HDV Manhattan, LLC v. Tax Appeals Tribunal of N.Y.

• Decision Date: 07 December 2017
• Docket Number: 523146
• Citation: 67 N.Y.S.3d 313,156 A.D.3d 963
• Parties: In the Matter of HDV MANHATTAN, LLC, et al., Petitioners, v. TAX APPEALS TRIBUNAL of the State of New York, et al., Respondents.
• Court: New York Supreme Court — Appellate Division

156 A.D.3d 963

67 N.Y.S.3d 313

In the Matter of HDV MANHATTAN, LLC, et al., Petitioners,

v.TAX APPEALS TRIBUNAL of the State of New York, et al., Respondents.

523146

Supreme Court, Appellate Division, Third Department, New York.

Calendar Date: October 20, 2017

Decided and Entered: December 7, 2017

Morrison & Foerster, LLP, New York City (Hollis L. Hyans of counsel) and Shafer & Associates, PC, Lansing, Michigan (Bradley J. Shafer, admitted pro hac vice), for petitioners.

Eric T. Schneiderman, Attorney General, Albany (Owen Demuth of counsel), for Commissioner of Taxation and Finance, respondent.

Before: McCarthy, J.P., Lynch, Devine, Clark and Pritzker, JJ.

MEMORANDUM AND JUDGMENT

Clark, J.

Proceeding pursuant to CPLR article 78 (initiated in this Court pursuant to Tax Law § 2016 ) to review a determination of respondent Tax Appeals Tribunal sustaining a sales and use tax assessment imposed under Tax Law articles 28 and 29.

Petitioners, a limited liability company and its members, operate the Hustler Club, an adult establishment that offers live, semi-nude entertainment to its patrons in Manhattan.¹ The club's public area is comprised of a main stage surrounded by tables and chairs and two additional stages located on balconies on opposite sides of the club overlooking the main stage, also with surrounding tables and chairs. In addition, the club has 16 private rooms—four of which include poles—where paying customers can receive private dances from entertainers. To obtain a private dance during the period in question, customers were required to pay a "room charge" to the club by credit card and an additional fee directly to the entertainer, which could be paid in cash or, if the customer paid by credit card, with scrip—a form of in-house currency that the club sold to its customers at a 20% markup (e.g., $100 of scrip cost $120). Customers could also use scrip to tip entertainers, floor hosts and bartenders and to purchase "table dances" from entertainers in the main area of the club.² In addition to the 20% surcharge imposed on its scrip-purchasing customers, the club charged entertainers and floor hosts a fee to redeem the scrip paid to them by patrons. Specifically, the club collected 10% of the face value of scrip redeemed by entertainers and 30% of the face value of scrip redeemed by floor hosts. The club recorded the amount paid to it by floor hosts as "service fee income."

In December 2008, the Department of Taxation and Finance commenced a sales and use tax audit of the club's tax liability for the period of June 1, 2006 through November 30, 2008. At the conclusion of the audit, the Department issued separate notices of determination to each petitioner asserting a tax deficiency of over $4.8 million, plus penalties and statutory interest. Following conciliation conferences, the asserted tax deficiency was reduced to $2,113,204.38, plus statutory interest, and all penalties were abated. Petitioners thereafter filed petitions for redetermination with the Division of Tax Appeals, arguing that no tax deficiency existed for the audit period. The matter proceeded to an evidentiary hearing before an Administrative Law Judge (hereinafter ALJ), at which the parties solely disputed whether the club's sale of scrip and the service fee income were taxable. The ALJ found that petitioners owed taxes on both the sale of scrip and the service fee income and sustained the notices of determination, as modified by the orders of conciliation. Petitioners filed exceptions and, following oral argument, respondent Tax Appeals Tribunal reversed that portion of the ALJ's determination holding that the amounts attributable to service fee income were taxable, but otherwise sustained the determination. Petitioners then commenced this CPLR article 78 proceeding challenging the Tribunal's determination, and we now confirm.

We begin our discussion with a reminder of the limited scope of review that this Court may employ in cases where, as here, the issues argued before the Tribunal involved the "specific application of ... broad statutory term[s] in a proceeding in which the agency administering the statute must determine it initially" (Matter of American Tel. & Tel. Co. v. State Tax Commn., 61 N.Y.2d 393, 400, 474 N.Y.S.2d 434, 462 N.E.2d 1152 [1984] [internal quotation marks and citation omitted]; accord Matter of O'Brien v. Spitzer, 7 N.Y.3d 239, 242, 818 N.Y.S.2d 844, 851 N.E.2d 1195 [2006] ; Matter of Easylink Servs. Intl., Inc. v. New York State Tax Appeals Trib., 101 A.D.3d 1180, 1181–1182, 955 N.Y.S.2d 271 [2012], lv denied 21 N.Y.3d 858, 2013 WL 3185278 [2013] ). In such cases, we accord deference to the Tribunal's interpretation of the statutes at issue, administered by the Department (see Matter of Lake Grove Entertainment, LLC v. Megna, 81 A.D.3d 1191, 1192, 917 N.Y.S.2d 725 [2011] ; Matter of Island Waste Servs., Ltd. v. Tax Appeals Trib. of the State of N.Y., 77 A.D.3d 1080, 1082, 909 N.Y.S.2d 790 [2010], lv denied 16 N.Y.3d 712, 2011 WL 1675376 [2011] ), and we will not disturb the Tribunal's determination if it has a rational basis and is supported by substantial evidence (see Matter of Great Lakes–Dunbar–Rochester v. State Tax Commn., 65 N.Y.2d 339, 343, 491 N.Y.S.2d 605, 481 N.E.2d 237 [1985] ; Matter of American Tel. & Tel. Co. v. State Tax Commn., 61 N.Y.2d at 400, 474 N.Y.S.2d 434, 462 N.E.2d 1152 ; Matter of Jay's Distribs., Inc. v. Boone, 148 A.D.3d 1237, 1238, 48 N.Y.S.3d 551 [2017], lv denied 29 N.Y.3d 918, 2017 WL 4015519 [2017] ).

Turning to the merits, petitioners argue that the club's sale of scrip is not taxable under Tax Law § 1105(f)(1) because it does not qualify as an "[a]dmission charge," as defined in Tax Law § 1101(d)(2), to a place of amusement. Pursuant to Tax Law § 1105(f)(1), a sales tax of 4% is imposed on "[a]ny admission charge ... in excess of [10] cents to or for the use of any place of amusement in the state, except charges for admission to ... dramatic or musical arts performances." For purposes of the statute, an "[a]dmission charge" is defined as "[t]he amount paid for admission, including any service charge and any charge for entertainment or amusement or for the use of facilities therefor" ( Tax Law § 1101[d][2] ). Further, "it shall be presumed that all receipts for ... all amusement charges of any type mentioned in [ Tax Law § 1105(f) ] are subject to tax until the contrary is established, and the burden of proving that any ... amusement charge ... is not taxable [t]hereunder shall be upon the person required to collect tax or the customer" ( Tax Law § 1132[c][1] ).

We find no basis to disturb the Tribunal's determination that the club's receipts from the sale of scrip are taxable as admission charges to a place of amusement. As the Tribunal recognizes, the definition of admission charge in Tax Law § 1101(d) (2), as well as the relevant regulation (see 20 NYCRR 527.10 [b][1][i] ), establish that, for the purposes of Tax Law § 1105(f)(1), an admission charge includes any additional cost for entertainment or amusement that must be paid to gain access to the place of amusement—here, the private room.³ Although petitioners argued that the fee for the private room and the fee for the private dance were separate, they failed to come forward with evidence establishing that one fee could be paid without the other. The record is devoid of any evidence demonstrating that patrons could, and did, purchase time in a private room without also purchasing a private dance from an entertainer. As such, it was not unreasonable for the Tribunal to conclude that payment of both the room fee and the entertainer's fee were required to gain entry into one of the private rooms and, thus, that both fees constituted an admission charge. Additionally, although the record establishes that patrons could pay entertainers in cash, petitioners produced no evidence as to the frequency with which patrons would use cash, rather than purchasing scrip. In view of the foregoing, we find that the Tribunal rationally determined that the purchase of scrip to pay for a private dance constituted an admission charge within the meaning of Tax Law § 1105(f)(1) (see Tax Law § 1101[d][2] ; see generally Matter of 1605 Book Ctr. v. Tax Appeals Trib. of State of N.Y., 83 N.Y.2d 240, 245, 609 N.Y.S.2d 144, 631 N.E.2d 86 [1994], cert. denied 513 U.S. 811, 115 S.Ct. 61, 130 L.Ed.2d 19 [1994] ; compare Fairland Amusements v. State Tax Commn., 66 N.Y.2d 932, 934–935, 498 N.Y.S.2d 796, 489 N.E.2d 765 [1985], revg 110 A.D.2d 952, 487 N.Y.S.2d 879 [1985] ). Relatedly, although some scrip sold to customers may have been used to tip or to purchase table dances, petitioners failed to establish the amount of scrip sold that was attributable to these transactions. In the absence of such evidence, we will not disturb the Tribunal's determination that all scrip sales were presumptively taxable (see Tax Law § 1132[c][1] ).

Next, petitioners assert that, even if the sale of scrip is a taxable admission charge under Tax Law § 1105(f)(1), they are exempt from the amusement tax because the purchase of scrip to pay for private dances qualifies as a charge for admission to a dramatic or musical arts performance. While Tax Law § 1105(f)(1) imposes sales tax on admission charges in excess of 10 cents to any place of amusement in the state, the Legislature, "with the evident purpose of promoting cultural and artistic performances in local communities, ... created an exemption that excluded from taxation admission charges for a discrete form of entertainment—‘dramatic or musical arts performances' " ( Matter of 677 New Loudon Corp. v. State of N.Y. Tax Appeals Trib., 19 N.Y.3d 1058, 1060, 955 N.Y.S.2d 795, 979 N.E.2d 1121 [2012], cert. denied ––– U.S. ––––, 134 S.Ct. 422, 187 L.Ed.2d 280 [2013], quoting Tax Law § 1105[f][1] ). The taxpayer bears the burden of establishing that the exemption applies (see Matter of 677 New Loudon Corp. v. State of N.Y. Tax...