In the latest decision in a line of cases dealing with the same adult entertainment club, the New York State Tax Appeals Tribunal, reversing in part a decision of an Administrative Law Judge, has held that admission charges to an adult entertainment club are subject to sales tax, as are charges for admission to private rooms at the club. Matter of 677 New Loudon d/b/a Nite Moves, et al., DTA Nos. 824333, 824334 & 824335 (N.Y.S. Tax App. Trib., Aug. 25, 2016).

Facts. 677 New Loudon Corporation operated an adult entertainment club (the "Club") in Latham, New York, which featured semi-nude and nude dancing by females, lap or table dances and private dances. It serves nonalcoholic beverages but no food or alcohol. It had one stage illuminated by spotlights in a large lounge area of about 28 feet by 34 feet; six rooms, each about 5 feet by 6 feet, designated for couch dances; a dressing room for employees; and lavatories. To enter the Club, customers paid an admission charge of $4 prior to 5:00 p.m. and $11 thereafter. The admission charge did not include drinks, which were usually priced at $3. Beverage sales accounted for about 16% of gross revenues. Charges for private dances varied depending on the duration chosen by the customer and whether the performer was topless or fully nude. Generally, the price of a dance lasting one song was $20 for topless or $30 for nude; for four songs, the topless charge was $55 and the nude charge $75. As stated in the Tribunal's findings of fact, the owner and one of the dancers both testified that the ultimate goal at the Club was to "entice customers to purchase private dances" because that generated the most revenue.

After an audit, the Department assessed sales tax on a variety of charges, with the largest disputed issues concerning the admission charges and the charges for private dances.

The Law. Sales tax applies to "[a]ny admission charge . . . in excess of ten cents to . . . any place of amusement in the state, except charges for admission to . . . dramatic or musical arts performances." Tax Law 1105(f)(1). The exact term "dramatic or musical arts performances" is not defined in the statute, but a "dramatic or musical arts admission charge" is defined as "[a]ny admission charge paid for admission to a theatre, opera house, concert hall or other hall or place of assembly for a live dramatic, choreographic or musical performance." Tax Law 1101(d)(5). Sales tax is also imposed on "[t]he amount paid as charges of a roof garden, cabaret or other similar place in the state." Tax Law 1105(f)(3). A "roof garden, cabaret or other similar place" is defined as: "[a]ny roof garden, cabaret or other similar place which furnishes a public performance for profit, but not including a place where merely live dramatic or musical arts performances are offered in conjunction with the serving or selling of food, refreshment or merchandise, so long as such serving or selling of food, refreshment or merchandise is merely incidental to such performances." Tax Law 1101(d)(12).

Arguments and Procedural Background. The Club argued that both the door admission charges and private dance charges were excluded from tax because the performances qualified as dramatic, choreographic or musical performances and, in particular, that the dances were choreographed. The Club presented the testimony of its owner and two dancers, who testified that they choreographed their routines for the main stage, lap dances and private dances. Testimony was also presented from four expert witnesses (a cultural anthropologist; a choreographer; a gymnast, coach, pole dancing teacher and personal trainer; and a choreographer, dance teacher and owner of a dance center) and an entertainment critic from the Albany Times Union newspaper. All four experts had viewed videos of performances on the main stage and in the private rooms. Their testimony generally established that the Club was a theater, and that the performances were detailed, pre-planned and choreographed. One expert also visited the Club and observed dances on the main stage and one private dance, and interviewed the dancer. She testified that the private dance was "kind of the same thing" as the stage dance but constrained by the small space. The entertainment critic observed the stage show and paid for a lap dance, and testified that the dancing was art and, while "`terrible art,'" that "`bad art is still art, . . . no matter how uncomfortable it makes us or how the majority views it.'"

Prior Proceedings. The Club had been the subject of a prior audit and challenged the results all the way up to the Court of Appeals, New York's highest court. The Court of Appeals, in a 4-3 decision, held that general admission charges and the private dance charges were subject to sales tax and not excluded as charges for musical arts performances or choreographed performances. It found that the Club had failed to carry its burden of proof to show the dances qualified as choreographed performances because its one expert who had testified had not actually observed any of the dances in question. Matter of 677 New Loudon Corp. v. State of New York Tax App. Trib., 19 N.Y.3d 1058 (2012). Three judges dissented, including the chief judge, concluding

that there was "not the slightest doubt" that the charges in question were for dance performances, and that the majority's decision simply found the performances not sufficiently "`cultural and artistic,'" thereby engaging in discrimination based on content.

The Tribunal . . . found that even though the dances were choreographed, the private dance rooms did not qualify as a theater, hall or other place of assembly . . . because they were "physically too small" for an audience and did not have a stage or theatrical lighting.

The ALJ Decision. The ALJ found that the door admission charges were not subject to sales tax, concluding that they were charges for admission to choreographed performances, which are excluded from tax under Tax Law 1105(f)(1). Although the Department had argued that the case was controlled by the earlier decision of the Court of Appeals, the ALJ found that the Club's evidentiary presentations in the new case, including testimony by experts who this time had actually viewed videos or live presentations of the dances, overcame the failure of proof in the earlier case and established that the performances were choreographed. However, the ALJ found that the charges for the private dances were taxable because the Club failed to demonstrate that the private dances were choreographed, due to significant limitations in the space of the private rooms and differences between the stage performances and the private dances, and the fact that the expert witnesses had only viewed videos of private dances staged by the Club's employees, which conflicted with the description of the dances by both the supervising auditor and the Club's owner.

Tribunal Decision. While agreeing that the earlier decision against the Club was not binding and that, this time around, the Club had established that the dances on the main stage were indeed choreographed, the Tribunal nonetheless found the admission charges to be taxable on a theory that was not discussed in the ALJ decision. The Tribunal first found that even though the dances were choreographed, the private dance rooms did not qualify as a theater, hall or other place of assembly where such performances need to be held to be entitled to the "choreographic" exclusion set forth in Tax Law 1101(d)(5) because they were "physically too small"

for an audience and did not have a stage or theatrical lighting. Then, the Tribunal held, not only did this mean the charges for private dances were taxable, it also meant that the admission charges were taxable too, because the door admission charges "allowed customers the option of paying for the private performances," and there was no other means by which a customer could purchase a private dance without first paying the door admission charge. Because the door admission charges were for access to both the large stage area and then eventually the private rooms--although an additional charge was required for private rooms--the Tribunal concluded that the door admission charges were not excluded from tax as payments for choreographic performances. Finally, the Tribunal rejected all of the club's constitutional arguments, characterizing them not as challenging the statutes as unconstitutional on their face but as only arguing that the statutes were being applied unconstitutionally, and agreeing with the ALJ who had concluded that the Club had offered no evidence that it was treated any differently than other similarly situated taxpayers.

Additional Insights

The Tribunal appears to have applied a theory not raised on audit or addressed by the ALJ: whether the venue qualified as a theater, hall or other place of assembly. Therefore, it is not clear how well developed the facts and law were regarding whether or not the private rooms were halls or theaters within the meaning of the statute, since there is no discussion of legislative history, no discussion of evidence submitted on the issue, or any recitation of arguments made by either side on whether the statutory language did or did not cover this type of venue.

Also, the Tribunal noted in a footnote that it was "not unsympathetic" to the Club's request that it reconsider its previous holding in the earlier years' case regarding whether the language concerning choreographic dramatic or musical arts performances is an exclusion from tax or an exemption, noting that the earlier Tribunal decision dealt with the issue in a "cursory manner," indicating that it was not disputed. It does not appear from the earlier decisions that the issue was in fact considered or argued by the parties. However, it can be an important distinction, because if the provision is an exclusion, it is generally the Department's burden to prove that the tax applies, while a taxpayer generally bears the burden of establishing it is entitled to a statutory exemption. The Tribunal noted that this request would have to be addressed to the Court of Appeals, which had affirmed the earlier treatment of the statutory language as an exemption, although again without any explicit consideration of the issue.