NY Court Denies Tax Carve-Outs for Gentlemen’s Club

Published December 19, 2016

New York State judges disagreed with the interpretation of state tax exemptions asserted by owners of an adult entertainment club, ordering the business to remit more than $2 million in overdue sales taxes.

New York state law requires businesses to pay the government 4 percent of their revenue from admission to and purchases at “places of amusement,” such as amusement parks, professional sporting events, and museums.

The owners of CSMG Restaurant Group, a business operating adult entertainment establishments in New York, sued the state government over its entertainment tax. CSMG argued consumers’ purchases of in-house currency, known as “Beaver Bucks,” should qualify for an exemption issued by the state for other kinds of performance art exhibitions, such as ballet recitals.

In November, the New York Supreme Court Appellate Division ruled against the business owners. 

Clambering for Carve-Outs

Ken Girardin, a policy analyst for the Empire Center for Public Policy, says carve-outs create an unhealthy competition for government favors.

“The problem with all the exclusions, like in our sales taxes, is that once you open up one for one group, you have other people trying to squeeze their way into them or pushing lawmakers to add more exemptions for them,” Girardin said. “It creates a slippery slope, and it compromises the equability of the system. I wouldn’t say a sales tax on amusement services is a bad idea, per se, but if you’re going to have a sales tax, you have to do it equitably.

“The simpler the definition of a tax, the less likely you are to be showing favoritism toward one or another,” Girardin said.

Adam Millsap, a research fellow for the State and Local Policy Project at the Mercatus Center at George Mason University, says the New York exemption is arbitrary and unfair.

“What I find somewhat annoying with this particular scenario is that some places are exempt from this tax,” Millsap said. “Choreographed plays and musicals are exempt from this tax, and it creates a distortion between the two types of entertainment. They seem to be arbitrary, why some things are exempt and others aren’t.”

Correlated with Carve-Outs

Millsap says sales-tax rates tend to rise when there are a greater number of exemptions to the tax.

“I think that sales taxes on the final consumption of goods and services are fine, in the sense you have to have them on everything, to keep the rates lower,” Millsap said. “When you start exempting certain things, then that leads to the rates being higher.”