Sales Tax Slice: Could Taxing the Taboo Generate Significant Revenue?



Shrouded in taboo and often unmentionable in polite company, adult entertainment is a form of amusement that has been around for centuries. If one decided to take a road trip across the entire country, a person could actually frequent what the Huffington Post describes as some of “the best” strip clubs in each of the 50 states. Plenty of options are available since there are about 4,000 strip clubs to choose from, according to Statistic Brain.  Adult entertainment establishments, particularly strip clubs, generate considerable revenue (over $3 billion dollars in the U.S. annually and $75 billion worldwide). With these kinds of proceeds, some states have taken steps to get in on the action by imposing a sales tax on fees for these “sinful” services. 

On Nov. 8, a tax initiative  targeting strip clubs appeared on Georgia’s ballot, and voters approved the proposed constitutional amendment. Amendment 2 permits the state to impose assessments on “adult entertainment establishments”; these revenues would fund social services for sexually exploited children. The initiative does not automatically establish a tax, but rather only allows the state to impose one. The manner in which the tax would be applied is also still unclear, but other states such as Utah, Illinois, and Texas will likely to set the tone. In 2013, for example, Illinois enacted legislation which explicitly imposed a tax, often referred to as the “pole tax,” on the revenue collected by adult entertainment facilities offering nude dancing and stripping performances for a fee. There are two options for calculating the surcharge under the Illinois statute: either the fee is $3 per admission, or it is calculated based on the amount of gross receipts. Texas, on the other hand, requires these establishments to collect a $5 fee per customer. Utah takes another approach imposing a 10 percent tax on amounts collected by strip clubs for admissions, any service and sales of tangible personal property.

Although there was initially some skepticism in 2014 about whether the Illinois pole tax would live up to its expectations, the State Journal-Register reported in 2016 that the Department of Revenue collected roughly $0.5 million in pole-tax revenue. But other states have managed to find ways to tax adult entertainment services by simply looking to their amusement tax provisions. As reported by Bloomberg BNA’s John Herzfeld, New York’s Division of Taxation and Finance has done exactly that.  On Nov. 3, 2016, the Division won an appeal entitling the state to more than $2 million in amusement tax revenue from Larry Flint’s Hustler Club. The tax was assessed against revenues collected by the club for the sale of “beaver bucks,” a form of “in house currency” that customers used to indulge in lap dances, pay for private rooms and tip dancers and servers. The club argued that its performances were tax-exempt live dramatic, choreographed dances. The administrative law judge who handed down the decision concluded that the club offered “sexual fantasy” to its patrons and sales of such services are taxable under the state’s amusement tax. 

The Arizona Department of Revenue had a similar victory on Oct. 6, 2016 when the state’s Court of Appeals held that Le’ Girls Cabaret was liable for payment of a tax deficiency exceeding $10,000 resulting from revenue generated from fees collected from the sale of “shows,” including nude performances and various ancillary fees. Under the broad scope of Arizona’s amusement tax provisions, nude performances and all gross income that is either directly or indirectly derived from these shows is taxable.

Considering the fact that there are roughly 4,000 strip clubs scattered about the U.S., it would seem that there is some truth behind the age-old saying that “sex sells.” Based on these recent rulings, taxing the sale of adult entertainment services under amusement tax provisions may be an effective way to generate a steady stream of tax revenue.  

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think adult entertainment establishments should be paying taxes for providing “sexual fantasy”?

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