When someone goes into the red light district of Amsterdam and pays for a transsexual instead of a female prostitute. Transvestites have blue lights as opposed to red lights over their windows, hence the name blue light special.
Taylor -"Hey Brad how was last night in Amsterdam?"
Brad-"It sucked, I payed for a hooker and she had a dick."
Taylor- "Man you got the old blue lightspecial you dirty sailor."