Comptroller to Strip Clubs: Time to Pay Up

Texas Comptroller Susan Combs is pressing the state’s strip clubs to cough up millions of dollars she says they owe under a new “pole tax” even though the $5-a-patron fee still faces a court challenge.

“Any claim that ongoing litigation is a basis for nonpayment of the Sexually Oriented Business Fee is not valid,” insists an April 11 letter from the comptroller’s tax division that was sent to roughly 200 clubs in Texas that offer nude entertainment.

The fee, which strip club attorneys have claimed is an unfair tax, has been the subject of legal fights virtually since it was passed in 2007 as a way to fund programs for sexual assault victims and health care. The strip clubs' lobby organization, the Texas Entertainment Association, filed a lawsuit challenging the constitutionality of the fee, arguing that erotic dancing is a form of expression protected by the First Amendment. But in 2011, the Texas Supreme Court ruled the fee did not violate free speech.

A new challenge, still under consideration by the 3rd Court of Appeals, argues that the "pole tax" is unconstitutional because the fees are not used appropriately. In the April 11 letter, Combs' office said the continuing legal battle doesn't mean the clubs can avoid paying all the fees they owe since the law took effect six years ago. 

“I think it’s good. I think it’s been a long time coming,” said Lawrence Collins, a lobbyist for the Texas Association Against Sexual Assault, an organization that supported the fee.

But some say that if the clubs have to pay all that is owed, many, if not most, could go out of business. Some of the clubs started to pay when the law was enacted in 2008, but only a fraction of the expected $44 million was collected. So far, a little more than $14 million has been paid.

Owners of some of the larger clubs in the state — Rick’s and the Colorado Bar and Grill in Houston, The Lodge and Baby Dolls in Dallas and The Yellow Rose and The Landing Strip in Austin, declined to return calls requesting comment. 

Gary Calfee, a lobbyist for the Texas Entertainment Association, which represents strip clubs in Texas, had little to say when contacted about the comptroller's letter.

“We’d like to have a chance to work through this before we comment on it,” Calfee said. “It is in the Texas Court of Appeals. We’re waiting on a decision.”

Stewart Whitehead, an attorney for the Texas Entertainment Association, did not return calls seeking comment. 

“They don’t like to be seen or heard,” state Rep. Harold Dutton, D-Houston, said of the club owners. “And I think that is what caused them to get in the ditch on this thing.” 

So far, Dutton is the only lawmaker defending the clubs. In an April 23 letter to Combs, he asked the comptroller why her office decided last month to send out letters while the clubs’ latest court challenge is awaiting a decision from the 3rd Court of Appeals.

“I did send her a letter, asking her what has changed,” said Dutton, who opposes the fee. He said that if sexual assault programs need money, “the Legislature ought to step up to the plate and do that.”

Instead, what often happens, he said, is that lawmakers create fees against things they don’t like, like strip clubs.

“Where does it end once you start down that road?” he said.

A spokesman for the comptroller’s office, R.J. DeSilva, indicated in an emailed response that there was nothing remarkable about the timing of the collection notice.

“Our agency regularly sends notices or updates to taxpayers on various taxes and fees,” he wrote. “This particular notice was to remind business owners that the Sexually Oriented Business Fee is still in effect while litigation continues.”

In 2012, the U.S. Supreme Court declined to hear the strip clubs' challenge after the Texas Supreme Court determined that the fee does not violate the First Amendment. 

Now, the clubs are arguing that the state “fee” is really an occupation tax that should be directed to public schools under the Texas Constitution. They contend that the fee violates the state Constitution, which requires that one-fourth of occupation taxes go to public schools, because none of the money goes to schools.

The clubs’ attorneys are also asking the court to consider free speech provisions in the Texas Constitution, which they claim are broader than that of the First Amendment.

The state maintains that the fee is not an occupation tax, though, and it rejects arguments that it encroaches on free speech.

This isn’t the first lengthy legal tangle involving strip clubs in Texas.

The city of Houston passed a local version of the state pole tax. However, the enforcement of that tax — which covers more than just nude entertainment — is on hold until the state statute winds its way through the courts, said Donna Edmundson, an assistant city attorney in Houston.

And one major 16-year battle with strip clubs in Houston just ended last year. It stemmed from a 1997 set of city rules that, among other things, outlawed lap dances and required dancers to wear ID tags.

Houston’s gentlemen’s clubs fought the stricter regulations, and in 2013, the city of Houston devised a compromise. 

According to the agreement signed last year, the “Sweet 16” group of clubs that fought the new rules were allowed to opt out of the prohibition in exchange for a hefty contribution to the Houston Police Department’s human trafficking efforts.

“There’s a greater good,” Edmundson said. “We can do something novel and off the chart to go after human trafficking, which we found much more offensive than a lap dance.”

About $800,000 has been raised so far, she said. That money helped HPD hire a lieutenant, a sergeant, six officers and two analysts.