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Hegar v. Texas BLC, Inc.

Court of Appeals of Texas, First District

January 9, 2020

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS, Appellant
v.
TEXAS BLC, INC., Appellee

          On Appeal from the 250th District Court Travis County, Texas [1] Trial Court Case No. D-1-GN-17-002768

          Panel consists of Justices Kelly, Hightower, and Countiss.

          MEMORANDUM OPINION

          PETER KELLY JUSTICE

         We dismiss this appeal because, in light of a ruling from the federal district court for the Western District of Texas, Austin Division, no ruling from this court can currently affect the rights of the parties and this appeal is thus moot. We write to explain the unusual procedural posture of this case that leads to this conclusion.

         In 2007, the Texas Legislature enacted a statute requiring the collection of a $5 per patron fee from businesses that offer live nude entertainment and allow the consumption of alcohol on their premises. Tex. Bus. & Comm. Code § 102.052(a). Such a business is considered a sexually oriented business ("SOB"). Id. § 102.051(2). SOBs are required to self-report and remit the SOB fees. See Tex. Bus. & Comm. Code § 102.053 (requiring SOBs to remit the fee quarterly along with a report "containing the information required by the comptroller").

         The Legislature delegated to the Comptroller of Public Accounts responsibility for administration, collection, and enforcement of the SOB fee. Id. § 102.056; see also Tex. Tax Code § 111.001 ("Comptroller to Collect Taxes"). The Comptroller is authorized to "adopt rules that do not conflict with the laws of this state or the constitution of this state or the United States for the enforcement of the provisions of this title and the collection of taxes and other revenues under this title." Tex. Tax Code § 111.002(a).

         The SOB fee statute became effective January 1, 2008, and it was immediately challenged in state court. See State of Texas, 2017 WL 11072005, at *6 (June 2, 2017) (ALJ Proposal for Decision). The Travis County district court held that imposition of the SOB fee violated the First Amendment to the United States Constitution, and it enjoined the Comptroller from assessing or collecting the fee. Tex. Entm't Ass'n, Inc. v. Combs, No. D-1-GN-07-004179, 2008 WL 2307196 (345th District Court, Travis County, Mar. 28, 2008) (Combs I), rev'd, 347 S.W.3d. 277 (Tex. 2011). The Austin Court of Appeals concluded that the SOB fee was a "content-based tax subject to strict scrutiny," and it held that the SOB fee was "unconstitutional under the First Amendment. See Combs v. Tex. Entm't Ass'n, Inc., 287 S.W.3d 852, 864 (Tex. App.-Austin 2009) (Combs II), rev'd, 347 S.W.3d 277 (Tex. 2011).

         The Supreme Court of Texas disagreed that the SOB fee statute was subject to strict scrutiny, concluding that it was "not aimed at any expressive content of nude dancing but at the secondary effects of the expression in the presence of alcohol." See Combs v. Tex. Entm't Ass'n, Inc., 347 S.W.3d. 277, 286, 287-88 (Tex. 2011) (Combs III) ("The fee in this case is clearly directed, not at expression in nude dancing, but at the secondary effects of nude dancing when alcohol is being consumed. An adult entertainment business can avoid the fee altogether simply by not allowing alcohol to be consumed. For these reasons, we conclude that the fee is not intended to suppress expression in nude dancing.").

         The Texas Supreme Court evaluated the statute under the four-part test of U.S. v. O'Brien, 391 U.S. 367 (1968), which concerns content-neutral restrictions on symbolic speech. 391 U.S. at 377. Under O'Brien,

a government regulation is sufficiently justified [1] if it is within the constitutional power of the Government; [2] if it furthers an important or substantial governmental interest; [3] if the governmental interest is unrelated to the suppression of free expression; and [4] if the incidental restriction on alleged First Amendment freedoms is no greater than is essential to the furtherance of that interest.

Id. The Texas Supreme Court held that the O'Brien test was satisfied, in part by concluding that the $5 per patron fee was "a minimal restriction on the businesses." Combs III, 347 S.W.3d at 288.

         After the 2011 Supreme Court opinion, the case was remanded for the court of appeals to consider the arguments relating to the Texas Constitution, and in 2014, the Austin Court of Appeals upheld the statute against the state constitutional challenges. Tex. Entm't Ass'n, Inc. v. Combs, 431 S.W.3d 790, 801 (Tex. App.- Austin 2014, pet. denied) (Combs IV). The Comptroller then began enforcing the SOB fee. See State of Texas, 2017 WL 11072005, at *6 (June 2, 2017) (ALJ Proposal for Decision).[2]

         The Comptroller's enforcement actions sometimes included businesses that operate as bikini-latex clubs-clubs that serve alcohol and offer live entertainment by women, who are partially covered by latex that is applied to their bodies in a liquid or semiliquid state. The Comptroller contended that these clubs were sexually oriented businesses under the SOB fee statute. The clubs contended that they were not SOBs because their entertainers were covered with clothing or liquid latex that had dried on their bodies, and therefore they were not nude. In some cases, the administrative law judges agreed with the clubs and found that no SOB fees were owed.

         In 2017, the Comptroller adopted a rule regarding the sexually oriented business fee ("the SOBF Rule").[3] 34 Tex. Admin. Code § 3.722. The SOBF Rule defined "clothing" as "a garment used to cover the body, or a part of the body, typically consisting of cloth or a cloth-like material. Paint, latex, wax, gel, foam, film, coatings, and other substances applied to the body in a liquid or semi-liquid state are not clothing." Id. ยง 3.722(a)(1). After the adoption of this rule, the administrative law judges ...


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