Wednesday, June 15, 2011

Lap Dances are subject to Sales Tax?

Last week, the New York State Supreme Court determined that lap dances are not exempt from NY sales tax because the activity does not rise (pun intended) to the level of art. 

The Court ruled on June 9, 2011 in the matter of Loudon Corp dba “Nite Moves” vs. State of New York that lap dances are not considered choreographed artistic performances that would be exempt from sales tax.  Nite Moves has been fighting the tax law – first in an administrative hearing and then in court – following a 2005 audit by the NYS Division of Taxation that concluded the club owed $125,000 in sales tax, plus interest for door admission charges and private dance sales.  The Appellate Division of the NYS Supreme Court upheld that decision in a unanimous opinion.  A newspaper article describing this travesty of justice is here.

At least the issue of nexus in this case is clear.  In the recent battle of North Carolina vs. Amazon, nexus isn’t clear at all.  The February 2011 settlement between NC and Amazon only cleared up the matter of confidential information held by Amazon regarding specific customer purchases (which NC never wanted anyway).  Still at issue is the liability of sales tax. 

Liability for sales tax is determined by “nexus”, or connection, between the vendor and the state.  Nexus occurs when a vendor has a “presence” in a state, and a connection exists between vendor and state such that subjecting the vendor to the state’s laws is neither unfair to the vendor nor likely to harm interstate commerce – requirements stemming from the due process and commerce clauses of the U.S. Constitution. 

In the days prior to internet commerce, nexus was easy.  Does the vendor have a physical location in the state?   If they do, nexus is established.  Now, nexus is harder to pin down.  Clearly, there are no Amazon stores in the local malls.  In the Amazon case, in-state affiliates were enough to establish nexus.  This is a big deal for NC web entrepreneurs, because losing Amazon affiliate status costs a great deal of money.  It’s also a big deal for cash-strapped states.

Case law across the states doesn’t help much.  Despite similar fact patterns, a 2007 Louisiana ruling in St. Tammany Parish Tax Collector v. BarnesandNoble.com (05-5695 ED La) concluded that online did not have nexus, while a 2005 California decision reached the opposite conclusion in Borders online, LLC v. BOE, 29 Cal Rptr 3d176 [“Nexus Confusion: Sales and Use Tax”, Annette Nellen, CPA/Esq.].

In North Carolina, taxpayers have the opportunity to voluntarily report purchases that they should have paid sales tax on but didn’t, and pay the resulting self-assessed sales tax with their individual tax return.  No report on the success of that approach.

One thing is for certain – there will always be dispute between those riding the gravy train, and those pulling it.

A final note for my NC readers; I have no idea if lap dances occurring in North Carolina are subject to sales tax.  The last lap dance I had was in 1973, in Florida.  

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