Several nightclub owners in Ballard, Fremont, and Capitol Hill had every reason to believe their businesses were current on taxes. But within the last seven months, state auditors told at least three Seattle club owners that, in fact, they owed thousands of dollars in back taxes—up to $210,000 in one instance—due to a vaguely worded state code originally written to tax aerobics and jazzercise studios.

"This is the first time, in my experience, that they've applied this tax to music venues," says Seattle Office of Film + Music director James Keblas. "I'm worried about all our live music venues—even nonprofits—suddenly being audited and being told to pay or they'll be shut down."

The owner of one such bar, who asked to remain anonymous, concurs that unless the state waives the huge, unexpected bill, "I'll be shut down." And at this rate, the bar owner continues, the state is "going to shut down more businesses."

But the state Department of Revenue (DOR) insists the tax, which is being applied to venues where people can dance, is nothing new. "It is not a new interpretation of the code, we've always been doing this," says Mike Gowrylow, a spokesman for the DOR.

Now, club owners around the city are petitioning the state to clarify the code and forgive their past debts—which the state is attempting to collect retroactively for several years—before it bankrupts them. We can't name the bars involved, but you've probably heard of them. None of the nightclub proprietors contacted by The Stranger would speak on the record for fear of reprisal from the DOR, which confirms that it intends to collect the money from bars and clubs.

"We assume everyone is paying the tax if it applies to their business," says Bob Palen, a tax specialist at the DOR.

At the heart of the controversy is a vaguely worded, decades-old law (WAC 458-20-183) that leverages a 9.5 percent sales tax on amusement, recreation, and physical fitness activities like golf, billiards, swimming, and "charges made for providing the opportunity to dance." At first blush, that last part seems like a reference to concert ticket sales. But it was actually added in 1993 to address the state's (then) booming jazzercise and aerobics industry, according to Palen. In fact, the code refers to "exercise classes" and "physical fitness services," but never lists music clubs or dancing as taxable services.

Gowrylow says that auditors are cracking down on the code after the DOR discovered last year that gyms and other private sporting clubs weren't charging a sales tax on membership fees. "We identified it as a problem and sent a special notice to all the groups affected by the law that they were supposed to charge sales tax."

But club owners say they didn't receive the notice. "It would've been buzzed about in the industry, we would've been aware of it," says the club owner.

Informally called the dance tax, it's more appropriately called the "opportunity to dance" tax—and it covers more than just dance. Other businesses that fall under the law include karaoke bars, comedy clubs, and any other venue that provides opportunities for people to "sweat," according to Palen. He explains it this way: "If you pay a cover charge to get in and you're just sitting around listening to the music or whatever, if you can't participate, there's no sales tax. But if there's a dance floor where you could dance—you don't have to dance but the opportunity is there—or if there's a microphone available for standup comedy or karaoke, there's a tax. It's a tax on the opportunity."

Meaning every venue that has a dance floor—even if it's not being used—or offers karaoke or an open-mic night is subject to the sales tax. On average, businesses are audited every four years. But now if venues are found failing to collect the 9.5 percent tax, Palen says auditors could apply taxes going back "anywhere from four years to infinity."

It's no secret the state is scraping for money. The legislature has been tasked with filling multibillion-dollar deficits for the past several years (the state faced a $5 billion-plus shortfall for the 2011–2013 biennium). But while the state cuts several programs each year, the legislature also gives away hundreds of millions of dollars in tax breaks to software makers, airplane builders, Wall Street banks, and other large industries. The DOR isn't tasked with filling the deficit, auditors certainly don't have quotas to meet, but the state is clearly clawing for new revenue wherever it can get it—even if it's from the back pockets of small business owners.

Club owners say the state auditors have been single-minded and, in some cases, aggressive. "My auditor... came in with an obituary of a girl who committed suicide," says another club owner. "When I argued that we aren't primarily a dance club—we have 'No Dancing' signs up everywhere—she flashed this obit that said the girl liked to dance at [our club]. The auditor said, 'I know this is ridiculous, but I have to do this.'"

The impacts may trickle down to bands and patrons, the owners warn. Another club owner explains, "A sales tax cuts into their portion at the door," which means either bands will be paid less for playing or concertgoers will be charged more.

Right now, several bars are under the microscope while others are lying low (but still not talking about it on the record). "Businesses that haven't been audited can continue to gamble with not paying the tax until the law is clarified," the bar owner continues. "But every music venue that's been audited is held to another set of standards—and it's going to put us out of business."