LUXEMBOURG—Despite protests from the Beate Uhse chain of adult bookstores, the European Court of Justice has ruled that preview booths (better know in the U.S. as arcade booths), which allow patrons to see portions of adult movies before they buy them, are not considered to be "cinemas," and therefore do not meet the "cultural" exception from the Union's highest rate of Value Added Tax (VAT).
According to an article in Business Week, Erotic Center BVBA, a Belgian sex shop currently owned by the Beate Uhse chain, argued that its coin-operated booths qualified for the reduced 6 percent rate of VAT, just like other venues such as theaters, concert halls and movie theaters, instead of the standard rate of 21 percent.
The Sixth Directive of the European Economic Community requires all European Union member countries to charge a standard VAT rate for both products and services, but for certain categories, they're allowed to apply one of two reduced rates. Such categories—in this case the EEC's Category 7—include admissions to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities, and reception of broadcasting services.
However, in 2004, European tax authorities carried out an audit on Erotic Center and ruled that it had incorrectly applied a VAT of 6 percent to income from the preview booths, and charged the company EUR 48,454.36 (US$65,317.07) for the underpayment as well as a EUR 4,840 (US$6,524.09) fine. Erotic Center appealed the decision, and the European Court of Justice rendered its opinion on March 18 of this year.
"[T]he various events and facilities listed in the first paragraph of Category 7 in Annex H to the Sixth Directive have in particular the common feature that they are available to the public on prior payment of an admission fee giving all those who pay it the right collectively to enjoy the cultural and entertainment services characteristic of those events and facilities," the Court ruled. "It follows from the above that the concept of admissions to a cinema within the meaning of the first paragraph of Category 7 in Annex H to the Sixth Directive cannot, in light of the usual meaning of that term and the context of the provision within which it is included, be interpreted as meaning that it covers the payment made by a customer so as to be able to watch on his own one or more films, or extracts from films, in private cubicles such as those in issue in the main proceedings."
The ruling will apply to all members of the European Union, but whether other entities will be forced to pay additional taxes and/or fines based on their preview booth incomes remains to be seen. It is also unclear How the increased VAT rate will be incorporated into the booths' vending operations.
In another tax-related ruling, the income earned by freelance lap dancers in the United Kingdom is now subject to a 17.5 percent VAT, according to the UK's High Court in London—and the ruling also specified that it is the dancers themselves who will have to pay the increased liability.
The case was originally brought by U.S.-based Spearmint Rhino cabarets, which sued after VAT tribunal decision claimed that "lap-dance venues were supporting a shadow economy in which millions of pounds went undeclared each year," and tried to assess Spearmint Rhino for supposedly lost revenue to the Crown.
Spearmint Rhino, however, argued that its dancers, all of whom are required to have a "Dance Performance Licence," were independent contractors who had to pay the clubs for the facilities she used and that there was no contract between the club and the men the dancer "entertained."
Mr. Justice Mann of the High Court said he agreed with Spearmint Rhino's position.
"It seems to me to be a very forced construction of events, if it is possible at all, to say that the dancers are contracted as agents for the club," the Justice ruled, adding that the clubs' method of operation suggested that the dancers are performers "plying their self-employed trade at the club in their own right."
Typical fees charged by dancers range from £10 for a semi-nude or £20 for a fully-nude dance, up to £250 for the dancer to sit and socialize with a customer for an hour. Peter Stringfellow, owner of a chain of lap-dancing clubs in London, estimated that a dancer can earn up to £200,000 per year, and that since the revenues usually are cash transactions, many dancers pay no income taxes at all.
