When one thinks about adult entertainment, the first things that come to mind generally aren’t sales tax or the First Amendment. However, these concepts were pitted against each other in a challenge to New York’s imposition of sales tax on charges for amusements, roof gardens, and cabarets, which was recently considered by the United States Supreme Court. Although the Court ultimately declined to hear the case, paving the way for New York to collect the tax, it remains an intriguing issue for tax practitioners and constitutional scholars alike.
The case revolved around New York’s imposition of tax on Larry Flynt’s Hustler Club’s sale of so-called “Beaver Bucks,” a form of currency used within the establishment to pay for private rooms and lap dances and to tip exotic dancers and bartenders. The state taxed the transactions as charges for an amusement or a cabaret under N.Y. Tax Law § 1105(f) and issued an assessment against the club for sales tax on $24 million dollars’ worth of the “‘funny money’” sold to patrons, to the tune of $2.1 million in unpaid taxes.
The crux of the club’s protest was the fact that New York provides an exemption for “dramatic or musical arts performances” from the sales tax imposed on admissions charges. The club claimed that allowing an exemption for certain types of performances, deemed “cultural” or “artistic” by the state, but taxing exotic dancing amounted to an impermissible form of content-based free speech discrimination.
In an earlier decision on the case, an administrative law judge had found that the tax was not distinguishing between exempt dance performances, like a ballet, and exotic dancing, because charges to view an exotic dance are charges for a “sexual fantasy” rather than to view a dance. Thus, there was no discrimination, because the tax was imposed on the fantasy service, rather than a different type of “dramatic or musical performance.”
On appeal, the Appellate Division of the New York Supreme Court also ruled against the club, stating that although topless or fully-nude entertainment is protected by the First Amendment, the imposition of sales tax on such activities does not prevent people from engaging in them. The court found that New York is allowed to distinguish between types of performances it would like to subsidize through tax exemptions, and those it would not, as long as the unsubsidized performances were not prohibited by the state.
Larry Flynt’s Hustler Club submitted a petition for writ of certiorari to the Supreme Court, asking it to further consider the First Amendment issues in the case. When the Court denied certiorari on Oct. 30, 2017, it extinguished the club’s last avenue to argue against the tax on free speech grounds. Although this particular case is still pending in a lower court on an administrative challenge, the Court’s action clears the way for New York to collect sales tax on “Beaver Bucks,” scrip, or any other form of admissions charged for adult entertainment in the state.
Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Do you think New York’s tax on adult entertainment is discriminatory? What other First Amendment issues do you think could arise in future sales tax litigation?
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