CMSG Rest. Group, LLC v. State of New York
145 A.D.3d 136
| N.Y. App. Div. | 2016Background
- Plaintiffs operate Larry Flynt’s Hustler Club in Manhattan and sell in‑house scrips (“Beaver Bucks”) used for admission, tips, lap dances and private rooms; scrips state: “Good for entertainers and tips only.”
- DTF audited the club (June 1, 2006–Nov. 30, 2008), issued a tax determination, and ultimately assessed over $2.1 million in sales tax (partly based on scrip sales); plaintiffs pursued administrative review but also filed this declaratory action.
- Plaintiffs challenged the Amusement Tax (Tax Law §1105(f)(1)) and Cabaret Tax (Tax Law §1105(f)(3)) as facially and as‑applied violations of the First Amendment, equal protection, vagueness, and due process; they also sought injunctions and refunds.
- The ALJ in the administrative proceeding upheld the assessment, finding the club sold admission to a sexual/fantasy service (striptease) and that recordkeeping prevented separating exempt from taxable receipts.
- Supreme Court dismissed the complaint and denied injunctive relief; the Appellate Division modified only to declare the statutes constitutional and otherwise affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Do the Amusement and Cabaret Taxes violate the First Amendment by content‑based discrimination? | Taxes target protected exotic dancing and burden speech; exemptions discriminate by content. | Taxes are generally applicable, not aimed at expression; exemptions are subsidies, not penalties. | Court: Taxes are content neutral/subsidy choices; no First Amendment violation (New Loudon/Stahlbrodt controlling). |
| Do the exemptions violate Equal Protection by irrationally favoring dramatic/musical performances? | Exemptions irrationally burden sexually expressive performances. | Exemptions rationally promote cultural/artistic performances; tax classifications get rational‑basis review. | Court: Rational basis satisfied; exemptions legitimate subsidies, not invidious discrimination. |
| Are the exemption terms unconstitutionally vague, permitting arbitrary enforcement? | Terms like “choreographic” are subjective; auditors cannot reliably classify performances after the fact. | Any imprecision is tolerable in economic/subsidy context; administrative guidance and advisory opinions mitigate vagueness. | Court: Not unconstitutionally vague; administrative mechanisms and civil (not criminal) context reduce vagueness concerns. |
| Were plaintiffs denied procedural due process because auditors could not view live performances during audits? | Auditors cannot retroactively evaluate live performances; taxpayers cannot practically preserve every performance. | Taxpayers may present testimony, representative videos, and other evidence in administrative proceedings. | Court: Due process claim fails; evidentiary presentation at administrative hearing suffices; fact‑specific exemption claim must be pursued administratively (Tax Law §1140). |
Key Cases Cited
- Matter of 677 New Loudon Corp. v. State of N.Y. Tax Appeals Trib., 19 N.Y.3d 1058 (2012) (upholding application of amusement/cabaret taxes to exotic dance; court treated exemptions as legislative subsidies)
- Stahlbrodt v. Commissioner of Taxation & Fin., 92 N.Y.2d 646 (1998) (distinguishing content‑based penalization from permissible tax exemptions that subsidize certain expression)
- Reed v. Town of Gilbert, 135 S. Ct. 2218 (2015) (addressing content‑based regulation analysis; distinguished here as a speech‑suppressing regulation rather than a general tax)
- City of Erie v. Pap’s A.M., 529 U.S. 277 (2000) (recognizing nude/exotic dancing as expressive conduct within outer ambit of First Amendment)
- Murdock v. Commonwealth of Pa., 319 U.S. 105 (1943) (striking down license tax that operated as a restraint on religious literature distribution; distinguished from nondiscriminatory sales tax)