill discussed by the Revenue Laws Study Committee would expand the tax to venues that remain exempt under the new law, including “state attractions,” agricultural fairs, youth sporting events and limited nonprofit events. That would extend the tax to the N.C. Museum of Art, the North Carolina Zoo and the State Fair, among others.

The draft legislation still calls for exempting events at public schools and those sponsored by nonprofit groups with no paid employees.

Wells said the law as it now stands makes no sense because many large arts organizations are exempt while small ones aren’t.

“Under the current law with the current deadline, on Jan. 1 the Museum of the New South in Charlotte would have to begin collecting sales tax, and the N.C. Museum of History would not,” Wells said.

Arts North Carolina is advocating that the effective date of the law be delayed until the legislature acts on the draft bill. The legislature isn’t scheduled to go back into session until May.

Not only would that be fairer, but it also would give small arts groups more time to map out how to implement the new tax collection, Wells said.

“If you are talking about a one-person organization or a two-person organization or even a five-person organization, ... there is nobody existing in this organization to take on this responsibility,” Wells said.

Sure, many arts groups already pay sales tax on concessions, but doing so on tickets is more complex because it can involve multiple venues with “different types of events and different ticket prices,” including prices that are different for the same event depending on the day, she said.

Theater industry not happy

Although McCrory signed the bill into law in July, it wasn’t until last month that it was clear which organizations were affected, Wells said.

“The legislature and, for a time, the Department of Revenue, were very unclear about who was exempt and who was not,” Wells said. “So no one exactly knew who was supposed to be preparing.”

The movie theater industry has been especially outspoken in its opposition to being included in the expanded sales tax. It has continued lobbying against the law.

John Fithian, president of the National Association of Theatre Owners, called it “by far the most significant incremental admissions tax increase we have ever experienced around the country” in a Sept. 26 letter to Art Pope, the state’s budget director. Fithian wrote that the tax would “deter further investment” by the industry, which employs more than 5,000 people in North Carolina.

Herman Stone of Charlotte-based Stone Theatres, which has multiplexes in Morrisville, Fayetteville and Indian Trail, complained that admissions were singled out in the expanded sales tax while services such as haircuts, auto repairs, doctors and dentists remain exempt.

Movie patrons, he said, include very price-sensitive groups – senior citizens, college students and teenagers.

“We don’t need to make it more expensive for people to go to the movie theater,” Stone said.

But, so far, the Hollywood ending that the theater owners are seeking hasn’t materialized.