ALBANY, N.Y. (CN) – Hoping to wiggle out of a $10 million tab, a company that installed "funny money" machines in strip clubs claims in court that its service is akin to a currency exchange, which is not subject to sales tax.
Metro Enterprise Corp. notes in a footnote of its Feb. 24 complaint that funny money is known in the industry as “scrip,” an alternative currency that customers low on cash can buy with a credit card to buy dances or tip performers.
Likening its machines to ATMs, Metro notes that it charges a transaction fee but does not otherwise profit from scrip sales.
“The scrip that dancers received from patrons for rendering private dances or for gratuities did not enter Metro's gross receipts,” the complaint states, filed in Albany County Supreme Court.
Noting that it does not share in any revenue the club generates from cover charges or alcohol sales, Metro emphasizes that service-fee charges at ATM or point-of-banking machine are not subject to sales tax.
“Sales and purchases of scrip are, in essence, currency exchanges,” the complaint continues. “Such sales and purchases might also be viewed as akin to the sale of gift cards or gift certificates. Sales Tax is not imposed on currency exchanges, sales of gift cards, or sales of gift certificates.”
Despite this, the New York State Department of Taxation and Finance sent Metro a bill this past August for $3.8 million in taxes, $4.5 million in interest and a $1.5 million penalty.
Metro says the state is seeking to hold it liable for more than $38 million worth of scrip sales at four New York clubs, plus the taxable sales at those clubs totaling another $6 million. The four New York clubs are Stiletto Palace Gentleman's Club, Lace Gentlemen's Club, MLB and 44th. Metro operates in another four clubs outside New York.
Meanwhile, the state does not assess any tax on cash transactions between dancers and customers, according to the complaint.
Metro says that the Tax Department failed to provide requested records and source documentation, and cited no case law or factual basis for asserting the sales tax liability.
Disputing the state’s characterization of it as a "vendor," Metro notes that it does not sell any products or services subject to the tax.
The complaint says Metro's predecessor, Pacific Club Services, operated in the same way, and that the same Tax Department treated its sales as nontaxable.
In addition to operating scrip machines, Metro notes that it also earns nominal, one-time fees of $1 and $10 for referring dancers to the clubs.
Any dancers that Metro refers also give Metro a percentage of the scrip they redeem.
Westwood, N.J.-based Metro Enterprise filed the complaint with its owner John Scarfi. They are represented by Michelle Merola of Hodgson Russ in Albany.
Representatives from the New York State Department of Taxation and Finance declined to comment on the lawsuit Monday afternoon.
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