Sales Tax Slice: Philadelphia’s Tax Hand Stops at Strip Clubs’ Velvet Ropes


State and local municipalities often seek to fill their coffers by expanding the application of their sales and use taxes. Facing mounting deficits, city councilmembers in Philadelphia have been pushing for various sales tax increases, specifically on cigarettes. Recently, however, Mayor Michael Nutter’s office shifted focus toward alternative tax sources: applying amusement tax to lap dances.

The Nutter Administration’s attempt to broaden Philadelphia’s amusement tax was halted last month; the city’s tax reach was stopped at the front door of three of Philadelphia’s largest gentlemen’s clubs: Delilah’s, Club Risqué and Cheerleaders. A Pennsylvania Court of Common Pleas judge upheld a Tax Review Board ruling that the city’s amusement tax does not expansively apply to lap dances in strip clubs.

Philadelphia’s municipal code specifies that the 5 percent amusement tax is imposed “on the admission fee charged for attending any amusement in Philadelphia. Included are concerts, movies, athletic contests, night clubs and convention shows for which admission is charged.” Gentlemen’s clubs are no exception, and entrance fees are subject to the tax. However, the at-issue fees are unique, as they pertained to additional activities taking place beyond the front door. 

At the gentlemen’s clubs, patrons were initially charged admission fees or cover charges at the entrances. Once inside, they could purchase food and drinks, listen to music, and watch stage performances by individual entertainers. In addition, patrons could pay for lap dances within the clubs, either in general seating areas or in private or semi-private areas, which typically ranged in price from $20 to $600. The city’s 5 percent amusement tax, if applicable to the lap dances, would have yielded approximately $1 to $30 per transaction. This amounted to nearly $1.3 million in back taxes, interest and penalties, for the three clubs combined.

The amusement tax language did not provide sufficient guidance as to what other amusement transactions, if any, beyond door admission prices are subject to the city’s tax. The petitioners contended that the amusement tax covered only the admission charge collected at the front door and did not pertain to lap dances occurring within their clubs. Conversely, the city asserted that the tax was to be broadly construed, and applied to fees charged once inside the clubs to patrons who purchased “additional personal entertainment services.”

The Court of Common Pleas disagreed with the city, determining that the ordinance language was simply too vague to be applied to the at-issue dances. The decision was bolstered by the fact that prior city auditors in 2006 limited their assessments for the amusement tax to the admission fees charged for entry into two of the at-issue clubs.

The Pennsylvania ruling could be the culmination of a legal battle dating back nearly two years. The city still has the option to appeal, but in the meantime the courts limited the breadth of Philadelphia’s amusement tax.

The ruling was not the only recent instance of transaction-based tax challenges by adult-themed establishments. In 2012, Nite Moves, an Albany adult “juice bar” appealed to the state’s highest court, having been assessed for roughly $124,000 in back taxes. In a 4-3 decision, the New York Court of Appeals determined that the establishment did not qualify for a sales tax exemption for “dramatic or musical arts performances.”

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What effect do these types of taxes have at diminishing municipal deficits?

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By Mark J. Kennedy

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