Texas' $5 'Pole Tax' Survives Appeal

May 12, 2014 2:00 PM PST

AUSTIN, Texas — Texas' $5-per-head tax on strip and gentlemen's clubs does not violate free-speech rights, a state appeals court ruled.

On Friday, the state's 3rd District Court of Appeals affirmed most aspects of the so-called "pole tax" — finding no violation of the Texas Constitution's equal and uniform clause, or its free-speech clause —  but reversed its occupation-tax designation, which would have made a requirement that 25 percent of its revenue go to public schooling.

The 3rd District Court of Appeals originally affirmed a ruling that the tax violated the club owners' First Amendment rights, but it considered the case again after the Texas Supreme Court reversed and called for consideration of the remaining claims under state law.

The decision comes seven years after Texas Entertainment Association, which  advocates for gentlemens' clubs, and Karpod Inc., the owner of Players Gentlemen's Club in Amarillo Texas, sued the state.

The case has wended it way up and down the Texas court system, and eventually ended up at the Texas Supreme Court, which ruled that the law isn't directed at nude dancing but on combating social harms. An appeal to the U.S. Supreme Court was declined.

The Texas Entertainment Association alleged in the appeal at the 3rd District that the tax violated Texas' own free-speech protections, unfairly targeted strip clubs but not other forms of adult entertainment, and qualified as an occupation tax so was thereby subject to occupational tax revenue rules. 

On Friday, the 3rd District appeals court, in affirming all of the points with the exception of the occupational tax, went on to cite secondary effects and social harms brought by adult entertainment venues as a justification for the fee, which will go to sexual assault prevention programs.

"The primary purpose of the sexually oriented-business tax is not to tax these businesses for the privilege of providing nude entertainment in the presence of alcohol consumption," the court said. "Rather, the tax’s primary purpose is to discourage this type of business activity altogether while also generating revenue to ameliorate the type of social ills that are associated with this type of business." 

Because Texas strip and gentlemens clubs stopped collecting the fees while they faced legal challenges, they now face millions of dollars in retroactive payments owed to the state. 

Texas Comptroller Susan Combs said in a letter to club owners in early April that the pole tax is still due and payable despite litigation.

One gentlemens club chain that has a major presence in the state is Rick's Cabaret International, which has more than 30 clubs in Texas. Rick's Cabaret has accrued about $14.6 million in liabilities for the pole tax in the past four years. After 2009, the company has not made any pole-tax payments to the state.

The pole tax amounted to $866,000 for its Texas clubs in the past quarter.

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