A “gentlemen’s club” in New York City got hit with a $3 million tax bill over the scrip it encourages customers to use to pay and tip the club’s entertainers.

Patrons of the Penthouse Executive Club LLC didn’t pay sales tax on their optional purchase of the scrip, but it turns out that it is considered an admission charge that is subject to sales tax, even though there is also an actual admission charge was only payable by cash or credit, not the scrip. Or at least a New York administrative judge found that it was, and found the club liable for a tax of over $3 million.

While the club collects and remits sales tax on the actual admissions charge, it encourages guests to purchase the scrip, called “executive dollars,” to pay entertainers. Customers have the option to pay the entertainers either in scrip or in cash. Entertainers are licensees of the club who pay a house fee to receive a license to perform services on the club premises. The benefit of the executive dollars to the club is that there is a surcharge, both on the sale of the dollars to customers and when they are redeemed by the entertainers. Private rooms at the club can be rented for brief periods of time from a separate company, Rooms With a View LLC. However, while the executive dollars can be used for tipping and paying an entertainer, they can not be used for admission to a room.

The club argued that its receipts from the sale of executive dollars are not subject to sales tax as an admission charge because the executive dollars do not grant admission to anything.

New York Tax Law Section 1105(f) imposes sales tax on receipts from certain admission charges to or for the use of a place of amusement. The Tax Appeals Tribunal referenced a previous case in which it concluded that the fact that a customer incurred separate charges for the use of the private room and for the personal dance in the private room made no difference to the taxability of such charges. For purposes of the tax, admission charge means “the amount paid for admission, including any service charge and any charge for entertainment or amusement or for the use of facilities therefor.” (Tax Law Section 1101[d][2]).

According to the tribunal, since “personal dances constitute entertainment, the receipts from sales of the executive dollars are taxable to the extent that such dollars were used for personal dances.” The tribunal noted that to the extent that executive dollar were used to pay tips to the entertainers and other employees of the club, the receipts would not be subject to tax. However, these amounts were not at issue in this case since the club did not raise or present any evidence on the issue.

The club further argued that what is provided is not entertainment but rather a nontaxable service similar to a therapeutic massage conducted in a sensual manner or personal services provided by a sex therapist. Since this argument was raised on exception and there was no evidence regarding the conduct of therapeutic massages or sex therapy, the club failed to meet its burden of proof. The tribunal affirmed the decision of the administrative judge that the sale of scrip was subject to sales tax.

Empire State Plaza, in Albany
The New York State Tax Appeals Tribunal in Albany (in Agency Building 1, at left) Matt H. Wade
Roger Russell

Roger Russell

Roger Russell is senior editor for tax with Accounting Today, and a tax attorney and a legal and accounting journalist.