The Nevada Supreme Court recently held that the 2004 Live Entertainment Tax (LET) does not constitute a violation of strip clubs’ rights to freedom of speech under the First Amendment. While the plaintiffs, comprising a group of Nevada strip clubs, claimed the excise tax was discriminatory in nature, the court – despite the numerous exemptions provided to other sub-industries in the live entertainment space – ruled it constitutional.
The LET is an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. levied on admissions, snacks, drinks, and merchandise in the live entertainment sector. The taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate varies, however, depending on the size of the facility hosting the event. If the occupancy capacity of the facility hosting the event is less than 7500, the applicable tax rate is 10 percent, versus five percent if the capacity is greater than or equal to 7500. A strip club, thus, falls under the 10 percent tax rate (For more details on the LET and further background on the Nevada Supreme Court hearing of this case, see our previous blog post).
The LET has caused significant contention within the live entertainment sector, the key reason being the exempt status many sub-industries, like NASCAR racing, live ambient music, and even the Burning Man festival, enjoy. The initial intention of state legislators was to enact a clean, broad-based tax. However, with the many exemptions in place, it is not surprising that contention has arisen.
In the Nevada case, Deja Vu Showgirls of Las Vegas, LLC v. Nevada Dep't of Taxation, the plaintiffs argued the LET unconstitutional based on the following key points:
- Freedom of expression is subject to violation;
- A specific form of speech is explicitly being limited, meaning adult entertainment;
- Numerous exemptions granted to sub-industries in the live entertainment sector make the tax no longer broad-based, specifically targeting adult entertainment;
- The tax is content-based, requiring taxpayers to reveal in which form of speech they participate.
However, the Nevada Supreme Court disagreed, stating that the tax does not inhibit freedom of expression; and, moreover, argued that the LET is broadly applicable, does not target the people who are actually exercising the right to freedom of expression (in this case, the stripper), and is not specifically directed toward adult entertainment.
This case is not the only legal process pertaining to taxation of strip clubs. A related ruling occurred in Texas, where a “pole tax,” a $5 per-patron admission fee at strip clubs, was at first deemed unconstitutional, but later revoked by the Texas Third Court of Appeals in May 2014.
Regardless of whether these state-levied taxes are unconstitutional, the key consideration is if this tax effectively raises revenues in a way that minimizes economic harm, given its relatively narrow base. Tax structures with a broad base and low rates are fundamental to a robust tax policy. A narrow tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , on the contrary, can stir speculation with respect to the use of a tax as a political instrument to disfavor a specific group, as in the case of strip clubs in Nevada. This is as true of narrow tax privileges (like Nevada’s recent mega-deal with Tesla) as of narrow excise taxes. Ultimately, the purpose of the tax code is not to enable policymakers to pick favorites or make social policy, but to raise revenue with minimal economic distortions. On that test, regardless of its constitutionality, Nevada’s “stripper tax,” like many excise taxes, doesn’t perform very well.
Read more on Nevada here.
Read more on excise taxes here.
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