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Planet Fitness shows entrepreneurial spirit by dodging tanning excise tax

 

Planet Fitness shows entrepreneurial spirit by dodging tanning excise tax

The 2010 excise tax on tanning has been used as leverage by some health clubs to win in the indoor tanning market

Brandon Lafving
by Brandon Lafving, IRS contributor (@TechDragoon)

Part of the health care overhaul began in 2010 when a new excise tax was levied on indoor, ultraviolet tanning. The IRS now collects 10% of consumer tanning purchases. The tax was intended to help pay the increasing costs of healthcare under the Affordable Care Act. Over the next ten years, the tax is scheduled to reap $2.7 billion.

Natural reactions to this tax could be:

  1. Rolling your eyes (as a Republican), or
  2. Applauding the fiscal responsibility of a bill that pays for itself (as a Democrat)

But at least one business owner bypassed this emotional investment and saw a market opportunity.

The new excise tax included a number of provisions (as they always do). These are intended to guard against potential loopholes, or from causing unintended and damaging consequences. The tanning tax was intended to shun ultraviolet tanning because it was correlated with skin cancer, so they exempted spray-on tanning from the 10% levy, for instance.

They also did not intend for health clinics to be docked. Many health clinics use tanning beds to practice 'phototherapy,' which treats seasonal affective disorder, insomnia and a variety of other conditions by exposing the patient to certain wavelengths of light.

These health clinics would have been forced to fork over the 10% tax even though treatments do not expose patients to harmful levels of ultraviolet light. So politicians threw in a provision, exempting qualifying health clinics from the excise tax. The provision became a market opportunity.

READ: Can you deduct your gym membership?

Gyms, like Planet Fitness, set up shop to meet all the qualifying criteria for the health clinic exemption. Tanning services were very clearly laid out as a small percentage of the business. You can buy a special, more costly membership at Planet Fitness, which provides unlimited access to its tanning beds, but there is no way to buy only the tanning without the gym. Also, the physical space of the tanning salon is only a small percentage of the total gym space.

These and other characteristics fit neatly within the qualifications for exemption, which stipulate that tanning cannot be a primary source of income, that customers must use the gym facilities more than the tanning facilities, that advertising must reflect the primary business, etc.

In one deft stroke, health clubs were able to set up two businesses under the same roof and gain a 10% competitive advantage in the tanning business.

READ: 5 goods you would not expect to be taxed

No wonder Planet Fitness opened 100 new locations in 2012, bringing the chain to over 600 gyms and counting… counting like a fourth grader on ADHD meds.

The tanning excise tax and follow-through is an example of how:

  • Tax policy creates market opportunities, sometimes on accident;
  • Positive thinking can lead entrepreneurs to success where others bemoan change and fail; and
  • Provisions and loopholes can be the same thing.