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January 29, 2007
Strip Clubs, Private Dances . . . and Taxation?
by Jennifer Carr and Cara Griffith

Full Text Published by Tax Analysts®

Document originally published in State Tax Notes
on January 29, 2007.

With January comes the opening of the legislative sessions in many states. No doubt taxation will be a major issue in many of them. In recent years, some states, including Missouri, Nevada, and Utah, have considered or enacted legislation that imposes taxes on various types of adult entertainment. In Kansas, which has flirted with the idea of an adult entertainment tax in the past, there are plans to introduce a special adult entertainment occupation license on strip clubs and similar businesses. A bill is also planned for the Missouri legislative session. In addition to potential tax policy arguments against taxes directed at adult entertainment, there's also a practical consideration regarding those statutes -- they are almost always challenged in court, with varying degrees of success. In the past few years, at least four states have found themselves in litigation over their tax treatment of adult entertainment. If Missouri and Kansas legislators proceed with their plans, they should be prepared to find themselves in court. Below is an overview of other litigation from around the country and the types of claims those states likely face.


Generally speaking, there are two types of adult entertainment taxation statutes that have been most prominently discussed in recent years. The first is an excise tax on an adult entertainment business. That type of statute was enacted in Utah and was closely mirrored by a Kansas bill that was introduced in 2006. Under the 2006 Kansas bill, a 10 percent excise would have been levied on businesses and individuals that provide "sexually explicit products and services." The tax would have been applied to admission fees, tangible personal property sales, any service, and food or beverage sales. Revenue raised by the tax would have gone to treat sex offenders and their victims. Twenty percent of the revenue would have also been set aside for protecting children from Internet sex offenders. Tennessee Rep. Stacey Campfield (R) has announce his intention to introduce a tax on adult entertainment. Gov. Phil Bredesen (D) and others have said the proposed tax is constitutionally suspect.

The second type of statute requires adult entertainment employees to pay some sort of industry-specific license fee. That type of statute was litigated in Georgia, where a county statute requires those working in the adult entertainment industry to pay a special license fee. The stated purpose of the fee is to combat the potential negative secondary effects associated with adult entertainment establishments. That is the direction Kansas proponents of adult entertainment taxation appear to be headed for the upcoming term, after last session's excise tax statute failed to pass. Municipalities have enacted, in addition to fees and taxes, zoning ordinances that impose location and distance restrictions on adult businesses.


Several pending cases involve taxation of the adult entertainment business. For example, in Utah, a state district court is expected to issue a decision in the next 60 days in TDM Inc. et al. v. Tax Commission et al. TDM was initially brought in both state and federal courts, but the parties decided to proceed in state court. The issue is whether the state's sexually explicit business and escort service tax law, which imposes a tax "equal to 10 percent of amounts paid to, or charged by, sexually explicit businesses," violates the First Amendment of the U.S. Constitution. The tax was designed to be a gross receipts tax on all income of the applicable businesses and is imposed in addition to all other applicable state and local taxes. The case made its way to the Utah Court of Appeals on a jurisdictional issue; the court held that the district court had jurisdiction over the case and the parties were not required to exhaust their administrative remedies. The court concluded that there "is no administrative determination that could obviate the need to reach the constitutional issue" and therefore the "exhaustion of administrative remedies . . . would serve no useful purpose."

In Nevada a case pending before the U.S. Court of Appeals for the Ninth Circuit challenges a statute enacted in 2003. That statute replaced the casino entertainment tax with a tax on all live entertainment. The plaintiff businesses that brought suit operate establishments where "live performance dance entertainment" is provided and allege that the tax violates their First and Fourteenth amendment rights under the U.S. Constitution as a restraint on speech and a violation of substantive due process. The U.S. District Court for the District of Nevada first heard the case and granted the Department of Taxation's motion to dismiss on grounds that the businesses "neither established jurisdiction nor stated a claim upon which relief can be granted." Because the businesses were seeking an injunction against enforcement of the tax and a refund of taxes paid, the court reasoned that a federal court did not have jurisdiction to hear the case. Citing the U.S. Supreme Court's opinion in Hibbs v. Winn and the Tax Injunction Act, the court held that the case was "designed to enjoin or restrain the assessment or collection of a tax under a State law and further seeks damages, including a refund of taxes." As a result, it "clearly falls within the purpose of the Tax Injunction Act and removes [the] Court's jurisdiction."

Opinions also have been recently issued on the topic of adult entertainment taxation. The Georgia Supreme Court upheld the constitutionality of a county ordinance requiring any person -- including dancers, waitresses, bartenders, dishwashers, and janitors -- working at an adult entertainment establishment that serves alcohol to obtain a permit from the county tax commissioner's office. The initial permit costs $350 and must be renewed annually for a fee of $50. Several adult entertainment establishments and their employees filed suit in superior court, seeking to enjoin enforcement of the ordinance and a judgment that the ordinance was unconstitutional. The trial court found in favor of the county, and the case was appealed. The state supreme court affirmed the trial court, holding that the ordinance was content-neutral and was "aimed at combating undesirable secondary effects associated with adult entertainment establishments."

Finally, the West Virginia Supreme Court of Appeals ruled that "private dances" performed in adult entertainment establishments are nontaxable services for resale to customers. Patrons to the adult entertainment establishments pay a 6 percent service tax on both the cover charge to enter the facility and on special services (that is, private dances). Dancers are treated as subcontractors and receive a portion of the money paid by customers for those services. The Tax Department concluded that the payments made by the establishments to the dancers were taxable and issued a use-tax assessment. The court concluded that the payments were not taxable because the special services were purchased by the establishments as services for resale and services purchased for resale are tax-exempt.

First Amendment Analysis

One of the potential issues when a law is imposed on the adult entertainment industry is whether the law violates the First Amendment. In general, "entertainment, as well as political and ideological speech, is protected [by the First Amendment]; motion pictures, programs broadcast by radio and television, and live entertainment, such as musical and dramatic works, falls within the First Amendment guarantee." The question turns on whether states can tax a First Amendment freedom such as live entertainment and, specifically, whether they can tax nude or partially nude adult live entertainment.

The short answer is no. A state cannot tax a First Amendment right. The U.S. Supreme Court has said that "the power to tax the exercise of a privilege is the power to control or suppress its enjoyment." However, although the state cannot tax the speech itself, the state can exact a narrowly tailored tax or fee, imposed as a regulatory measure, to help defray some of the costs of policing the activities in question. That measure would be justified if it is independent of the suppression of speech, is designed to minimize the incidental burden on speech, and leaves open adequate alternative channels of communication. Ordinances regulating adult businesses that do not entirely ban those businesses are analyzed as "time, place, and manner" regulations and must be content-neutral. If a regulation is content-based, it would be considered presumptively invalid and subject to strict scrutiny. Because the justification for most ordinances involving adult entertainment is combating the secondary effect of the businesses, and not the actual content of the entertainment, those ordinances are considered to be content-neutral for the purpose of First Amendment analysis and will be subject to intermediate scrutiny. The U.S. Supreme Court has agreed that combating the negative effects of adult businesses is a significant government interest, but one that must be balanced against the inherent burden on speech.

Our nation values free speech. But as noted by Justice Anthony Kennedy in his concurrence in City of Los Angeles v. Alameda Books Inc., "speech can produce tangible consequences." Municipal governments are not required to ignore those consequences. Studies have shown that where there are adult entertainment businesses, crime tends to be higher and property values tend to be lower. However, a city cannot seek to curb those consequences by curbing the speech itself. Cities can use zoning ordinances to try to reduce the secondary effects, but they cannot attempt to ban adult entertainment businesses. Likewise, states and municipalities cannot use taxes or fees to effectively ban adult entertainment businesses. As the U.S. Supreme Court has held, "a community may not suppress, or the state tax, the dissemination of views because they are unpopular, annoying or distasteful."

Equal Protection Analysis

Another charge likely made by those challenging adult entertainment taxation is that the statutes violate equal protection by singling out members of one industry for disparate treatment. The basics of any equal protection challenge are that the government is dividing people or institutions into classes and treating the classes differently on illegitimate grounds. The most important question in equal protection analysis is almost always whether or not the law "operates to the disadvantage of some suspect class or impinges upon a fundamental right." If plaintiffs can show that the tax impinges on a fundamental right or that they are a suspect class, their chances of prevailing greatly increase. There are two ways adult entertainers would make an equal protection claim. First, they could make a content-based argument, as did the plaintiffs in I.D.K. Those arguments are best addressed using First Amendment analysis.

Another potential claim that was raised in I.D.K. but never fully developed is that those working in businesses that serve alcohol and provide adult entertainment are singled out for disparate licensing fee treatment compared with the treatment of those working in businesses that either serve alcohol or provide adult entertainment. That argument is even less likely to be successful than the content-based argument. The first issue would be whether the statute disadvantages a "suspect class or impinges upon a fundament right." The suspect- class argument is inapplicable, because those classifications typically require a traditionally disfavored immutable characteristic such as race or mental retardation.

Adult entertainment industry employees could argue that the taxes and permit fees at issue impinge on their fundamental right to employment. However, that claim is also likely to be rejected because courts have consistently applied a "standard less than strict scrutiny...'to state legislation restricting the availability of employment opportunities.'" If there are few fundamental rights to employment generally, the argument that there is a fundamental right to work in a particular industry would almost certainly be rejected. Because special license fees for adult entertainment employees don't affect a suspect class or a fundamental right, challenges will likely survive equal protection challenges based on disparate treatment of those in the adult entertainment industry so long as the fees are rationally related to a stated government purpose. Given the secondary problems generally perceived to be associated with adult entertainment (regardless of whether that perception is accurate), that standard will be easy for the states to meet.


Another issue that has been raised in challenges to adult entertainment industry taxation is jurisdiction, specifically the Tax Injunction Act and exhaustion of administrative remedies claims. As seen above, the Nevada and Utah litigation are hung up on those issues, respectively. In Nevada, the state appears to have won the first round, despite the ongoing appeal, because the Tax Injunction Act is a strong barrier to challenging state taxes in federal courts, even with a First Amendment argument. In the Utah case, the First Amendment argument appears to have assisted plaintiffs by allowing them to skip the administrative process and go directly to the courts.

Tax cases such as those, which involve both the federal constitution and state tax agencies, will usually have an initial round of jurisdictional litigation before courts get to the merits. That litigation almost invariably benefits defendants, who can at a minimum delay a decision on the merits, during which time they will likely be able to collect the disputed taxes. Parties considering a challenge to those taxes and fees should carefully consider in which forum they bring the suit and should make sure administrative appeals are properly exhausted beforehand. Although federal courts would likely be more helpful than state courts if they issue a decision on the merits, the Tax Injunction Act is a serious impediment that will frequently make it more advisable to file in state court.


State governments are having difficulty making ends meet. State legislators don't like raising taxes on their constituents. They do, however, like speaking out and putting the metaphorical thumbscrews to so-called undesirable portions of society -- liquor, tobacco, and adult entertainment. Given those facts, state taxation of adult entertainment is probably here to stay, along with the related litigation costs. There are some precautions, however, that legislators can take to increase their odds of succeeding when the inevitable legal challenges are filed. First, a content-neutral Nevada-style statute is more likely to survive litigation than the Utah statute that taxes a specific type of expression. A tax on secondary parties -- like the Georgia statute, which isn't levied directly on adult entertainment -- is also more likely be upheld. Another thing legislators should do is avoid stating on the record that they'd like to tax sexually oriented businesses out of existence. Although frankness and transparency in public finance and government operations should generally be praised, those statements aren't helpful to claims of content neutrality and regulatory intent.

For members of the adult entertainment industry challenging taxation specific to their businesses, there are not many good legal arguments to be made. The bottom line is that adult entertainment is typically disfavored in a way similar to tobacco and alcohol but not in a way that creates additional constitutional protections -- with the possible exception of First Amendment claims. The adult entertainment industry has a solid First Amendment argument when a state singles out the industry for taxes, particularly if the taxes or fees are particularly onerous or if they attempt to tax the actual entertainment. Adult entertainment businesses should expect taxes and fees -- whether they are good tax policy or not -- and zoning ordinances designed to combat the secondary effects inherent in adult entertainment.

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