Sexually Oriented Business Fee Declared Constitutional

Last month I posted an entry about a constitutional challenge to the “Sexually Oriented Business Fee,” or SOB Tax. This is the $5 per-customer charge imposed on Texas adult entertainment establishments that allow alcohol to be consumed on their premises. See my June 29 post on the Sexually Oriented Business Fee for additional background.

In that entry, I speculated that a Travis County District Court may soon declare the Fee to be unconstitutional because it is an improperly allocated occupation tax. This was based on the Judge’s comments and questions during the June 28 hearing. However, the Judge did appear hesitant to declare the statute unconstitutional, because he is required to find a statute constitutional if there is any possible way that it can be reconciled with the constitution.

Judge Jenkins appears to believe he’s found a way to reconcile the SOB Fee provision with the Texas Constitution. On July 9, he issued a Final Judgment holding that the Sexually Oriented Business Fee does not violate the Texas Constitution.

As a reminder, the taxpayers’ strongest argument was that the Fee was an occupation tax, and therefore it must comply with Article 7, Section 3 of the Texas Constitution. This constitutional provision requires that one-quarter of the revenue from occupation taxes must benefit the public schools.

The statute that created the Sexually Oriented Business fee very specifically states that the Fee should be  allocated to programs OTHER than public schools. The Legislature instructs the Comptroller to deposit the first $25 million per fiscal biennium into a program designed to prevent sexual assault. The Comptroller is then to allocate the remainder to a program that assists low-income individuals purchase health insurance.

So the Legislature’s instructions are fairly clear–all of the SOB fee is meant to go to two programs OTHER than public schools. But if the Fee is an occupations tax, one quarter of it must go to the public schools, according to the Constitution.

The Judge held (with no elaboration) that the Fee is indeed an occupation tax. (See my earlier entry for the likely reasons why the Judge determined this.) But the Judge nevertheless held that the Fee does not violate the constitution. He allows the Comptroller to escape the dilemma created by permitting it to use an artful interpretation of section 102.054 of the Texas Business and Commerce Code.

This section states that “[t]he Comptroller shall deposit the first $25 million received from the fee imposed . . . to the credit of the sexual assault program fund.” Judge Jenkins holds that the Comptroller can use her authority granted by the Government Code to instead read the provision to state “[t]he Comptroller shall deposit the first $25 million received from the fee imposed [net of the 25% that must be allocated to the public schools] . . . to the credit of the sexual assault program fund.” In other words, now that the Fee has been declared to be an occupation tax, the Comptroller must allocate 25% of the revenue to public schools. Of the remaining 75%, the first $25 million should go to the sexual assault fund and the balance should go to assist low-income individuals pay for health insurance.

It is true that “[W]hen a statute is reasonably susceptible of two interpretations, by one of which it is unconstitutional and by the other valid, the court prefers the meaning that preserves to the meaning that destroys” (Panama Refining Co. v. Ryan, 293 U.S. 388, 439 (1935) (Cardozo, J., dissenting)). But in this case, I don’t see two reasonable interpretations of the statute. The statute clearly directs that all of the revenue from the Fee should go to programs other than the public schools.Therefore, the SOB Fee is an unconstitutional occupation tax.

The taxpayers have not appealed the judgment yet, but it appears likely that they will. The Notice of Appeal is due by October 8.

Update: The taxpayers filed for appeal on August 8, 2012.

(photo: http://www.flickr.com/photos/quinnanya/4183503336/)