Glenn Hegar, Comptroller of Public Accounts v. Texas BLC, Inc.

Opinion issued January 9, 2020
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-18-00554-CV
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GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS, Appellant
V.
TEXAS BLC, INC., Appellee
On Appeal from the 250th District Court
Travis County, Texas1
Trial Court Case No. D-1-GN-17-002768
1
This appeal was transferred from the Third Court of Appeals to the First Court of
Appeals pursuant to an order of transfer by the Texas Supreme Court. See TEX.
GOV’T CODE § 73.001. We are unaware of any conflict between the precedent of
the Court of Appeals for the Third District and that of this Court on any relevant
issue. See TEX. R. APP. P. 41.3.
MEMORANDUM OPINION
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).
2
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
3
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
2
At oral argument, the parties explained that during the protracted pendency of the
litigation concerning the constitutionality of the SOB fee statute, the Comptroller
4
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. § 3.722(a)(1). After the adoption of this rule, the
administrative law judges began holding in favor of the Comptroller, finding that
bikini-latex clubs were SOBs for the purposes of the fee.
did not seek collection from bikini-latex clubs because the parties had reached an
understanding.
3
In 2015, Glenn Hegar became the Comptroller, succeeding Susan Combs, who
served from 2007 until 2015.
5
Ordinarily, to assert a challenge that a taxing statute is unlawful, the
taxpayer is required to pay the tax under protest and seek a refund. See TEX. TAX
CODE § 112.051(a) (“If a person who is required to pay a tax or fee imposed by
this title or collected by the comptroller under any law, including a local tax
collected by the comptroller, contends that the tax or fee is unlawful or that the
public official charged with the duty of collecting the tax or fee may not legally
demand or collect the tax or fee, the person shall pay the amount claimed by the
state, and if the person intends to bring suit under this subchapter, the person must
submit with the payment a protest.”). However, the Administrative Procedure Act
authorizes the filing of a declaratory judgment action to challenge “the validity or
applicability of a rule,” when “it is alleged that the rule or its threatened application
interferes with or impairs, or threatens to interfere with or impair, a legal right or
privilege of the plaintiff.” TEX. GOV’T CODE § 2001.038(a). A party can also
challenge the constitutionality of a statute or rule under the Uniform Declaratory
Judgment Act. See Patel v. Tex. Dep’t of Licensing & Regulation, 469 S.W.3d 69,
76 (Tex. 2015).
Texas BLC is an association of bikini-latex clubs and the appellee in this
appeal. As an association, it was not subject to the SOB fee. See TEX. BUS. &
COMM. CODE §§ 102.051–.056. However, under the doctrine of associational
standing, on June 19, 2017, it filed an APA suit for declaratory judgment (Texas
6
BLC v. Glenn Hegar, No. D-1-GN-17-002768) challenging the validity of SOBF
Rule, specifically the definition of clothing and its exclusion of materials applied to
an entertainer in a liquid or semi-liquid state.4
“Courts generally presume that agency rules are valid, so parties who
challenge a rule have the burden of proving its invalidity.” Tex. State Bd. of
Exam’rs of Marriage & Family Therapists v. Tex. Med. Ass’n, 511 S.W.3d 28, 33
(Tex. 2017). A rule is invalid when it: “(1) contravenes specific statutory language;
(2) runs counter to the general objectives of the statute; or (3) imposes additional
burdens, conditions, or restrictions in excess of or inconsistent with the relevant
statutory provisions.” Id. Determining the validity of a rule requires us to construe
the statutory language. See id.; Tex. Orthopaedic Ass’n v. Tex. State Bd. of
Podiatric Med. Examiners, 254 S.W.3d 714, 719–20 (Tex. App.—Austin 2008,
pet. denied).
The issue in the state-court case challenging the validity of the SOBF Rule
required the court to determine whether the rule was in harmony with the SOBF
statute based on a construction of the statute and the Rule. In the state-court case,
4
Although not challenged in the trial court or raised on appeal, we note that Texas
BLC has standing to sue on behalf of its members by virtue of associational
standing. See Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 447
(Tex. 1993) (quoting Hunt v. Washington State Apple Advertising Comm’n, 432
U.S. 333, 342 (1977)); Tex. Dep’t of Family & Protective Servs. v. Grassroots
Leadership, Inc., No. 03-18-00261-CV, 2018 WL 6187433, at *4 (Tex. App.—
Austin Nov. 28, 2018, no pet.) (mem. op.).
7
Texas BLC did not challenge the constitutionality of the SOBF Rule, although it
could have done so by way of a suit for declaratory judgment. See Patel, 469
S.W.3d at 76. On May 14, 2018, the Travis County district court entered final
judgment holding the SOBF Rule invalid. On June 6, 2018, the Comptroller filed a
notice of appeal, invoking this court’s jurisdiction in this appeal.
Meanwhile, on June 19, 2017, the same day the underlying case was filed in
state court, Texas Entertainment Association, Inc. v. Glenn Hegar, No.
1:17CV00594, was filed in the federal district court for the Western District of
Texas, Austin Division. TEA, like Texas BLC, is an association of bikini-latex
clubs. In the federal case, TEA challenged the constitutionality of the SOBF Rule
under the U.S. Constitution. While this appeal was pending, in February 2019, the
federal district court granted partial summary judgment in favor of TEA, finding
that the Rule was unconstitutional under the First Amendment.
The federal district court began its analysis by declining to consider a
challenge to the constitutionality of the SOBF statute because the Texas Supreme
Court has already considered that and found the statute withstands constitutional
scrutiny. See Combs III, 347 S.W.3d at 277. The federal district court found,
however, that the SOBF Rule was a content-based restriction, not a content-neutral
restriction. Slip op. at 20–22. In reaching that conclusion, the federal court stated:
“By defining the word ‘clothing’ to not cover the latex worn in latex clubs, the
8
Comptroller expanded the application of the fee to businesses not previously taxed,
and then tried to recover fees based on that expanded coverage.” Slip op. at 20.
The court also relied on MD II Entm’t, Inc. v. City of Dallas, Tex., 935 F.
Supp. 1394, 1396 (N.D. Tex. 1995), aff’d sub nom., MD II Entm’t, Inc. v. City of
Dallas, 85 F.3d 624 (5th Cir. 1996). In MD II, Dallas amended a zoning ordinance
relating to sexually oriented businesses. 935 F. Supp. at 1396. The amendment
changed the definition of nudity. Id. Before the amendment a female dancer who
covered her areola opaquely was not considered nude, but after the amendment, a
dancer would be required “to cover opaquely all of her breast beneath the areolae
to avoid the relevant zoning restrictions.” Id. The zoning ordinance thus expanded
the definition of nudity but did so without evidence of a link to secondary effects
that could be curbed by the expanded definition. Id. at 1397–98. The court struck
the Dallas zoning amendment as a content-based restriction. Id. at 1399.
The federal district court in the TEA case concluded that the SOBF Rule was
likewise a content-based restriction because the Comptroller adopted it without
“reference to or concern for mitigating any identified secondary deleterious
effects,” and it further concluded that the SOBF Rule was “directed at the essential
expressive nature of latex clubs’ business, and thus is a content-based restriction.”
Slip op. at 22.
9
The court also concluded that if the Rule were considered content-neutral, it
would nevertheless fail the O’Brien test. Slip op. at 23. The O’Brien test requires
that the regulation be justified by a substantial governmental interest. See 391 U.S.
at 377. The Comptroller asserted two substantial governmental interests advanced
by the SOBF Rule: (1) reducing the secondary effects of adult businesses and
(2) managing fiscal operations through assessing, administering, and collecting
taxes. Slip op. at 24. The court rejected the first reason because the Comptroller
provided no evidence that the SOBF Rule reduced the secondary effects of adult
businesses in any way different from the statute itself, and it rejected the second
reason, saying the SOBF Rule “expands” the statute. Id. The federal district court
wrote:
The amended rule also does not serve the second asserted interest. The
amended rule expands—or clarifies—the application of the $5 fee
statute. It speaks to the imposition of the fee itself; it is not a rule that
merely assists in the administration or collecting of an otherwise valid
fee or tax. If this asserted interest is sufficiently substantial to justify
the amended rule, then any fee or tax furthers a substantial
government interest merely by existing, no matter what it seeks to
regulate or why. Such expansive and tautological reasoning must be
rejected, particularly so where the issues are of a constitutional
dimension.
Id. (internal citations omitted). By holding the Rule unconstitutional, the federal
district court has effectively enjoined the Comptroller from enforcing the SOBF
statute against bikini-latex clubs, including the members of Texas BLC.
10
This brings us to the unusual procedural posture of this appeal. The federal
district court has already determined the sole issue in this case: the validity of the
SOBF Rule.5 The federal district court construed the SOBF Rule, saying: “By
defining the word ‘clothing’ to not cover the latex worn in latex clubs, the
Comptroller expanded the application of the fee to businesses not previously taxed,
and then tried to recover fees based on that expanded coverage.” Slip op. at 20.
No Texas appellate court has yet construed the SOBF statute’s meaning of
the terms “clothed,” “unclothed,” “uncovered,” or “clothing.” Cf. Moore v. Sims,
442 U.S. 415, 429 (1979) (“State courts are the principal expositors of state law.”).
In our court, the Comptroller has argued that the SOBF Rule is fully in harmony
with the statute, which the Supreme Court of Texas has already found to
withstand constitutional scrutiny. See Combs III, 347 S.W.3d at 278.
The Texas Legislature has provided that all direct review of the validity or
applicability of a rule shall be concentrated in the state district courts of Travis
County. See TEX. GOV’T CODE § 2001.038; see also Burford v. Sun Oil, 319 U.S.
315, 326 (1943) (discussing principles underpinning equitable federal abstention).
5
The federal district court also relied on MD II Entm’t, Inc. v. City of Dallas, Tex.,
935 F. Supp. 1394, 1396 (N.D. Tex. 1995), aff’d sub nom., MD II Entm’t, Inc. v.
City of Dallas, 85 F.3d 624 (5th Cir. 1996), as a white-horse analogous case. But
the value of MD II Entm’t as persuasive authority depends entirely on whether the
Comptroller’s Rule imposed a new restriction, as the City did in MD II Entm’t. As
we explain in the main text, that is the question presented in this appeal from the
state district court judgment.
11
In Burford, the United States Supreme Court concluded that federal courts should
leave “problems of Texas law to the State court” and that when regulatory
questions “so clearly involve[] basic problems of Texas policy,” federal courts
should exercise “equitable discretion” to permit “Texas courts the first opportunity
to consider them.” 319 U.S. at 332.
In Younger v. Harris, 401 U.S. 37 (1971), the Supreme Court addressed “the
notion of ‘comity,’ that is, a proper respect for state functions. . . .” 401 U.S. at 44.
The Court explained:
This, perhaps for lack of a better and clearer way to describe it,
is referred to by many as “Our Federalism” . . . .
The concept does not mean blind deference to “States’ Rights”
any more than it means centralization of control over every important
issue in our National Government and its courts. . . . What the concept
does represent is a system in which there is sensitivity to the
legitimate interests of both State and National Governments, and in
which the National Government, anxious though it may be to
vindicate and protect federal rights and federal interests, always
endeavors to do so in ways that will not unduly interfere with the
legitimate activities of the States.
Id.
The United States Supreme Court has identified “three distinct
considerations that counsel abstention when broad-based challenges are made to
state statutes.” Moore, 442 U.S. at 428. The first consideration, arising from
Railroad Comm’n v. Pullman Co., 312 U.S. 496, 498 (1941), is “that a federal
court will be forced to interpret state law without the benefit of state-court
12
consideration and therefore under circumstances where a constitutional
determination is predicated on a reading of the statute that is not binding on state
courts and may be discredited at any time—thus essentially rendering the federal-
court decision advisory and the litigation underlying it meaningless.” Moore, 442
U.S. at 428. The second consideration is “the need for a concrete case or
controversy.” Id. The third consideration is “the threat to our federal system of
government posed by ‘the needless obstruction to the domestic policy of the states
by forestalling state action in construing and applying its own statutes.’” Id. at 429
(quoting Alabama State Fed’n of Labor v. McAdory, 325 U.S. 450, 471 (1945)).
The federal district court’s interpretation of the SOBF Rule as expanding the
SOBF statute is “a reading” “that is not binding on state courts.” Moore, 442 U.S.
at 428. The federal district court’s order did not expressly address the text of the
SOBF Rule, any canons of construction, see TEX. GOV’T CODE §§ 311.001–.035
(the “Code Construction Act”), or whether the SOBF Rule contravened statutory
language, ran counter to the objectives of the statute, or imposed additional
burdens, conditions or restrictions in excess of or inconsistent with the relevant
statutory provisions. See Tex. State Bd. of Exam’rs of Marriage & Family
Therapists, 511 S.W.3d at 33. The SOBF statute defines “nude” as “(A) entirely
unclothed” or “(B) clothed in a manner that leaves uncovered or visible through
less than fully opaque clothing any portion of the breasts below the top of the
13
areola of the breasts, if the person is female, or any portion of the genitals or
buttocks.” TEX. BUS. & COMM. CODE § 102.051(1) (emphasis supplied). By
defining “nude” in terms of being “unclothed” or “clothed” but with exceptions
that leave the specified body parts visible, the question before our court in this
appeal was whether the Legislature intended that only fully opaque clothing would
suffice to render a business not subject to the SOB fee.
Were we to conclude that the statute imposed the SOB fee when the
specified body parts were covered but not with “clothing,” then we would
necessarily conclude that the Comptroller did not expand the application of the fee
to businesses not previously taxed. In other words, we could interpret the statute
and the Rule in a manner contrary to the conclusion reached by the federal district
court because its order is not binding on us. The federal district court’s order is,
however, binding on the parties to that case, which includes the Comptroller. And
it is this effect of the federal district court’s order that renders this appeal moot.
Because the federal district court’s decision enjoins the Comptroller from
collecting SOB fees from bikini-latex bars, including the members of Texas BLC,
there is no live controversy between the parties that will actually be resolved by a
determination of the validity of the Comptroller’s SOBF Rule. See Matthews, on
behalf of M.M. v. Kountze Indep. Sch. Dist., 484 S.W.3d 416, 418 (Tex. 2016)
(“The mootness doctrine applies to cases in which a justiciable controversy exists
14
between the parties at the time the case arose, but the live controversy ceases
because of subsequent events.”). Even if we were to conclude that the SOBF Rule
is fully consonant with the SOBF statute, the Comptroller could not collect the
SOB fees from the bikini-latex bars that are members of Texas BLC because the
federal district court order prevents it from doing so.
“A declaratory-judgment action does not give a court jurisdiction ‘to pass
upon hypothetical or contingent situations, or to determine questions not then
essential to the decision of an actual controversy, although such questions may in
the future require adjudication.’” Tesco Corp. (US) v. Steadfast Ins. Co., No. 01-
13-00091-CV, 2015 WL 456466, at *2 (Tex. App.—Houston [1st Dist.] Feb. 3,
2015, pet. denied) (mem. op.) (quoting Bexar Metro. Water Dist. v. City of
Bulverde, 234 S.W.3d 126, 130–31 (Tex. App.—Austin 2007, no pet.)). We are not
authorized to issue an advisory opinion. See Texas Ass’n of Bus., 852 S.W.2d at
444.
Accordingly, we dismiss this appeal. All pending motions are dismissed.
Peter Kelly
Justice
Panel consists of Justices Kelly, Hightower, and Countiss.
15