Are the entry fees participants pay to enter a tournament subject to Alabama sales (amusement) tax when the organizer collects the fees and pays them all back out to participants as prize money?

Plain-English summary

A 501(c)(3) organization sponsored a national tournament (the holding identifies it as a bowling tournament) that Alabama cities hosted — City B in 1994 and City A in 1997. More than 50,000 entrants each paid an entry fee to participate, and those fees were paid back out to the participants as prize money. The sponsor asked whether the entry fees are subject to Alabama sales tax as gross receipts from operating a place of amusement.

Alabama's amusement tax lives in the sales tax statute: § 40-23-2(2) imposes a 4% tax on the gross receipts of any person in the business of conducting or operating a place of amusement or entertainment in the State. The Department's rules apply that tax to admission fees charged to the public and to other amounts the operator charges and retains (e.g., Rule 810-6-1-.125 on places of amusement, Rule 810-6-1-.125.01 on public golf courses, Rule 810-6-1-.139 on fairgrounds parking).

The Department ruled the entry fees are NOT taxable, for two independent reasons:

• The operator doesn't keep the money. The receipts the amusement tax reaches are those retained by the operator. Here the entry fees are returned to participants as prize money — a pass-through, not receipts the operator keeps. Any portion used to offset tournament expenses is incidental to the fees' purpose as a source of prize money.
• It isn't an ongoing Alabama "business." Even though a national organization conducts the tournament, hosting it in Alabama once in 1994 and once in 1997 is not an activity or business regularly engaged in or continuing within the State, so the operator isn't "in the business of" operating a place of amusement here.

Holding: entry fees paid by participants in a bowling tournament that the sponsor returns to them as prize money are not subject to Alabama sales tax.

What this means for you

Pass-through prize pools generally aren't taxable amusement receipts

If you collect entry fees and pay them back out as prize money, Alabama's amusement tax — which reaches receipts the operator retains — generally does not apply to that pass-through. The key is that the money isn't the operator's gross receipts; it belongs to the prize pool. Keep records showing the fees flowed through to winners.

"Incidental" expense offsets don't change the result

The ruling tolerates using some of the entry-fee pool to offset the cost of running the event, treating that as incidental to the pool's prize-money purpose. But a structure where the operator effectively keeps a meaningful cut (a retained admission or service charge) is a different case — retained amounts are exactly what § 40-23-2(2) taxes.

Regularly operating a venue is the taxable activity

The amusement tax targets someone in the business of operating a place of amusement. A genuinely one-off or occasional event by an organization not regularly running amusement activities in Alabama may fall outside the tax on that ground alone — but a venue or promoter operating on a continuing basis is squarely within it.

This is one ruling, on its own facts

Under § 40-2A-5 the ruling is not precedent and binds the Department only as to the sponsor and facts described. Admissions, spectator charges, concessions, and retained service fees can be taxable even where a pass-through prize pool is not — analyze each charge separately.

Common questions

Q: Are tournament or contest entry fees subject to Alabama sales tax?
A: Not when they are returned to participants as prize money. The amusement tax under § 40-23-2(2) reaches receipts the operator retains; a pass-through prize pool the operator doesn't keep is not taxed (Revenue Ruling 93-003).

Q: What is taxed under Alabama's amusement tax?
A: The 4% sales tax applies to the gross receipts of a person in the business of operating a place of amusement or entertainment — including admission fees charged to the public and other charges the operator keeps (Department Rules 810-6-1-.125, -.125.01, -.139).

Q: Does it matter that a nonprofit ran the event?
A: The ruling's reasoning turned on the fees being paid out as prize money (not retained) and the event not being an ongoing Alabama business — not on the sponsor's 501(c)(3) status. Don't assume nonprofit status alone exempts amusement receipts.

Q: Can I rely on this ruling for my event?
A: No. Ala. Code § 40-2A-5 makes revenue rulings non-precedential; this one is limited to the sponsor's facts. Confirm the treatment of your specific charges.

Citations and references

Statutes and rules:

• Ala. Code 1975 § 40-23-2(2) — 4% sales tax on the gross receipts of a place of amusement or entertainment
• Alabama Dept. of Revenue Rule 810-6-1-.125 — receipts from operating places of amusement
• Alabama Dept. of Revenue Rule 810-6-1-.125.01 — receipts of golf courses open to the public
• Alabama Dept. of Revenue Rule 810-6-1-.139 — receipts from parking on fairgrounds
• Ala. Code 1975 § 40-2A-5 — revenue rulings are not to be used or cited as precedent

Source

• Landing page: Alabama Department of Revenue -- Revenue Rulings
• Original PDF: https://www.revenue.alabama.gov/wp-content/uploads/2022/06/2017_05_RR-93-003.pdf

Original ruling text

State of Alabama
Department of Revenue

Montgomery, Alabama 36132 GEORGE E. MINGLEDORFF Il
Assistant Commissionet
GEORGE E. MINGLEDORFF III LEWIS A. EASTERLY
Somme ss oer Acure Secretan

This document may not be used or cited as precedent. Code of
Alabama 1975, §40-2A-5(a).

TO:

FROM: Commissioner of Revenue
Alabama Department of Revenue

DATE: November 30, 1993

RE: Revenue Ruling 93-003

ISSUES AND FACTS

City A, Alabama will host a national tournament in 1997. City
B, Alabama will host the tournament in 1994. The tournaments
are expected to attract more than 50,000 entrants who will
participate in the tournament. Each person is required to pay
an entry fee to participate in the tournament. The entry fees
are returned to the participants as prize money. The sponsor of
the tournament has also qualified with the Internal Revenue
Service as a 501(c)(3) organization.

The request for a revenue ruling concerns whether the entry fees

paid to participate in the tournament are subject to Alabama
sales tax as a gross receipt from operating a place of amusement.

LAW AND ANALYSIS

Code of Alabama 1975, §40-23-2(2) imposes a 4% tax upon the
gross receipts of any person in the business of conducting or
operating a place of amusement or entertainment within the State
of Alabama. Regulations promulgated by the Department of
Revenue consistently impose a tax upon admission fees which are
charged to the general public and also upon other amounts
charged by the operator which the operator retains. See Rule
810-6-1-.125, receipts from operating places of amusement, Rule
810-6-1-.139, receipts from parking on fairgrounds and Rule
810-6-1-.125.01, receipts of the golf courses open to the public.

However, the receipts which are subject to tax are retained by
the operator of the place of amusement. The entry fees which
are paid to participate in the tournament are returned to the
participants as prize money. The entry fees are not retained by
the operator of the place of amusement. Therefore, the entry
fees are not subject to the amusement tax as a gross receipt

from operating a place of amusement. Any portion of the entry
fees used to off-set expenses from operating the tournament is
incidental to their purpose as a source of funds for prize
money.

Although the national organization will conduct and operate the
tournament, the national organization will not operate the
tournament aS an ongoing "business". Although the State of
Alabama is fortunate to have two cities host the tournament in
1994 and 1997, this is not an activity or business regularly
engaged or continuing within the State of Alabama.

HOLDING

Entry fees paid by participants in a bowling tournament which
the sponsor of the tournament returns to the participants as
prize money are not subject to Alabama sales tax.

GEORGE E. MINGLEDORFF/ Ill

JWH:eb240