Sexually Oriented Business Fee May Soon be Declared Unconstitutional . . . Again

post image for Texas SOB Fee may be unconstitutionalUpdate: On July 9, Judge Jenkins published a Final Judgment holding that the SOB Fee does NOT violate the Texas Constitution. See my July 30 post on the Texas Sexually Oriented Business Fee for more details.

The Texas Sexually Oriented Business Fee may soon be declared unconstitutional as an improperly allocated occupation tax. Yesterday, District Court Judge Scott Jenkins (Travis County) heard arguments in Combs v. Texas Entertainment Association, Inc.  He appeared to have already spent significant time considering the arguments. He also appeared to be inclined to invalidate the tax.

The Texas Sexually Oriented Business Fee (commonly called “the SOB fee”) is a $5-a-head charge imposed on “sexually oriented businesses”. The statute (section 102.051 of the Texas Business & Commerce Code, in particular) generally defines a “sexually oriented business” to be a nightclub, bar, restaurant, or other enterprise that provides live nude entertainment and authorizes the consumption of alcohol on its premises. Every quarter, such businesses must pay the Comptroller $5 for every customer that walked in their doors. The statute does not require these businesses to pass this charge on to their customers, but expressly allows them the discretion to do so. In other words, it’s a fee imposed on the strip club, not the patron, but the club is free to pass the fee on to its patrons via a door charge if it chooses to do so.

In 2008, Judge Jenkins declared the SOB fee to be an unconstitutional violation of the clubs’ right to free speech guaranteed by the First Amendment of the U.S. Constitution. In 2009, the Third Court of Appeals upheld Judge Jenkins’s decision. However in 2010, the Texas Supreme Court reversed the two lower courts and declared that the fee did not violate the First Amendment. The case was sent back to the district court so that the taxpayers could follow through with their additional arguments against the fee.

Yesterday, the taxpayers (represented by Elliot Clark and Stewart Whitehead of Winstead PC) argued that the SOB “fee” was actually an occupation tax, not a fee. If it’s an occupation tax, the Texas Constitution (Article 7, Section 3(a)) requires a quarter of the revenue to be set apart for the benefit of the public schools.

The statute authorizing the SOB fee does not allocate any funds to public schools. In fact, the statute very specifically states that the money from the SOB fee must go to programs OTHER than the public schools. The  first $25 million of the fee received each biennium must go into the State’s sexual assault fund. The remaining amount is to go into the Texas health opportunity pool, which helps low-income adults pay for health insurance. The primary reason for the fee is to fund these programs, at least according to the testimony of a number of witnesses at the trial that occurred back in 2008.

At the hearing, Judge Jenkins appeared to be convinced that the tax was indeed an occupation tax. The State argued that the tax was not an occupation tax, but instead an excise “sin” tax. In other words, it was a tax on the “sin” of watching nude entertainment in the presence of alcohol. It was meant to discourage such behavior. But Judge Jenkins didn’t appear to accept that. The fee is imposed on a particular subset of entertainment businesses, because of their particular business models. Moreover, the fee is clearly imposed on the business and not the customer, even though the club may pass the fee on to the customer if it wishes to do so.

So, if the fee is an occupation tax, the Comptroller is faced with a dilemma. She can follow the Legislature’s instructions, and deposit the collections into the sexual assault fund and the health opportunity pool. But that would violate the Texas Constitution because the Constitution requires a quarter of all occupation taxes to fund the public schools. If she instead follows the Texas Constitution and sends a quarter of the collections to the schools, she then violates the Legislature’s express order to use the fee to fund the sexual assault fund and health opportunity pool.  Therefore, the taxpayers argue, the only solution is for the Comptroller not to collect the tax at all.

Judge Jenkins appeared inclined to agree with the taxpayers, though he made a point to mention that he was prepared to invalidate the tax because the law required him to do so, not because he “wished” to do so. Case law does not allow a judge to write words into a statute, so Judge Jenkins is not permitted to override the Business & Commerce Code’s provisions and direct the Comptroller to send a portion of the funds to the schools.

Judge Jenkins’s only apparent hesitation is that other court decisions require him to preserve the Legislature’s intent while still ensuring that the law complies with the Texas and U.S Constitutions. In other words, he must find as much of a statute constitutional as he possibly can. For instance, the Government Code does allow him to strike unconstitutional provisions from a statute while leaving the remainder. So he could potentially strike the two sections that direct the money into programs other than the public schools and then leave standing the provisions that create the tax itself. But case law states that a judge may only do this if the Legislature would have passed the act without the offending provisions intact. Judge Jenkins didn’t appear to be particularly convinced that the Legislature would have done such a thing.

At the end of the hearing, the Judge instructed the State’s attorney to draft him a proposed order that would allow him to find the tax to be an occupations tax, but still allow the tax to stand. The State is expected to file its proposed order before July 4. If Judge Jenkins decides he can’t accept the State’s proposed order, he appears prepared to declare the tax unconstitutional a second time. The State would almost surely appeal such a decision, but it’ll be an interesting case to watch.


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