Texas Court of Appeals Strikes Down Cabaret Tax

AUSTIN, Tex. — In a stunning victory for adult nightclubs in Texas, a panel of judges for the Third District Texas Court of Appeals has upheld a lower court decision striking down a tax which imposed a $5 fee for each customer entering a "sexually oriented business" (SOB).

"The SOB tax targets a small group of taxpayers engaged in expression protected by the First Amendment, even if only marginally so," wrote Justice Diane M. Henson for the panel's majority. "A tax imposed on a small group of First Amendment speakers, particularly a group conveying a message that the taxing body might consider undesirable, carries a greater risk of suppressing speech than a zoning ordinance because 'the power to tax involves the power to destroy'." [Citations removed here and below]

The appeals court conducted an exhaustive analysis of whether the SOB tax was a "content-based speech regulation" and therefore should be subjected to the "strict scrutiny" required to determine if the regulation were narrowly tailored to serve a compelling governmental interest.

"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'," the Court found. "As a result, differential taxation based on content is subject to strict scrutiny... Testimony at trial revealed that in order to determine whether the SOB tax should be assessed against a particular taxpayer, representatives from the Comptroller's office would be required to examine the content of the expressive conduct. For example, Steven White, a program specialist in the Comptroller's tax policy division, testified that if a play involving nudity was held at a bar or other establishment that serves alcohol, the owner of the establishment would not be subject to the SOB tax because 'the main ingredient of the performance is not necessarily that of live nude entertainment.' White also testified that a comedy show involving nudity at a venue where alcohol is sold would not trigger the SOB tax, because 'the essence of that performance is not necessarily one of live nude entertainment'."

Indeed, just about the only situation that would trigger the tax is if stripping took place in a venue that sold alcohol — and a regulation doesn't get more content-based than that.

The Court also shot down several arguments advanced by the State, including the claim that the tax would help reduce the secondary effects of the taxed business; that the tax was a "least-restrictive regulation" because although the State has the power to ban nude dancing totally, "the SOB tax must be constitutionally permissible because it is less restrictive than a total ban";  and that the tax was really an "alcohol regulation" rather than a tax on speech.

"Despite the limitation of the SOB tax burden to businesses that allow the consumption of alcohol, the SOB tax remains a content-based differential tax burden on protected speech, and is subject to strict scrutiny," Justice Henson wrote. "The Comptroller concedes that the SOB tax cannot withstand strict scrutiny. As the trial court stated in its judgment, 'Defendants failed to — and conceded that they cannot — meet their burden to show that [the tax] is necessary to serve a compelling state interest and narrowly tailored for that purpose.' In light of the Comptroller's concession and our determination that the SOB tax is a content-based tax subject to strict scrutiny, we hold that the SOB tax is unconstitutional under the First Amendment."

Bertter still, the Court upheld the trial court's award of attorney fees to the Texas Entertainment Association's (TEA) attorneys.

"At the time [appellee] Karpod's [Uniform Declaratory Judgments Act] claim was filed, it had a constitutional right to a declaratory judgment regarding its tax liability and such a declaration was not redundant to any remedy available under the tax code," the Court's majority concluded. "As a result, the trial court did not abuse its discretion in awarding attorneys' fees under the UDJA. The Comptroller's fourth issue is overruled."

The case for the appellees was argued by Texas adult industry attorney Stewart Whitehead.