Combs v. Tex. Ent. Ass'n Inc.

• Decision Date: 26 August 2011
• Docket Number: No. 09–0481.,09–0481.
• Citation: 347 S.W.3d 277,54 Tex. Sup. Ct. J. 1723
• Parties: Susan COMBS, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Petitioners,v.TEXAS ENTERTAINMENT ASSOCIATION, INC. and Karpod, Inc., Respondents.
• Court: Texas Supreme Court

347 S.W.3d 277

54 Tex. Sup. Ct. J. 1723

Susan COMBS, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Petitioners,

v.TEXAS ENTERTAINMENT ASSOCIATION, INC. and Karpod, Inc., Respondents.

No. 09–0481.

Supreme Court of Texas.

Argued March 25, 2010.Decided Aug. 26, 2011.

Attorney General Greg W. Abbott, Attorney General of Texas, David S. Morales, Deputy First Assistant Attorney General, James C. Ho, Gibson Dunn & Crutcher LLP, Dallas, Danica Lynn Milios, James C. Todd, Christine Monzingo, Peter Carl Hansen, Office of the Attorney General, Austin, for Susan Combs.George Stewart Whitehead, Winstead P.C., Craig T. Enoch, Enoch Kever PLLC, Elliot Clark, Winstead P.C., Douglas M. Becker, Toni Hunter, Gray & Becker, P.C., Kelly Hilgers Winship, Winstead P.C., Austin, for Texas Entertainment Association, Inc.Christopher D. Kratovil, Stephen Michael Dacus, K&L Gates LLP, Dallas, for Amicus Curiae Ellen Cohen.Justice HECHT delivered the opinion of the Court.

A Texas statute requires a business that offers live nude entertainment and allows the consumption of alcohol on its premises to remit to the Comptroller a $5 fee for each customer admitted. We are asked to decide whether the statute violates the right to freedom of speech guaranteed by the First Amendment to the United States Constitution. We hold it does not. We reverse the judgment of the court of appeals ¹ and remand the case to the trial court for further proceedings.

I

In 2007, the Legislature enacted the Sexually Oriented Business Fee Act. ² Section 102.052(a) states: “A fee is imposed on a sexually oriented business in an amount equal to $5 for each entry by each customer admitted to the business.” ³ A “sexually oriented business” is specially defined as

a nightclub, bar, restaurant, or similar commercial enterprise that:

(A) provides for an audience of two or more individuals live nude entertainment or live nude performances; and

(B) authorizes on-premises consumption of alcoholic beverages, regardless of whether the consumption of alcoholic beverages is under a license or permit issued under the Alcoholic Beverage Code.⁴

The fee is imposed on the business, not the customer, and the business is given “discretion to determine the manner in which [it] derives the money required to pay the fee”.⁵ The Comptroller estimates that there are 169 such businesses in Texas. The first $25 million collected is to be credited to the sexual assault program fund,⁶ and the balance is to be used to provide health benefits coverage premium payment assistance to low-income persons.⁷

Respondents Karpod, Inc., the operator of a sexually oriented business defined by the Act and the Texas Entertainment Association (TEA), an association representing the interests of such businesses in Texas, sued the Comptroller and the Attorney General (collectively, the Comptroller) for declaratory and injunctive relief, asserting that the fee violates the free-speech guarantee of the First Amendment.⁸ After a bench trial, the trial court concluded that:

• “erotic nude/topless dancing is protected expression under the First Amendment”;

• the fee “is a content-based tax” on such expression;

• the Comptroller “failed to—and concedes [she] cannot—meet her burden under strict scrutiny to show that the [tax] is necessary to serve a compelling state interest and narrowly tailored for that purpose”; and

• “[e]ven if the [tax] could be considered a content-neutral measure ..., it fails intermediate scrutiny.”

Accordingly, the trial court rendered judgment declaring that the statute violates the First Amendment, permanently enjoining collection of the fee, and awarding respondents attorney fees.

A divided court of appeals affirmed.⁹ The majority concluded that the statutory fee is a “content-based” tax—one directed at constitutionally protected expression in nude dancing—for essentially two reasons. First, whether the fee applies depends on the nature of a business's activities, whether they constitute “live nude entertainment or live nude performances” within the meaning of the statute.¹⁰ Representatives for the Comptroller testified, that to audit a business, they would be required to examine the content of the expression or “essence” of the transaction; for example, they would consider a “wet T-shirt contest” ¹¹ to come within the definition but perhaps not plays or comedy shows.¹² Second, the statute “single[s] out a specific class of First Amendment speakers” who are “conveying a message that the taxing body might consider undesirable”.¹³ “A selective taxation scheme in which an entity's tax status depends entirely on the content of its speech is ‘particularly repugnant to First Amendment principles.’ ” ¹⁴

The majority rejected the Comptroller's argument that because the government can ban public nudity completely, as the United States Supreme Court held in City of Erie v. Pap's A.M.,¹⁵ it can impose a lesser restriction—a $5 fee.¹⁶ The important difference between the ban upheld in Pap's A.M. and the fee, the majority reasoned, is that the ban applied to all nudity while the fee singles out nude entertainment and performances.¹⁷

The Comptroller argues that the fee is directed, not at expression in nude dancing, but at the negative secondary effects of nude entertainment, especially in the presence of alcohol—rape, sexual assault, prostitution, disorderly conduct, and a variety of other crimes and social ills—and in this respect is similar to the zoning ordinance the Supreme Court upheld in City of Los Angeles v. Alameda Books, Inc.¹⁸ The appeals court majority also rejected this argument, though the members differed in their reasoning. One believed that “a tax on speech is not necessarily content-neutral simply because it is aimed at secondary effects”, and that “evidence that the [fee] is aimed at reducing secondary effects of sexually oriented businesses does not preclude the proper application of strict scrutiny”.¹⁹ The other argued that the fee might be upheld if there were evidence that the Legislature actually intended to address secondary effects when the statute was enacted, but concluded that no such evidence existed.²⁰

Having determined that the fee is “a content-based differential tax burden on protected speech”, the majority accepted the Comptroller's concession that the fee could not withstand strict scrutiny ²¹—that is, the fee is not “a precisely drawn means of serving a compelling state interest”.²² But they added that “[e]ven if we were to consider the ... tax to be content-neutral, it would fail constitutional muster under the intermediate-scrutiny standard because it is not narrowly tailored to further a substantial governmental interest.” ²³ The dissent would have held that the fee met the intermediate scrutiny standard.²⁴

We granted the Comptroller's petition for review.²⁵

II

Respondents, like the court of appeals, insist that the statutory fee in this case is really a tax. The Comptroller acknowledges that one purpose of the statute is to generate revenue and concedes that her position on respondents' First Amendment challenge does not depend on whether the fee is really a tax or on the Act's dedication of the revenue to specific funds. Accordingly, we assume the fee is a tax, although we refer to it as a fee because the statute does, and we do not take into consideration the uses for which the revenue is to be put.

We have been cited to only one case involving a tax directed at adult entertainment. In Bushco v. Utah State Tax Commission, the Supreme Court of Utah upheld a ten percent gross receipts tax on “businesses in which individuals perform services while nude or partially nude”, including “escort services”, against a First Amendment challenge.²⁶ In so doing, the court relied heavily on the United States Supreme Court's decisions in Pap's A.M.²⁷ and Alameda Books.²⁸ Inasmuch as those cases are the Supreme Court's most recent pronouncements on the validity of restrictions on adult entertainment, we, too, look to them for guidance.

A

Pap's A.M. involved a public indecency ordinance passed by the City of Erie, Pennsylvania, that made it an offense to knowingly or intentionally appear in public in a “state of nudity.” ²⁹ To comply with the ordinance, nude erotic dancers were required to “wear, at a minimum, ‘pasties' and a ‘G-string.’ ” ³⁰ Pap's A.M., which operated an establishment known as Kandyland that featured nude erotic dancing, challenged the ordinance as a violation of the First Amendment.³¹ The Supreme Court held that the ordinance was not required to pass strict scrutiny and did not violate the First Amendment.³² Justice O'Connor's plurality opinion announcing the Supreme Court's judgment was joined by Chief Justice Rehnquist, Justice Kennedy, and Justice Breyer.³³ Justice Scalia and Justice Thomas agreed that the ordinance did not violate the First Amendment, but because it regulated only conduct, not expression.³⁴ Justice Souter agreed with the plurality opinion's analytical approach but would have remanded for further evidence regarding the purpose and operation of the ordinance.³⁵ Justice Stevens, joined by Justice Ginsburg, dissented.³⁶

Justice O'Connor's plurality opinion begins by noting that the expressive conduct in nude dancing “falls only within the outer ambit of the First Amendment's protection.”

37 The opinion concludes that “the governmental purpose in enacting the [ordinance was] unrelated to the suppression of expression,” ³⁸ and therefore the ordinance “should be evaluated under the framework set forth in [ United States v. O'Brien³⁹] for content-neutral restrictions on symbolic speech.” ⁴⁰ The plurality reached this conclusion for essentially two reasons. First, it noted that the ordinance was “on its face a general prohibition on public nudity” ⁴¹ that did not “target nudity that contains an erotic message”.⁴² Second, the plurality explained that the ordinance was

...