Special Report: Sin Taxes on Adult Websites

Alex Henderson
On Jan. 1, Texas' new statewide sales tax on strip clubs officially went into effect; patrons must now pay a $5 surcharge whenever they enter a strip club anywhere in the Lone Star State, and similar "sin taxes" or "poll taxes" are being considered or discussed in Florida and New Mexico.

For adult webmasters, the growing popularity of taxes on strip clubs raises some important questions: what types of taxes will be proposed for adult websites in the future, and how high will they be?

Will new taxes on the adult Internet come about at the federal level or at the state and local levels, and will new adult Internet taxes take the form of excise taxes or sales taxes?

All of that remains to be seen, but with the federal government as well as state and local governments facing so many budgetary challenges in the U.S. in 2008, it is safe to assume that politicians — both Democrat and Republican — will be looking at adult Internet companies as a possible source of additional tax revenue.

Proposals to tax the adult Internet are not new. In 2005, Democratic Sen. Blanche Lincoln of Arkansas introduced a bill that would have imposed a federal excise tax of 25 percent on most adult websites. Lincoln's bill, which was called the Internet Safety and Child Protection Act of 2005, was supported by several other Senate Democrats (including Joseph Lieberman), but drew strong criticism from attorneys for the adult industry — who felt that singling out adult websites for significantly higher taxes was an attack on constitutionally protected speech — as well as from members of the Christian Right.

The Family Research Council, for example, argued that using adult websites to raise tax revenue "legitimizes" them. Lincoln's bill never passed, but proposals for new adult Internet taxes will no doubt continue, and many attorneys for the adult industry are concerned about the First Amendment implications should adult websites be taxed at considerably higher rates than mainstream websites.

The Florida-based First Amendment attorney Lawrence G. Walters said that although some Christian Right activists believe that taxing adult entertainment legitimizes it, he fears that other anti-erotica crusaders of the far right will decide that taxes of 25 percent or higher will be an effective way to harm the adult industry financially.

"This whole sin-tax approach appears to be the new tack that the Religious Right is taking with respect to media that it disagrees with or doesn't like," Walters said. "This is happening with violent video games as well as adult entertainment. They probably had a meeting somewhere, and somebody probably said, 'If we can't censor these companies, let's try to make them unprofitable. We'll just tax them out of existence. We'll tax anything we don't like, and we'll raise money for these popular, impossible-to-vote-against causes like battered women and survivors of sexual abuse and children with disabilities — the most heart-wrenching things they can come up with in order to force the legislators to back the sin tax. Unfortunately, they haven't considered the free-speech implications of that approach, but that's the battle that is being fought currently."

Many people in the adult entertainment industry are opposed to any type of new erotica tax — however small — being imposed at the federal, state or local level. There are also those in the adult industry, however, who strongly believe that if an erotica tax is reasonable rather than punitive, it could benefit the adult industry. Bill Margold, who was a major adult film star in the 1970s and remains very active in the adult industry with his organization Protecting Adult Welfare, has long argued that a national erotica tax would be beneficial for the industry. In fact, he proposed an erotica tax when he testified in front of the Meese Commission back in 1985, saying that the revenue should fund sex education.

The 64-year-old Margold supports a national erotica tax for the same reason that some Christian fundamentalists oppose it: he believes that it would send out a message that the adult industry is a legitimate, if controversial, part of the business world. Margold has very specific ideas about how a national erotica tax should be carried out, and he said that Lincoln's Internet Safety and Child Protection Act of 2005 was doomed to failure because it was fundamentally flawed.

Margold said that the 25 percent that Lincoln wanted was "insane" and "way too much," adding that he believes a 10 percent national sales tax on erotica would be "fair." Another major flaw of Lincoln's bill, Margold said, was the fact that the Arkansas senator focused on adult websites exclusively; all adult entertainment-related purchases — whether one is paying a monthly charge for a membership adult website, ordering an adult DVD online, buying an adult DVD or magazine in a brick-and-mortar store or paying for adult pay-per-view in a hotel — should be taxed by the federal government at a rate of 10 percent, Margold said.

"A national tax on the adult entertainment industry is inevitable," Margold asserted. "So we should accept it, work with it and accommodate it. From 1972-2008, the adult entertainment industry has had 36 years of sociological acceptance as a result of 'Behind the Green Door' and 'Deep Throat,' and we damn well better expect to pay to play — which is what a tax is all about. For years, I've been arguing with people in the adult business who say, 'No, no, no, we don't want to be taxed.' And I always say, 'But you want to be legitimate, don't you? Well, guess what: the price of legitimacy is taxation.' The adult entertainment industry is here to stay; Pandora's box was disintegrated, and we should accept the fact that taxation is the price we have to pay for doing business. But there has to be taxation with representation for the adult industry."

If a national 10 percent sales tax/consumption tax on erotica is implemented in the U.S., Margold said, the federal government must have a genuine dialogue with the adult industry and realize that adult entertainment — like alcohol, tobacco and gambling — isn't going away despite attacks from people he describes as "right-wing, Bible-thumping puritanical swine who jack off to us with their left hands and deny us with their right hands."

"I like to say that adult entertainment is the fourth prong on the devil's pitchfork, which also includes alcohol, tobacco and gambling," Margold said. "Those things are taxed, and a federal tax on adult entertainment would make us look more legitimate in the eyes of society. If there is taxation with representation for the adult industry, the government will have to listen to us because we are buying our way in literally; we're paying at the door to be heard. A national tax on adult entertainment would represent a new piggy bank for a government that needs all the money it can get, but there needs to be a comfortable way for the adult industry to be taxed; a tax of 25 percent would be ridiculous, and if politicians are that greedy, they will lose."

First Amendment attorney Jennifer M. Kinsley (of the Cincinnati-based firm Sirkin, Pinales & Schwartz) does not believe that the introduction of new erotica taxes will make adult businesses any less vulnerable to attacks from the Christian Right. Kinsley said that while some Democratic politicians and moderate Republicans might like having adult businesses as sources of new tax revenue, the Christian Right is much more concerned about "family values" than balanced budgets.

"This is not a fiscal issue for the Religious Right," Kinsley said. "For them, it is a moral issue — and politicians who support them will cut their budget if they have to in order to get rid of adult content. We represent a small brick-and-mortar adult bookstore in a little town called Kennedale, Texas. It's a very impoverished community of about 5,000 people, and the store does a booming business. Hands down, it is the largest taxpayer in the city. But that city has been trying to run that business out for about five years now. So I don't necessarily buy the argument that the government is going to want to keep adult businesses around just because they are paying taxes. They'll find somebody else to tax if they want to."

Kinsley noted that a far-reaching national adult entertainment tax would not only affect adult companies — it could also affect all the mainstream cable and satellite television providers and large hotel chains that are distributing erotica in some fashion. "If they make the adult entertainment tax too broad," Kinsley said, "they are going to tread into the area of Marriot and AT&T — the companies with big lobbyists who will no doubt oppose any sort of tax that is going to cut into their bottom line. Any kind of tax on adult entertainment at the federal level would need to be fairly narrowly drawn to avoid the big corporate interests that will get involved. It becomes a question of how big the tax is, how expansive it is and who it is covering."

If new Internet-specific erotica taxes are enacted in the U.S., Internet-based adult companies won't be the only ones affected; so will all the San Fernando Valley adult film studios that are doing more and more business online. So will Andrew Blake, Rob Black and other filmmakers who have officially abandoned DVDs and declared that digital online distribution is the way to go.

Walters said that the convergence of the film/video and Internet sides of the adult industry "makes it more difficult to impose and collect a tax on one segment or the other. If it's an across-the-board tax, you don't have to get into these distinctions of what is VOD or DVD and so forth. But if they try to impose a tax on only one facet of the adult entertainment industry — only on Internet adult entertainment — well, what is that?

"What does Internet adult entertainment mean? If someone burns a DVD by getting the VOD stream from a website, is that different from Netflix sending a DVD to your house in the mail? You still end up with the same product; it's just delivered in a slightly different way. And should that make a difference from a taxation standpoint? Those are all the different questions that come up. The devil is in the details."

Walters said that taxes on strip clubs, adult video stores or BDSM dungeons are easier for state and local tax agencies to enforce because they are dealing with brick-and-mortar businesses, but taxing the adult Internet, he said, is much more complicated and challenging given its international nature — challenging at the state or local level, and challenging for the federal government.

"It is exceedingly difficult to try to impose Internet taxes and enforce them at the state level — and frankly, it is just as difficult to enforce them at the national level," Walters asserted.

"There are plenty of Internet companies that are international and might be based in Barbados and Ireland as well as the U.S. Where is the revenue being generated from? What kind of presence do they have in the U.S.? Are their servers located outside the U.S., and maybe they just have an office here? These are complicated questions. The courts will sort them out eventually, and 20 years from now Internet law will be fairly well established. But right now, we're still writing the rules."