Exotic Dance Club Wins Battle, Loses War

Brian Gordon, CPA
Published Date:
Nov 1, 2016

Admission charges to a place of amusement—such as baseball games, museums, and beaches—are subject to New York State sales tax. There is, however, an exemption under New York Tax Law section 1105(f)(1) on admission charges to a theater or place of assembly for “dramatic or musical arts performances.” Examples include a Broadway show, a ballet, and now—according to a recent decision from the New York State Tax Appeals Tribunal—an exotic dance club.

The controversy in this case was whether exotic dancing or pole dancing on a stage rises to the level—as intended under the law—for a “musical arts performance.” An additional question was whether private dances in small private rooms would also qualify as a musical arts performance.

677 New Loudon Corp., which does business as “Nite Moves,” has been in the news before. On a prior audit concerning whether its admission charge was exempt from state sales tax, an administrative law judge (ALJ) ruled in favor of Nite Moves on the issue of stage dancing, which was done in view of the general customers; however, the ALJ decided against the dancing in private rooms. The Tribunal, however, overturned the decision in favor of stage dancing. Nite Moves then appealed to the New York Court of Appeals, where they narrowly lost, with three of seven judges finding in favor of Nite Moves. Although the dissent felt that the law should not discriminate against nudity or eroticism, the majority found that the evidence presented did not indicate that the dances rose to the level of a musical arts performance—settling, the courts believed, this long-disputed issue.

In a follow up audit for the tax periods from September 2005 through February 2010, an ALJ once again found in favor of Nite Moves on the issue of stage dancing. The state disagreed with the decision, and appealed to the Tax Appeals Tribunal, arguing that the court should abide by its previous decision—as well as the decision of the New York Court of Appeals—under the doctrine of stare decisis.  

According to the Tribunal, however, the doctrine of stare decisis simply mandates that adjudicators are bound by prior controlling precedent and, as such, applies only to principles of law or settled legal issues, “rather than to prior factual or legal determinations.”

 The Tribunal agreed with the ALJ in its determination that the testimony of additional witnesses and additional evidence, such as video tapes, resulted in new facts and a clearer description of the dance involved. Because the new evidence changed the facts, the judge was legally able to come to a different conclusion—specifically, that the stage area of Nite Moves qualifies as a theater and the dancers’ performances qualified as a musical arts performance. As the title of this article suggests, Nite Moves nonetheless lost the war.  So what happened?         

 As previously mentioned, while the admission charge for stage dances in theory qualified as exempt from sales tax, the charge for private dances did not: The private dances did not take place in a theater—and were not musical arts performances. In a surprising turn, the Tribunal stated that since the only way to purchase a private dance was to first pay the club’s admission charge, the front door admission charge was not only for a musical arts performance, but also included an option to purchase a private dance. The Tribunal concluded that in order for the admission charge to be exempt from sales tax, the venue had to qualify as a theater—which it did—and the charge had to be only for a musical arts performance. Nite Moves’s admissions charge was not. In the words of the Tribunal, “[W]hile the private performances were paid for separately, there is no evidence in the record before us indicating that there was any means by which a customer could purchase a private performance, without paying the front-door admission charge first.”

 Based on this decision, it would appear that if Nite Moves allowed customers to pay for private dances without first being required to pay for the public performance, it would pass this test and its admission charge would be exempt from sales tax.

 It should be noted, however, that exotic dance clubs shouldn’t assume that their club will be allowed an exemption as a result of this case’s conclusions. I’m sure that they will have to provide evidence that their dancers meet a certain standard, that their club qualifies as a theater, and that they meet all standards for all definitions under the law. In fact, all taxpayers should be aware that the New York State Department of Taxation and Finance fights very hard to defend its positions. There are many disputed issues on tax audits, and you have to be completely prepared—with a thorough analysis of the law, detailed documentation, and evidence to support your position. With that, you have a good chance of prevailing in your audit.

gordon_newBrian Gordon, CPA, is director of state and local taxes at Sanders Thaler Viola & Katz LLP. His primary role is to represent taxpayers with NYS tax audits and other controversies. Previously, he was with NYS Department of Taxation and Finance for many years as the district audit manager in Manhattan and Brooklyn, where he worked on many audits of various tax types, including high-profile residency audits. Mr. Gordon is a member of the NYSSCPA New York, Multistate & Local Taxation Committee. He writes and speaks on various state and local tax issues and posts a monthly blog at http://www.st-cpas.com. He can be reached at 516-938-5219 or bgordon@st-cpas.com.

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