Strip clubs lose tax refund bid

The Nevada Tax Commission on Monday turned down Las Vegas strip clubs' claim that they are unconstitutionally singled out by the state's live entertainment tax, denying their bid to recoup nearly $2 million.

Lawyers for the clubs, which include the Spearmint Rhino, Treasures and Olympic Garden, said they plan to continue to pursue the case in Clark County District Court. A lawsuit previously filed in federal court was sent back to the state level.

The clubs argued that their right to free expression is violated by the tax because it falls on them while exempting many other types of live entertainment.

"The taxpayers are arguing that we're being picked on specifically, and it was the Legislature's intent to pick on adult entertainment in particular" in levying the tax, said Brad Shafer, a Michigan-based First Amendment attorney who is representing the six clubs.

"What we have here is a tax laid specifically on live entertainment, which is activity protected by the First Amendment," Shafer told the commission during the hearing.

However, lawyers representing the state said the tax is acceptable because it doesn't single out the strip clubs. Senior Deputy Attorney General David Pope said the tax also applies to ballet companies, stage shows and some sports, "so it is broad based."

"There's no indication that the state of Nevada enacted the live entertainment tax to stifle the expression of the appellants," Pope told the eight-member board, which voted unanimously to deny the clubs' claim.

Monday's hearing was an appeal of a decision by the Department of Taxation, which had previously denied a demand for a refund of taxes paid during the first four months of 2004. Taxation Director Dino DiCianno told the board the amount collected over that period was $1.8 million.

The live entertainment tax was enacted as part of the painful legislative battle of 2003, which produced a record-breaking tax increase cobbled together out of various levies. The live entertainment tax replaced and broadened the previously existing casino entertainment tax, which applied to performances in gaming establishments.

The tax was revised in 2005 and 2007. Shafer said 25 exemptions have now been carved out of the law, proving that the Legislature was attempting to focus the tax only on gentlemen's clubs and exclude other performance venues.

Among those exempted from the tax are NASCAR races, minor league baseball, and restaurants or shops in which music is played in the background.

The tax requires entertainment venues that hold more than 200 but less than 7,500 people to pay 10 percent of the price of admission, food, drink and merchandise.

Nude dancing is considered a form of expression protected by the First Amendment's guarantee of free speech.

Businesses whose product is "expressive activity" can be taxed like any other business, as long as the taxes aren't intended to stifle the speech in question, Derek Shaffer, executive director of the Stanford Constitutional Law Center, said in a phone interview.

In the strip clubs' case, "There is a very real question of whether this tax intends to penalize gentlemen's clubs or whether it is a tax of general application," said Shaffer, who is not involved in the case but has expertise on First Amendment issues.

"Is this a law intended to target the expression performed in the gentlemen's clubs, or does it in substance target this expression?" Shaffer said. If the clubs can show either, they will probably win this case, he said, cautioning it is far from clear the clubs will be able to do that.

That question was the crux of Monday's arguments. The clubs' lawyer, Shafer, told the board that the vast majority of the nongaming portion of the live entertainment tax collected comes from the strip clubs. He pointed to some comments by legislators when the tax was being debated that seemed to indicate they wanted to tax the clubs in particular.

"This was to tax the adult entertainment industry, and everyone else was exempted out," Shafer said. Legislators wanted to encourage good, clean fun and tax entertainment they found unsavory, he said.

"My clients' entertainment is not family-oriented, and all of a sudden they're subject to the tax, but NASCAR is not, minor league baseball is not," he said.

But the state's lawyers said that of 53 nongaming establishments paying the tax, only 11 are strip clubs. They said the exemptions that have been created have been to prevent establishments from being taxed that aren't primarily selling live entertainment, like a mall in which a choir performs, or for purposes of economic development, in the case of NASCAR racing and baseball.

"It's not the state of Nevada singling out those taxpayers represented by Mr. Shafer," Deputy Attorney General Dennis Belcourt said.

The board found that argument persuasive. Commissioner George Kelesis said the nongaming portion of the tax shouldn't be seen as separate from that levied on casinos. Taken as a whole, he said, the tax applies generally to performance venues, of which strip clubs are a minority.

"It could be a guy playing a guitar; it could be five dogs jumping through hoops," Kelesis, a lawyer, said of the performances subject to the tax.

The Nevada chapter of the American Civil Liberties Union supports the clubs, which also include Sapphire, Jaguars and the Crazy Horse Too, and will probably file a brief in support once the court case is filed, said Nevada ACLU general counsel Allen Lichtenstein.

"What concerns us is that it is a tax that is particularly aimed at a particular business involved with a particular type of First Amendment expression," he said.

"The Supreme Court has said that First Amendment businesses can be subject to all sorts of general taxes, just like any other business, but they can't be subject to special taxes aimed at particular types of expression," he said. "This will end up in court, and the overwhelming case law will show that this tax is not acceptable."

According to the state, the nongaming portion of the live entertainment tax generated about $13 million in the 2006-07 fiscal year.

Review-Journal Capital Bureau writer Sean Whaley contributed to this report.