MLB Enterprises, Corp. v. New York State Department of Taxation and Finance

Background

MLB Enterprises, Corp. owned and operated the Manhattan strip club Lace until it closed in 2018. Patrons could rent private party rooms and tip dancers with cash or with an alternative currency called scrip. Metro Enterprises Corp. sold the scrip at the club, charging patrons a fee and deducting an amount when dancers exchanged scrip for cash. MLB and Metro treated the scrip as gratuities belonging to the entertainers and did not include scrip sales in their gross taxable receipts. MLB did pay sales tax on party-room rentals.

The New York State Department of Taxation and Finance determined that MLB had underreported amounts connected to party-room rentals, bar sales, coat check, general admissions, and scrip transactions. It issued notices stating that MLB and Anthony Capeci, identified as MLB’s sole president and corporate officer, owed several million dollars in taxes, penalties, and interest; the exact amount was disputed. MLB was pursuing an administrative tax appeal when it filed this federal action.

Claims and motion

MLB challenged the assessments under 42 U.S.C. § 1983 and New York law. It argued that it was not a taxable entity, that New York law did not tax the scrip transactions or party-room rentals, and that paying tax on the scrip would require withholding dancers’ tips in violation of the Fair Labor Standards Act and New York Labor Law. MLB characterized the taxation as violating due process and sought declaratory and injunctive relief.

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which permits dismissal when the court lacks subject-matter jurisdiction. They relied on the Tax Injunction Act, 28 U.S.C. § 1341. That statute bars federal courts from stopping the assessment, collection, or enforcement of a state tax when the state provides a plain, speedy, and efficient remedy.

Court’s analysis

The court held that the Tax Injunction Act’s jurisdictional bar applied. It explained that a state remedy is adequate if it provides a full hearing and judicial determination in which the taxpayer may raise constitutional objections. New York provides administrative review followed by state-court review in an Article 78 proceeding, although a taxpayer generally must first pay the disputed tax or post a bond for that proceeding.

The court also found that New York law permits a declaratory judgment action for claims that a tax law is unconstitutional or wholly inapplicable. The court relied particularly on the Supreme Court’s decision in Tully v. Griffin, Inc., which held that the availability of a state declaratory judgment action made New York’s remedy sufficiently clear for purposes of the Tax Injunction Act. The court concluded that MLB could obtain a state-court determination of its constitutional objections even if some challenges to the tax’s applicability were subject to administrative review.

The court further noted that Capeci could pursue an Article 78 proceeding without prepaying the tax or posting a bond because the prepayment requirement did not apply to determinations of tax liability for corporate officers, directors, or employees. Because Capeci was jointly liable for the same assessments and could raise the same arguments, this provided an additional basis for applying the Tax Injunction Act.

Disposition

The court granted the defendants’ motion to dismiss for lack of subject-matter jurisdiction and dismissed MLB’s complaint in its entirety without prejudice. It did not consider the defendants’ other arguments for dismissal and did not need to decide MLB’s motion to strike a defense declaration. The Clerk was directed to terminate the motion and close the case.