Restaurants Win Victory Against State Tax Hikes

A Washington, D.C.-area restaurant company won a legal battle this week when a Maryland court determined that some dining establishments providing entertainment were being unfairly taxed.

The Maryland Court of Appeals (search) upheld a lower-court ruling that restaurants that provide entertainment for their patrons, but do not charge covers, require minimum purchases or otherwise inflate prices during performances were not liable for an additional amusement tax.

Clyde's Restaurants (search), a chain which operates a dozen restaurants in the greater Washington, D.C., area, had filed suit against the amusement tax, claiming that it would harm bar business.

"The entertainment enhances the ambience of the room. We don't charge for it," said Jeffrey Owens, Clyde's chief financial officer. "I think that it is ridiculous that the state would make us pay an additional 10 percent of our revenue."

"We are already taking a big hit on our bar business because of the smoking ban," Owens added, referring to a law that went into effect in Montgomery County earlier this month.  Clyde's is a primary plaintiff in a separate lawsuit against the smoking ban.

Owens said the court's decision was not unexpected because the restaurant group won on each level of the process.

"It's very, very difficult for anyone ... to pay to fight the government," said Tom Stone, attorney for the Restaurant Association of Maryland, which joined in the suit against the entertainment tax. "I mean, it's been four years."

The Court of Appeals, Maryland's highest state judicial body, determined that since restaurants did not charge patrons for entertainment and did not receive additional revenue from it, the cost could essentially considered overhead and therefore not subject to the extra tax.

In 2003, the Maryland House of Delegates (search) proposed legislation that would have put state law more in line with federal law, which taxes receipts from any and all sales when entertainment is provided. The legislation never reached a vote in the Senate.

In the ruling upholding the lower court's finding, Court of Appeals Judge Dale R. Cathell wrote that there was "the need for both an admission charge and a direct financial nexus between the entertainment and the profit."

In a concurring opinion, Judge Irma Raker wrote, "Where a tax statute's applicability, as opposed to a tax exemption, is ambiguous on its face, the ambiguity should be read in favor of the taxpayer."

The admission and amusement tax is a county tax and, according to briefs filed by the six largest counties in Maryland, is worth about $3.6 million in revenue statewide in fiscal 2004.

Since the lower court ruling was upheld, the state comptroller's office estimated that $8.4 million in admissions and amusement tax revenue collected between 2001 and 2003 was subject to refund.

"Obviously, we are disappointed with the result, but the courts have spoken and we respect that, but this is something that the General Assembly can fix," said Gerald Langbaum, assistant attorney general and counsel to the comptroller.

Raker, too, wrote in her concurring opinion that the General Assembly could change the law to conform with the federal statute.