Extending Sales-Tax Liability to In-House “Scrip” Used for Private Performances – Commentary on Matter of O’Neill v. New York State Tax Appeals Tribunal (2025 NY Slip Op 03110)

1. Introduction

The Appellate Division, Third Department, in Matter of O’Neill v. New York State Tax Appeals Tribunal has clarified that the sale of in-house “scrip” employed to obtain private dances in gentlemen’s clubs constitutes an “admission charge” subject to New York sales tax under Tax Law §1105(f)(1) & (3). The decision arises from a CPLR Article 78 challenge by Dominica O’Neill, owner of Pacific Club Holdings, Inc. (“Pacific”), after the New York State Tax Appeals Tribunal affirmed sales-tax assessments on Pacific’s scrip receipts.

The ruling not only reinforces earlier precedents involving adult-entertainment venues but also crystallises two broader principles:

Sales of non-cash substitutes (scrip, dance dollars, tickets, etc.) that function as the medium of payment for taxable amusement are themselves taxable at the point of sale.
The Department of Taxation & Finance will rarely be estopped from asserting tax, and recordkeeping deficiencies will defeat attempts to segregate nontaxable gratuities from taxable charges.

2. Summary of the Judgment

The Court confirmed the Tribunal’s determination that:

Private or semi-private rooms in the VIP Club constitute a “place of amusement” or “cabaret” within Tax Law §1105(f).
The 20 % surcharge collected by Pacific on the sale of scrip, along with the underlying face value, are “receipts” for an “admission charge,” taxable upon purchase.
Pacific, as the recipient of amusement charges, was the person required to collect and remit tax (Tax Law §1131[1]).
Petitioner failed to rebut the statutory presumption of taxability (§1132[c][1]) because she produced no reliable method to distinguish scrip used for tips (non-taxable) from that used for performances (taxable).
The doctrines of estoppel and veil-piercing do not insulate Pacific from liability.

Accordingly, the petition was dismissed and the assessment sustained.

3. Analysis

3.1 Precedents Cited

Matter of HDV Manhattan, LLC (2017) – Held that scrip used to buy lap dances in adult clubs is subject to sales tax as an admission charge. The Court leaned heavily on HDV to analogise the VIP Club’s private-room model.
Matter of Gans (2021) – Reaffirmed that “dance dollars” are taxable and rejected the “gift-card” analogy; O’Neill adopts the same reasoning and explicitly cites Gans for both the taxability analysis and for the taxpayer’s failure to segregate tips.
Metro Enterprises (2019) – Validated use of contractual evidence (performer agreements) to show club participation in the provision of amusement. O’Neill uses identical contractual language (“referral fee”) to show Pacific’s active role.
BTG Pactual NY Corp. (2022) & Walt Disney Co. (2022, aff’d 2024) – Cited for the standard of review: Tribunal determinations stand if rationally based and supported by substantial evidence.
Morris v. Taxation & Finance (1993) & related cases – Discussed to reject petitioner’s “piercing the corporate veil” argument; the Court clarifies the concept was irrelevant.
Estoppel line of cases – Matter of Ryan (2015), Winners Garage (2011) and Rashbaum (1996) – Establish that estoppel against the State in tax matters applies only in “manifest injustice” scenarios, a threshold not met here.

“Revenue generated from the sale of scrip—which could be used to purchase private dances—is properly taxable under Tax Law §1105(f)(3).” (HDV Manhattan cited with approval)

3.2 Legal Reasoning

Statutory Framework
Tax Law §1105(f) imposes sales tax on (1) admission charges to any place of amusement and (3) charges of a roof garden, cabaret, or similar place. Sections §1101(d)(2)(10)(12) supply definitions. Section §1132(c) presumes taxability.
Scrip = Admission Charge
The Court characterises Pacific’s scrip as the means by which a patron gains access to the private performance, not a mere currency exchange. The 20 % issuance fee and 10 % redemption fee underscore its service/entertainment character.
Evidence of Club Involvement
Contracts and prior pleadings show Pacific booked performances and retained a share of scrip proceeds (referral fee). Hence Pacific “furnished” the amusement.
Failure to Rebut Presumption
Although tips are not taxable, petitioner failed to provide records isolating tip-related scrip. Under §1132(c), the entire amount remains presumed taxable.
Rejection of Gift-Card Analogy
The taxpayer raised, but did not preserve, the argument that tax should be imposed only upon redemption (like a gift certificate). Even if preserved, Gans forecloses it. Gift cards are broadly governed by federal CARD Act provisions; scrip linked to a single establishment and used for immediate amusement charges is distinguishable.
Estoppel Not Available
The 2008 audit letter was conditional and limited to a single quarter; reliance was unproven, and the Department made no false representation of material fact intended for taxpayer reliance.

3.3 Impact of the Decision

Adult-Entertainment Sector – Solidifies the taxability of any club-issued medium (chips, tickets, wristbands) that secures a performance, even in private settings. Operators must register as vendors and collect sales tax upfront.
Broader Amusement Industry – Arcade cards, amusement park wristbands, and similar “stored-value” products may face analogous treatment where the product is tied to taxable amusement services.
Recordkeeping Imperative – Clubs wishing to treat any portion of scrip as nontaxable tips must implement systems that contemporaneously track usage. Absent granular data, the presumption of taxability is effectively irrebuttable.
Corporate Structuring – Separating functions among multiple entities will not avert tax where operations are integrated and patrons perceive a single business.
Limited Use of Estoppel – The precedent underscores that informal or conditional communications from the Department afford little protection; only formal closing agreements or Advisory Opinions confer reliable reliance rights.

4. Complex Concepts Simplified

Admission Charge: The total amount a customer pays to gain entry to, or enjoy, amusement. It covers entry fees, mandatory service charges, and charges for entertainment.
Place of Amusement / Cabaret: Any venue offering entertainment, whether music, dance, or performance, for profit. A gentlemen’s club is treated as a modern “cabaret.”
Presumption of Taxability (§1132): New York automatically presumes that receipts related to taxable categories are subject to tax. The taxpayer bears the burden of producing convincing records to prove otherwise.
Estoppel (in Tax Cases): A doctrine that prevents a party from contradicting previous conduct if someone reasonably relied on that conduct to their detriment. In tax law, courts apply estoppel against the State only in “manifest injustice” situations involving egregious misrepresentations – a very high bar.
Piercing the Corporate Veil: Allowing a court to disregard the separate legal identity of a corporation to hold owners liable. In O’Neill, the Court clarified that the Tribunal taxed Pacific directly, obviating any veil-piercing analysis.

5. Conclusion

Matter of O’Neill makes explicit that the sale of club-issued scrip used to obtain private performances is itself an admission charge subject to New York sales tax upon sale. The Court reaffirmed long-standing principles:

The statutory presumption of taxability is formidable; it will not be overcome without meticulous records.
Creative payment mechanisms cannot recharacterise what is, in substance, a charge for amusement.
Informal Department communications do not create binding tax immunity; estoppel remains exceptional.

The decision therefore serves both as a compliance roadmap for adult-entertainment operators and as a warning to businesses employing bespoke, in-house currencies. Going forward, taxpayers should assume that any receipt connected to amusement or entertainment is taxable unless they can affirmatively prove otherwise. In doctrinal terms, O’Neill cements the functional approach to “admission charges,” ensuring the tax base keeps pace with evolving payment structures.