At the beginning of the year, THUMP broke the news that once-beloved Brooklyn dancing spot Verboten was facing allegations of fraud and financial mismanagement. A cohort of the club's investors and former employees levied a number of complaints against the Williamsburg dance music institution, including accusing its owners of not paying staff and withholding taxes on international DJ fees.
Verboten is now under the limelight once again, after the New York tax department showed up at the club on Wednesday March 30 and temporarily shut it down for not paying over $360,000 worth of sales tax. The drama rumbled on throughout the week, and by Friday, the club was open once again after its owners, Jen Schiffer and John Perez, filed for bankruptcy for the business.
As the Verboten story unfolds more details are emerging that bring up more questions than they do answers. THUMP has put together an explainer to help parse what's happening at the club.
What happened on Wednesday night?
The New York Department of Taxation and Finance temporarily shut down the club for non-payment of sales taxes. On Friday, Schiffer told THUMP that she was treated like a "nightlife gangster" by the state authorities, who arrived at the club after business hours and seized the business.
OK, but what does being seized for not paying taxes actually mean?
Verboten owes $360,378.05 in sales tax to the state of New York. THUMP spoke to tax lawyer Joseph Lipari from the Manhattan law firm Roberts & Holland about how sales tax works. Lipari explained that when someone pays for goods—drinks, tickets—in a club, they pay the sales tax, which is then collected by the club and paid back to the state either on a monthly or quarterly basis. Because Verboten's management didn't hand over that sales tax, the state seized the business and effectively locked them out.
The state actually changed the locks?
Yup. Schiffer confirmed this to THUMP.
Why didn't Verboten pay their taxes?
Without an official explanation from the club, we're not sure yet. But Lipari explained to THUMP that there are only really two ways for a business to end up with a tax problem like this. "One is that the business is doing well, but they're skimming—taking money from the business and putting it in their pockets," Lipari said. "But also when bars and restaurants have a downturn, when business isn't as good as they like, there's a tendency to use tax monies to pay other bills." Lipari explained that because businesses like clubs and bars are cyclical by nature, it's not uncommon for them to experience periods of slow business. In those cases, it's tempting to use the money that's supposed to go to the tax department to pay for other business expenses, for example compensating talent or re-stocking the bar.
Right, but Verboten has since reopened. How did that happen?
Verboten's owners filed for bankruptcy on Thursday.
Wait a minute. They filed for bankruptcy but then reopened the club?
That's right. Schiffer and Perez filed for Chapter 11 bankruptcy in the Brooklyn Federal Court. There are many types of bankruptcy a business can file, and Chapter 11 is sometimes known as "reorganization bankruptcy." It allows a business to remain in operation while its owners figure out a way to restructure its finances. Chapter 11 filings are actually quite common; General Motors, K-Mart, and United Airlines, for example, have turned to the bankruptcy courts as a fix for financial problems. In the electronic music world, you may remember that EDM events conglomerate SFX Entertainmet recently filed for Chapter 11—and many of its subsidiaries are still ticking along just fine.
So will Verboten stay open for good then?
We don't know at this point. The management will have to present a plan to the bankruptcy court for how it will restructure its finances and resolve its debt. Also don't forget about the legal action they're also facing from the investors, who have taken them to court for allegedly violating labor standards, which will inevitably incur hefty legal fees. But with regards to the tax issue, the bottom line is the management have to find a way to pay the $360,378.05 back to the state.
Lipari said that sometimes in cases of sales tax issues, the figure the state has for the amount due isn't accurate. He said, however, it's unlikely that's what's happened with Verboten."It's gone to a warrant, so that's pretty far along the process, Lipari said. "So the chances of the club challenging the number is probably relatively small."
Long story short, the situation is pretty complicated and will continue unfolding in the coming weeks. Keep following THUMP for more updates.