The sales taxation of exotic dancing and transactions conducted in adult entertainment establishments has a long history before the Division of Tax Appeals and the New York courts. This case presents the most recent chapter. 

The ALJ determined that sales of scrip (an alternate currency used by patrons to tip and/or compensate entertainers at adult entertainment establishments) were subject to sales tax under three provisions of the Tax Law. First, the sales of scrip, which the ALJ found was sold by Petitioners’ employees and was used to purchase exotic dances and to pay for private room charges and entertainment in the private rooms, qualified as taxable admissions charges to a place of amusement. Second, the ALJ found the scrip sales qualified as taxable “charges of a roof garden, cabaret or other similar place.” Finally, the ALJ determined that the scrip sales constituted taxable charges by restaurants, taverns, or other establishments. The ALJ disagreed with Petitioners’ contention that the scrip was only used to pay gratuities to entertainers and that the Fair Labor Standards Act prohibited Petitioners from retaining any revenue from the sale of the scrip.

The ALJ next concluded that certain Petitioners were responsible persons required to collect and remit the sales tax on the scrip transactions, despite the fact that a third-party vendor issued and redeemed the scrip, and net income from the scrip sales was reflected in the other company’s bank deposits. The ALJ focused on Petitioners’ involvement with the scrip transactions, stating, “the record shows that petitioners’ employees were responsible for every step of the scrip transactions: petitioners’ employees sold the scrip to customers, ran the credit card transactions for the purchase of scrip, exchanged the scrip for cash, and recorded the scrip transactions in the daily ledgers.”

Finally, the ALJ found no merit in Petitioners’ estoppel and state and federal constitutional arguments, and sustained the imposition of penalties.