Extras on Excise: As Tennessee’s Adult Entertainment Tax Starts July 1, Three Lessons From a Decade of the Texas ‘Pole Tax’


Tennessee is the newest state to add a tax on adult entertainment to its repertoire of excise taxes and fees.The new law, going into effect July 1, imposes a $2 tax for every customer admitted to an adult performance business. Tennessee establishments will fall under the umbrella of “adult performance business,” and therefore must pay the tax, if they meet three criteria:

  1. the business is an adult-oriented establishment under Tennessee law;
  2. the business provides live nude entertainment or live nude performances for an audience of two or more individuals; and
  3. the business permits alcohol consumption on the premises.

The Tennessee law is nearly a carbon copy of the Texas Sexually Oriented Business Fee (a.k.a. SOBF or the Texas Pole Tax). The SOBF, at $5 per customer, has generated about $6.9 million in revenue for Texas since it began in 2008, Bloomberg Tax’s Andrew Ballard reports. Though that revenue figure indicates that the tax has been a success for the state, the tax has been fought hard in court battles and administrative proceedings by a large number of Texas businesses over the past decade.

 Tennessee’s adult entertainment businesses would be wise to study the lessons Texas businesses have learned over the past years under the SOBF.

Lesson #1. Don’t Bet on the Tax Being Held Unconstitutional (You May Lose Your Shirt)

According to Texas Tax Group, when the Texas Sexually Oriented Business Fee became effective in 2008, “certain of the SOB clubs believed that the law would be found unconstitutional … [and] many clubs simply did not file any returns nor did they report any SOB [f]ees.” After various court challenges arguing First Amendment and Texas constitutional violations, the constitutionality of the SOBF was ultimately upheld in 2014.

 As a result, Texas sexually oriented businesses, many of which had not paid the SOBF during the years the tax was being litigated, became liable for years of retrospective taxes, often to the tune of hundreds of thousands of dollars.

 If the new Tennessee tax faces the same kind of legal battle as did its Texas twin, Tennessee businesses would be wise to have a plan in place for how they might cover the tax if legal challenges are unsuccessful.

Lesson #2. ‘Nude’ Covers a Lot More Than You May Think

As the nickname suggests, the Texas SOBF brings to mind establishments where dancers are in some state of undress. But the way that the law was written and enforced in Texas meant that it has been applied to many businesses that were surprised by their inclusion under the sexually oriented business umbrella. As reported in 2017 by Bloomberg Tax’s Laura Lieberman, the SOBF has attracted many administrative challenges pertaining to the question, “whether entertainers were nude enough for the SOBF to apply.”

For context, the Texas SOBF statute Texas SOBF statute provides that “nude” means “entirely unclothed” or leaves certain portions of the anatomy visible through “less than fully opaque clothing.”

In several cases, businesses in Texas were found liable for the SOBF because their female entertainers did not follow the businesses’ dress codes.

The new Tennessee law is similar to Texas, in that it defines nude as “entirely unclothed” or exposes portions of the human body to public view, “even if partially covered by opaque material or completely covered by translucent material, including swim suits, lingerie, or latex covering.”

If a Tennessee bar or club wants to avoid paying $2 for every customer, they should have an airtight compliance plan both in writing and which is consistently enforced. As the examples show, even a single employee violation of the dress code could lead to years’ worth of tax liability.

Lesson #3. You Need to Count Customers

As businesses that serve alcohol and have been through an audit know, if they don’t have solid records to back up their numbers, they risk being subject to tax liability based on estimates by the taxing authority. And the calculus will rarely work in favor of the taxpayer.

Often, the Texas Comptroller’s office estimates the number of customers for sexually oriented businesses based on whatever limited information was available at the time. In some cases, that is done through observing how many customers enter the establishment on a few nights and then using that to estimate SOBF liability for the period at issue. Some assessments were calculated using an audit method used for auditing compliance with mixed beverage taxes. But absent records or other documentation demonstrating how many individuals entered an establishment during the time period at issue, it is a large burden for a taxpayer to prove that the comptroller’s estimate is incorrect.

For example, in Texas Comptroller’s Decision, Hearing No. 113,818, a manager testified that during the period in question the bar had about 160 customers a week. However, the auditor used vendor-reported purchases of alcohol to estimate the number of patrons, which was the best information available to calculate the number of customers, absent other documentation. In the end, an $885,591.80 assessment plus penalties and interest was upheld against the business.

Starting July 1, any Tennessee adult performance business needs to have a protocol in place to track the number of customers and keep excellent documentation. To do otherwise may lead to harsh tax consequences.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you expect Tennessee’s new adult performance business tax to face constitutional challenges?

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