“Adult entertainment” evokes a host of ideas, images, and opinions. Sales tax isn’t usually one of them. But sales tax has a way of touching everything, and so it didn’t surprise me to find it featured in a case involving New York strip clubs.

Do policy makers penalize salacious businesses activities with special taxes? Does what’s taxed, or not taxed, reflect the morality or prejudices of legislators? Should it?

Several years ago, the New York Court of Appeals decided that admission charges for adult entertainment in strip clubs are subject to tax because “performances by women gyrating on a pole to music” don’t qualify for the exception for dramatic or musical arts performances. The decision was criticized by Judge Robert S. Smith, who in his dissenting opinion chided the majority for making “a distinction between highbrow dance and lowbrow dance that is not to be found in the governing statute and raises significant constitutional problems.” Yet the Supreme Court of New York refused the club’s petition for a writ of certiorari.

Now another case involving sales tax in an adult entertainment club brings up similar issues. The owners of a Manhattan club (plaintiffs) contend that the “Beaver Bucks” or “scrips” customers purchase to tip the club’s employees, gain access to private rooms, and pay for lap dances should be exempt from New York Amusement Tax and Cabaret Tax. The New York Department of Taxation and Finance maintains sales of the currency are taxable. At stake is more than $2 million in back sales tax, interest, and penalties.

It’s not reality, it’s just a fantasy

The plaintiffs build their case on several points. Echoing the dissenting opinion referenced above, they question the constitutionality of the tax laws, which “infringe on their right to free speech … by imposing a differential tax on protected expression based on content … and allowing for different treatment of New York businesses engaging in constitutionally protected activities.” They maintain that the performances at their club are tax exempt under New York laws.

Patrons must pay a cover charge to enter the club, where dance entertainment is regularly performed by both clothed and topless performers. Once inside, they may purchase the scrips / Beaver Bucks that are marked “Good for entertainers and tips only.” The court opinion notes that “the scrips cannot be redeemed for beverages, merchandise, or the cover charge required to enter the club.”

When the plaintiffs challenged the tax determination before an administrative law judge (ALJ), the judge concluded the sales of scrips / Beaver Bucks were taxable because the club was selling taxable sexual fantasy, not exempt dance performances. She added: “Movements, whether dance moves or other choreography, that comprise an entertainer’s routine and that appeal to the patron, are ancillary to the ultimate service sold, which is sexual fantasy.” Would the scrips still be fantasy — and taxable — if the dancers wore clothes and didn’t sit on laps?

Define “art”

Under New York tax law, admissions to many forms of amusement are taxable but charges for admission to “dramatic or musical arts performances” are exempt. Section 1101[d][5] defines “dramatic or musical arts admission charge” as “any admission charge paid for admission to a theatre, opera house, concert hall or other hall or place of assembly for a live dramatic, choreographic or musical performance.” The plaintiffs contend that this leaves room for interpretation and they accuse Division of Taxation and Finance (DTF) of allowing morality to interfere with correct interpretation of the law.

However, the Court of Appeals reminds that the “legislature may enact tax exemptions to subsidize certain forms of expression ‘to the advantage of some forms of expression or speakers, but not others.” It underscores that “the taxes imposed on plaintiffs are equally applicable to many other types of entertainment and recreational activities” and that the club’s activities are not “’singled out for special treatment’ based on their erotic, sexual, or adult nature.” Rather:

“The performances merely happen to fall under the very broad categories of ‘entertainment’ or amusement,’ for purposes of the Amusement Tax, and ‘public performance for profit’’ for purposes of the Cabaret Tax.”

Finally, the opinion points out that the taxable sale is of the scrips, the in-house currency used for multiple purposes. “Undoubtedly, there can be no meritorious First Amendment challenge to imposing taxes on the sale of such multiuse in-house currency.” Read the full decision here, CMSG Restaurant Group, LLC, v. The State of New York.

Tax those sins

There is a long, rich tradition of taxing so-called sinful products like alcohol and tobacco, and there’s a growing movement to tax soda and other sugary drinks. Sin taxes can reduce consumption of products with potentially harmful health consequences, thereby reducing state healthcare costs; they also raise revenue, since consumers love their drinks and smokes and will pay for them in spite of higher taxes. Although they’re often called regressive, they remain popular in many states: on November 8, Californians voted to substantially increase their tobacco taxes, and four western cities saw taxes on sweetened beverages approved. Perhaps a tax on “sexual fantasy,” as the New York ALJ judge said, is in step with that trend. After all, states are exploring how to capture tax revenue from fantasy sports and augmented reality games like Pokémon Go.

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