Did a business attempt to get out of its tax obligations? That is what the Internal Revenue Service (IRS) recently argued in court. The business, which operates in New York, argues that its actions were within the law when it did not pay taxes on executive dollars purchased by patrons to its club. The business argues that it met its tax obligations by paying the sales tax on the admission fee, but that the additional tax sought by the IRS is not required.
What are the details of this case? This case caught a good deal of media attention because it involves a gentleman’s club. In order to enter the club, patrons were required to pay an admission fee. Patrons were then encouraged to also purchase “scrip,” or executive dollars. This scrip was then to be used to tip the entertainers. Since the purchase of this scrip did not result in admission, the business argued it was not required to pay a sales tax on the fee.
What does the law say? As noted in a recent piece in Accounting Today, the case specifically addresses a law in New York that requires a sales tax on receipts from admission charges. The term “admission charge” is expanded to include “any service charge and any charge for entertainment or amusement or for the use of facilities therefor.”
What was the argument? The business countered that the services offered were not amusement, but instead were similar to those offered when seeking the services of a sex therapist. If successful, this argument would have qualified for an exception to the tax obligation pursued by the IRS.
What did the court find? Ultimately, the court stated that the business failed to meet its burden of proof to establish that the services provided were therapeutic. Without this evidence, the court could not find that the business’ use of executive dollars met the exception.
What can business owners learn from this case? Any business can get questioned by the IRS. In order to protect your interests, it is wise to seek legal counsel. An experienced attorney is more likely to build a case that covers all elements required by the court, including the need for evidence to establish your argument (as was lacking in the above case).