In another decision dealing with the issue of the applicability of sales tax to adult club charges, the New York State Tax Appeals Tribunal has upheld the determination of an Administrative Law Judge and found that charges for scrip used for table dances and tipping dancers at an adult entertainment club are subject to sales tax. Matter of The Executive Club LLC, DTA No. 825850 (N.Y.S. Tax App. Trib., Apr. 19, 2017).

Facts. The Executive Club LLC operated the Penthouse Executive Club (the “Club”), an adult entertainment club in New York City. The Club generated revenue from admissions, bar sales, food sales, and performances of the entertainers. It collected and remitted sales tax on its admission charges, which varied depending on the day of the week and were paid with cash or credit card only. 

The Club also sold scrip, called “executive dollars,” which could be purchased with credit cards and which explicitly stated that it could be used only for table dances and tipping. The Club added a 20% surcharge when executive dollars were purchased. Entertainers earned their income from customers and were paid by the customers in cash or scrip. Minimum fees paid to entertainers for personal dances were established by the Club based upon industry custom. Entertainers paid the Club a house fee to perform at the Club’s facilities and, after payment of that fee, redeemed executive dollars from the Club, for which the Club charged a 13% fee. Private rooms at the Club could be rented by customers from a separate entity, Rooms With a View, LLC, and had to be paid for with cash or a credit card; executive dollars were not accepted. 

After an audit, the Department of Taxation and Finance determined that the sales of executive dollars were taxable as admission charges to a place of amusement under Tax Law § 1105(f)(1), and issued notices of determination seeking additional tax of over $2.4 million, plus interest. No penalties appear to have been asserted.

ALJ Decision. At the hearing, a question of fact arose as to whether executive dollars could be used for any purpose within the Club, as the auditor contended, or if they could be used only for tipping and paying entertainers. The ALJ found that the executive dollars could not be used for admission to private rooms or for any purpose other than tipping and paying entertainers. However, the ALJ determined that the decision in Matter of Marchello, DTA No.821443 (N.Y.S. Tax App. Trib., Apr. 14, 2011), was controlling, and that, since the Tribunal in Marchello had held that receipts from the sale of scrip were taxable as amusement charges, the Club’s executive dollars were similarly taxable, despite acknowledging that in Marchello the scrip could be used for admission to private rooms, which was not the case at the Club. 

On exception, the Club argued that receipts from the sale of executive dollars cannot be taxed as admission charges, because the executive dollars do not grant admission to anything, and raised a new legal argument that personal dances are not entertainment or amusement but instead constitute an “intimate personal service.” It also contended that the ALJ had failed to address its primary argument that executive dollars are intangible property, similar to gift cards, and are not subject to tax at the time purchased. 

Tribunal Decision. The Tribunal upheld the decision of the ALJ, although not in reliance on Marchello, which it never mentions other than to note the ALJ’s reliance. Instead, the Tribunal relied almost entirely on its more recent decision in Matter of HDV Manhattan, LLC, DTA Nos. 824229 & 824231-824234 (N.Y.S. Tax App. Trib., Feb.12, 2016), which it found controlling due to what it determined were closely similar facts. Although the Club argued that the ALJ had specifically found that the executive dollars could not be used for admission to the Club or to the private rooms, the Tribunal concluded that the ALJ was using only the “common understanding” of the word “admission” “as opposed to the statutory term ‘admission charges’ set forth in Tax Law § 1101(d)(2), which is inclusive of charges for ‘entertainment or amusement.’” Since the Tribunal determined that personal dances constitute “entertainment,” it found that receipts from sales of executive dollars were taxable to the extent the dollars were used for personal dances. While acknowledging that executive dollars were also used for tips to entertainers and other Club employees, and that such receipts “may not be subject to tax,” the Tribunal found that the Club did not raise that claim or present evidence on that issue. 

The Tribunal also rejected the argument that the sale of executive dollars is not a taxable event, in the same manner that the sale of a gift card is not a taxable event, finding that a similar argument had been rejected in HDV Manhattan because “implicit in this assertion” is the argument that the entertainers were responsible for collecting tax and that even though the Club in the present case did not receive the charges for the private room, which instead were paid to a separate corporation, there were “more than enough similarities to [HDV Manhattan] to find that the Club is indeed responsible for the collection of the sales taxes on the receipts from the admission charges for the personal dances.” 

Finally, the Tribunal rejected the arguments that the Club provides not entertainment but a nontaxable “intimate personal service” “similar to a therapeutic massage conducted in a sensual manner or personal services provided by a sex therapist” or that its operations are similar to those of a flea market that issues scrip for the convenience of its concessionaires since the Club presented no evidence in support of these arguments. 

Additional Insights  

The Tribunal’s decision, which acknowledges that the executive dollars cannot be used for admission charges but relies on an argument that they can nonetheless be taxable as admission charges because they are charges for the “entertainment” of dances, is arguably inconsistent with a Court of Appeals decision and with the Department’s own regulations and guidance regarding amusement parks. In Fairland Amusements, Inc. v. State Tax Commission, 66 N.Y.2d 932 (1985), the Court of Appeals expressly found that the tax on admission charges is imposed only on a charge, if any, to enter a place of amusement and is not imposed on all charges incurred once inside the place of amusement. This concept has been incorporated by the Department into its regulations and in guidance issued to taxpayers. See 20 NYCRR § 527.10(b)(1)(ii), (Examples 3 & 4); N.Y. Technical Service Bureau Memorandum, TSB-M-87(15)S, “Taxable Status of Amusement Rides and Admission Charges” (N.Y.S. Dep’t of Taxation & Fin., Nov. 13, 1987) (sales of tickets or tokens solely for the use of amusement rides are not subject to tax); Tax Bulletin, TB-ST-30 (N.Y.S. Dep’t of Taxation & Fin., July 28, 2010) (“[a] separate charge to play a game at an amusement park is not subject to sales tax”). 

Since the Court of Appeals and the Department itself have found that charges for entertainment other than admission charges are not separately taxable, the Tribunal seems to be moving in a different direction when considering the charges incurred not for admission to adult clubs but for other services available within adult entertainment clubs. 

Note: Morrison & Foerster LLP represents the taxpayers in HDV Manhattan, which is pending on appeal before the Appellate Division, Third Department.