Nite Moves, an exotic dance club in Albany, applied to have admission fees, pole dancing and private lap dancing qualified for tax exemption, arguing that the performances are difficult and require practice and choreography.
Revenue collected from "dramatic or musical arts performances" is not taxable under New York state law.
However, the court decided that exotic dancing was not artistic, although the decision was split 4-3.
Dissenting judge Robert Smith said that there is no distinction in state law between "highbrow dance and lowbrow dance" so the case raises "significant constitutional problems".
Smith also clarified that his dissent was for constitutional reasons only.
He said: "Like the majority and the Tribunal, I find this particular form of dance unedifying - indeed, I am stuffy enough to find it distasteful."
The court ruled that Nite Moves failed to prove it qualifies for the tax exemption for "dramatic or musical arts performances" with evidence of promoting cultural and artistic performances in local communities.
They wrote in an unsigned memorandum: "Surely it was not irrational... to conclude that a club presenting performances by women gyrating on a pole to music, however artistic or athletic their practice moves are, was also not a qualifying performance entitled to exempt status."
Cary Ziter, a spokesman for the state's Department of Taxation & Finance, said: "We're pleased with this decision, because it gives similar businesses clear guidance on the issue of sales tax when it comes to live exotic dance establishments."
Andrew McCullough, attorney for Nite Moves, said that he and his client were very disappointed with the court's decision, and is reportedly now considering appealing to the US Supreme Court.
Nite Moves was originally given a $125,000 tax bill on admission fees, drink sales and income from private dances between 2002 and 2005.
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