Because the appellants’ interests are aligned, we will refer to them collectively as “the 1

Comptroller.”

For purposes related to TEA and Karpod’s state constitutional claims, the parties dispute 2

whether the assessment at issue in this case is properly considered a tax or a fee. We will adopt the

language of the trial court’s order, which refers to the assessment as a tax. However, because we

need not reach the state constitutional claims in this appeal, we express no opinion on whether the

assessment imposed by subchapter B is properly considered a tax or a fee.

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-08-00213-CV

Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott,

Attorney General of the State of Texas, Appellants

v.

Texas Entertainment Association, Inc. and Karpod, Inc., Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT

NO. D-1-GN-07-004179, HONORABLE SCOTT H. JENKINS, JUDGE PRESIDING

O P I N I O N

The Comptroller of Public Accounts and the Attorney General of the State of Texas1

appeal the trial court’s judgment in a suit for declaratory and injunctive relief brought by

Texas Entertainment Association, Inc. (“TEA”), and Karpod, Inc. The trial court’s judgment

declared subchapter B of chapter 47 of the business and commerce code unconstitutional and

permanently enjoined the Comptroller from assessing or collecting the tax imposed by that

subchapter. See Tex. Bus. & Com. Code Ann. §§ 47.051-.056 (West Supp. 2008). Because we hold 2
After oral argument was heard in this case, both sides requested leave to file post- 3

submission briefs. Those motions are hereby granted. 

2

that subchapter B violates the First Amendment to the United States Constitution, we affirm the

trial court’s judgment. See U.S. Const. amend. I. 3

BACKGROUND

In 2007, the Texas Legislature enacted chapter 47, subchapter B, of the business and

commerce code, which imposes a tax “on a sexually oriented business in an amount equal to $5 for

each entry by each customer admitted to the business.” Tex. Bus. & Com. Code Ann. § 47.052(a).

The statute further defines a sexually oriented business (“SOB”) as:

a nightclub, bar, restaurant, or similar commercial enterprise that:

(A) provides for an audience of two or more individuals live nude entertainment or

live nude performances; and

(B) authorizes on-premises consumption of alcoholic beverages, regardless of

whether the consumption of alcoholic beverages is under a license or permit issued

under the Alcoholic Beverage Code.

Id. § 47.051(2). As a result, the tax applies only to businesses that permit alcohol consumption in

the presence of live, nude entertainment. “Nude” is defined as “entirely unclothed” or “unclothed

in a manner that leaves uncovered or visible through less than fully opaque clothing any portion of

the breasts below the top of the areola of the breasts, if the person is female, or any portion of the

genitals or buttocks.” Id. § 47.051(1). A business subject to the tax is not required to impose the

tax on its customers, but may use its discretion in determining how it will derive the money required

to pay the tax. Id. § 47.052(c). The legislature allocated the first $25 million in revenue received
 During the 2007 session, the legislature also repealed chapter 47 of the business and 4

commerce code, effective April 1, 2009, as part of a nonsubstantive statutory revision program. See

Act of May 15, 2007, 80th Leg., R.S., ch. 885, § 2.47(a)(1), 2007 Tex. Gen. Laws 1905, 2082.

Subchapter B of chapter 47 was enacted without reference to this repeal.

 In light of its finding that the statute is unconstitutional under the First Amendment, the 5

trial court declined to reach TEA and Karpod’s state constitutional claims.

3

from the SOB tax to the State’s sexual assault program fund and the remaining revenue to the

Texas health opportunity pool to fund health insurance for low-income Texans. Id. §§ 47.054-.055.

The SOB tax went into effect on January 1, 2008.4

In response to the enactment of subchapter B, Karpod, a sexually oriented business,

and TEA, an association representing the interests ofsexually oriented businesses in Texas, filed suit

for declaratory and injunctive relief against the Comptroller, asserting that the tax violated the state

and federal constitutions. After a bench trial, the trial court issued a declaratory judgment that the

statute violated the First Amendment to the United States Constitution, permanently enjoined the

Comptroller from collecting or assessing the tax, and awarded attorneys’ fees in favor of TEA and

Karpod. This appeal followed. 5

DISCUSSION

On appeal, the Comptroller argues (1) that the SOB tax does not violate the First

Amendment, (2) that the SOB tax does not violate the Texas Constitution, (3) that sovereign

immunity bars suit by TEA, and (4) that the trial court erred in awarding attorneys’ fees.

The First Amendment

We note at the outset that “the fact that protected speech may be offensive to some

does not justify its suppression.” Carey v. Population Servs. Int’l, 431 U.S. 678, 701 (1977). In fact,
4

“it is in those instances where protected speech grates most unpleasantly against the sensibilities that

judicial vigilance must be at its height.” Young v. American Mini Theatres, Inc., 427 U.S. 50, 87

(1976) (plurality opinion) (Stewart, J., dissenting).

In conducting our First Amendment analysis, we must first determine whether the

SOB tax is subject to strict or intermediate scrutiny. Content-based restrictions on speech are

presumptively invalid and subject to strict scrutiny. See, e.g., City of Los Angeles v. Alameda Books,

Inc., 535 U.S. 425, 434 (2002) (plurality opinion). In order to withstand strict scrutiny, a statute

must be narrowly tailored to promote a compelling government interest. See, e.g., United States

v. Playboy Entm’t Group, Inc., 529 U.S. 803, 813 (2000). The Comptroller concedes that the SOB

tax cannot survive a strict scrutiny analysis, arguing instead that the tax is content-neutral and

therefore subject to intermediate scrutiny. A content-neutral restriction on speech withstands

intermediate scrutiny “if the conduct itself may constitutionally be regulated, if the regulation is

narrowly drawn to further a substantial governmental interest, and if the interest is unrelated to the

suppression of free speech.” Clark v. Community for Creative Non-Violence, 468 U.S. 288, 294

(1984) (citing United States v. O’Brien, 391 U.S. 367, 376 (1968)). 

“As a general rule, laws that by their terms distinguish favored speech from

disfavored speech on the basis of the ideas or views expressed are content-based,” while “laws that

confer benefits or impose burdens on speech without reference to the ideas or views expressed are

in most instances content-neutral.” Turner Broad. Sys., Inc. v. FCC, 512 U.S. 622, 643 (1994). The

principal inquiry in determining content neutrality “is whether the government has adopted a

regulation of speech because of disagreement with the message it conveys.” Ward v. Rock Against
 While the Comptroller characterizes the SOB tax as a “modest fee” of five dollars

6

per customer, “the level of the fee is irrelevant. A tax based on the content of speech does not

become more constitutional because it is a small tax.” Forsyth County v. Nationalist Movement,

505 U.S. 123, 136 (1992). 

5

Racism, 491 U.S. 781, 791 (1989). Rules are generally considered content-based when the

regulating party must examine the speech to determine if the restriction applies. See, e.g., Forsyth

County v. Nationalist Movement, 505 U.S. 123, 134 (1992); Arkansas Writers’ Project, Inc.

v. Ragland, 481 U.S. 221, 230 (1987); FCC v. League of Women Voters of Cal., Inc., 468 U.S. 364,

383 (1984). 

While nude dancing “falls only within the outer ambit of the First Amendment’s

protection,” it is nevertheless protected as expressive conduct. City of Erie v. Pap’s A.M., 529 U.S.

277, 289 (2000) (plurality opinion). In arguing that the SOB tax is subject to intermediate scrutiny,

the Comptroller points to cases in which the U.S. Supreme Court has applied intermediate scrutiny

to zoning restrictions aimed at the secondary effects of businesses offering adult entertainment. See

Alameda Books, 535 U.S. at 434 (plurality opinion) (zoning ordinance prohibiting more than one

“adult entertainment business” in single building); Renton v. Playtime Theatres, Inc., 475 U.S. 41,

48 (1986) (zoning ordinance restricting location of adult movie theaters); Young, 427 U.S. at 71-72

(plurality opinion) (same).

Unlike the restrictions at issue in Alameda Books, Renton, and Young, the SOB tax

is not a zoning restriction, but a tax on businesses that offer live, nude entertainment in the presence

of alcohol. The U.S. Supreme Court has suggested that zoning restrictions directed to secondary 6

effects of speech are inherently different from other types of restrictions on speech. See Alameda
 Because Justice Kennedy concurred in the judgment of the Court on the narrowest grounds,

7

his concurrence represents the Court’s holding in Alameda Books. See Marks v. United States,

430 U.S. 188, 194 (1977) (“When a fragmented Court decides a case and no single rationale

explaining the result enjoys the assent of five Justices, the holding of the Court may be viewed as

that position taken by those Members who concurred in the judgments on the narrowest grounds.”)

(internal quotation marks and citation omitted).

6

Books, 535 U.S. at 449 (plurality opinion) (Kennedy, J., concurring) (“[Z]oning regulations do not 7

automatically raise the specter of impermissible content discrimination . . . because they have a

prima facie legitimate purpose: to limit the negative externalities of land use. . . . [T]hese sorts of

ordinances are more like a zoning restriction on slaughterhouses and less like a tax on unpopular

newspapers.”) (emphasis added); Young, 427 U.S. at 62, 73 n.35 (plurality opinion) (stating that the

zoning ordinance’s restrictions are so minimal that “the market for this commodity is essentially

unrestrained” and that “[t]he situation would be quite different if the ordinance had the effect of

suppressing, or greatly restricting access to, lawful speech”). Because zoning ordinances are

distinguishable from other restrictions on speech, we do not find the First Amendment analyses

applied in zoning cases to be particularly relevant to the present case. See Alameda Books, 535 U.S.

at 445 (plurality opinion) (Kennedy, J., concurring) (stating that city could regulate secondary effects

of adult entertainment businesses with zoning ordinance, but could notsuppressthe speech itself by,

“for example, imposing a content-based fee or tax”).

Furthermore, while the Supreme Court has held that bans on public nudity should be

reviewed with intermediate scrutiny as content-neutral restrictions, the public-nudity bans at issue

in those cases did not single out a specific class of First Amendment speakers, as the SOB tax does.

See Pap’s A.M., 529 U.S. at 290 (plurality opinion) (“By its terms, the ordinance regulates conduct
7

alone. It does not target nudity that contains an erotic message; rather, it bans all public nudity,

regardless of whether that nudity is accompanied by expressive activity.”); Barnes v. Glen Theatre,

Inc., 501 U.S. 560, 566, 571 (1991) (plurality opinion) (“Indiana, of course, has not banned nude

dancing as such, but has proscribed public nudity across the board. . . . Public nudity is the evil the

State seeks to prevent, whether or not it is combined with expressive activity.”).

Having found the cases involving zoning restrictions and total nudity bans

inapplicable to the present case, we now turn to the body of law addressing differential taxation of

First Amendment speakers. The SOB tax targets a small group of taxpayers engaged in expression

protected by the First Amendment, even if onlymarginally so. See Barnes, 501 U.S. at 566 (plurality

opinion). 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.” McCulloch v. Maryland, 17 U.S. 316, 431 (1819). As the Supreme Court stated in

Leathers v. Medlock:

[D]ifferential taxation of First Amendment speakers is constitutionally suspect when

it threatens to suppress the expression of particular ideas or viewpoints. . . . A tax is

also suspect if it targets a small group of speakers. Again, the fear is censorship of

particular ideas or viewpoints. Finally, for reasons that are obvious, a tax will trigger

heightened scrutiny under the First Amendment if it discriminates on the basis of the

content of taxpayer speech.

499 U.S. 439, 447 (1991) (citations omitted). “A power to tax differentially, as opposed to a power

to tax generally, gives a government a powerful weapon against the taxpayer selected.” Minneapolis

Star & Tribune Co. v. Minnesota Comm’r of Revenue, 460 U.S. 575, 585 (1983). 
8

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.” Arkansas Writers’

Project, 481 U.S. at 229. As a result, differential taxation based on content is subject to strict

scrutiny. Id. at 231. A taxing statute is content-based if it “singles out income derived from

expressive activity for a burden the State places on no other income, and it is directed only at works

with a specified content.” Simon & Schuster, Inc. v. Members of N.Y. State Crime Victims Bd.,

502 U.S. 105, 116 (1991). Where taxing authorities must necessarily examine the content of the

message that is conveyed, “[s]uch official scrutiny of the content of publications as the basis for

imposing a tax is entirely incompatible” with the First Amendment. Arkansas Writers’ Project,

481 U.S. at 230. 

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.” White further explained that a bar hosting a “wet t-shirt

contest” or a bar at which bartenders periodically perform dance routines and become nude as

defined by the statute would be subject to the tax. Similarly, Emma Fuentes, an auditor in the
9

Comptroller’s office testified, “Using my own judgment, I would look at the taxpayer we’re auditing.

If it’s like a theater that puts on plays and concerts I would think that maybe this fee was not

appropriate for them . . . [b]ecause the whole essence of the transaction to me would be for

somebody to go see a play and not so much a sexually oriented business.” These examples reveal

that the SOB tax is not imposed in all incidents where live nude entertainment occurs in the presence

of alcohol, but only in those situations in which the taxing authority—the Comptroller—determines,

after examining the content of the expression, that it represents the “essence” of live nude

entertainment. This type of differential taxation based on content is precisely the type of restriction

warranting strict scrutiny in Arkansas Writers’ Project, Minneapolis Star, and Simon & Schuster.

The bulk of the testimony at trial focused on the Comptroller’s argument that the

SOB tax is aimed at reducing the secondary effects of sexually oriented businesses. However, a tax

on speech is not necessarily content-neutral simply because it is aimed at secondary effects. See

Forsyth County, 505 U.S. at 134. While intermediate scrutiny is applied to zoning regulations aimed

at decreasing secondary effects, zoning regulations are distinguishable from differential

taxation statutes, as previously discussed. See Alameda Books, 535 U.S. at 449 (plurality opinion)

(Kennedy, J., concurring) (stating that designation of zoning restrictions on adult entertainment

businesses as “content-neutral” is legal fiction used because “[t]he zoning context provides a built-in

legitimate rationale, which rebuts the usual presumption that content-based restrictions are

unconstitutional”). In light of this distinction, evidence that the SOB tax is aimed at reducing

secondary effects of sexually oriented businesses does not preclude the proper application of strict

scrutiny in this case.
 We note that the Court’s holding in 44 Liquormart did not foreclose the possibility of a 8

state using its inherent police power to place restrictions on the sale of alcohol in the presence of

nude dancing. See 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 516 (1996). However, such

use of a state’s police power must satisfy First Amendment scrutiny. See Young v. American Mini

Theatres, Inc., 427 U.S. 50, 80 (1976) (plurality opinion) (Powell, J., concurring) (stating that

“no aspect of the police power enjoys immunity from searching constitutional scrutiny”).

10

The Comptroller also argues that the State has the power to categorically ban nude

dancing or the sale of alcohol in the presence of nude dancing, and therefore the SOB tax must be

constitutionally permissible because it is less restrictive than a total ban. First, the Supreme Court

cases relied upon by the Comptroller for the proposition that the State may ban nude dancing

altogether refer, as previously discussed, to content-neutral bans on nudity in general, rather than

specific prohibitions on nude dancing. See Pap’s A.M., 529 U.S. at 290 (plurality opinion); Barnes,

501 U.S. at 566, 571 (plurality opinion). Second, with regard to the power to ban alcohol in the

presence of nude dancing, the Supreme Court held in 44 Liquormart, Inc. v. Rhode Island, 517 U.S.

484, 516 (1996), that “the Twenty-first Amendment does not qualify the constitutional

prohibition against laws abridging the freedom of speech embodied in the First Amendment.” In

other words, a state’s regulatory power over the sale and use of alcoholic beverages under the

Twenty-first Amendment cannot be used to shield the suppression of speech from constitutional

scrutiny. See id.8

Furthermore, we disagree with the Comptroller’s a fortiori argument that if a

government may, in the interest of public safety, ban alcohol in the presence of nude dancing, it may

also impose a tax on establishments that provide alcohol in the presence of nude dancing. The
11

reason this argument fails is best addressed by the following analogy posited by the U.S. Supreme Court:

[T]he situation becomes the same as if California law forbade shouting fire in a

crowded theater, but granted dispensations to those willing to contribute $100 to the

state treasury. While a ban on shouting fire can be a core exercise of the State’s

police power to protect the public safety, and can thus meet even our stringent

standards for regulation ofspeech, adding the unrelated condition alters the purpose

to one which, while it may be legitimate, is inadequate to sustain the ban. Therefore,

even though, in a sense, requiring a $100 tax contribution in order to shout fire is a

lesser restriction on speech than an outright ban, it would not pass constitutional

muster.

Nollan v. California Coastal Comm’n, 483 U.S. 825, 837 (1987). As this hypothetical suggests, the

power to ban speech pursuant to a government’s police power does not presuppose the power to

impose a financial disincentive on such speech. This reasoning is even more applicable in the

present case because the act of shouting fire in a crowded theater, unlike nude dancing, is not subject

to First Amendment protection at all. See Schenck v. United States, 249 U.S. 47, 52 (1919).

The Supreme Court has held that while a government has the power to regulate the

use and sale of alcohol, it “may not deny a benefit to a person on a basis that infringes his

constitutionally protected interests—especially his interest in freedom of speech.” 44 Liquormart,

517 U.S. at 513 (internal quotation marks and citation omitted). “[I]f the government could deny

a benefit to a person because of his constitutionally protected speech or associations, his exercise of

those freedoms would in effect be penalized and inhibited. This would allow the government to

‘produce a result which [it] could not command directly.’” Perry v. Sindermann, 408 U.S. 593, 597

(1972) (quoting Speiser v. Randall, 357 U.S. 513, 526 (1958)). This is precisely what the State seeks

to do in the present case. By conditioning the ability to sell alcohol on the forfeiture of a
 The fact that there is no constitutional right to provide alcohol in the presence of nude 9

dancing is immaterial because “even though a person has no ‘right’ to a valuable governmental

benefit and even though the government may deny him the benefit for any number of reasons, there

are some reasons upon which the government may not rely,” including those that demand the

surrender of a constitutional right. Perry v. Sindermann, 408 U.S. 593, 597 (1972). 

12

First Amendment right, the State attempts to produce a result—the imposition of a content-based tax

on speech—which it could not command directly.9

Furthermore, we disagree with the Comptroller’s characterization of the SOB tax as

an alcohol regulation, rather than a tax on speech. While it is true that a sexually oriented business

owner may avoid the tax by choosing not to allow the consumption of alcohol on the premises, this

aspect of the SOB tax is insufficient to transform a content-based tax into a content-neutral alcohol

regulation. In reviewing the plain language, context, and legislative history of the relevant statutory

provisions, we are not convinced that “the statute’s predominant purpose is with regulating the

service of alcohol,” as was the case in Illusions - Dallas Private Club, Inc. v. Steen, 482 F.3d 299,

309 (5th Cir. 2007), in which the Fifth Circuit applied intermediate scrutiny to a provision of the

Texas Alcoholic Beverage Code prohibiting sexually oriented businesses from obtaining private club

permits from the Texas Alcoholic Beverage Commission (TABC) to serve alcohol in dry counties.

See Tex. Alco. Bev. Code Ann. § 32.03(k) (West 2007). In Illusions, the Fifth Circuit held that the

statute at issue was “part of a ‘web’ of alcohol regulations,” which are unrelated to the suppression

of speech, and emphasized the statutory context of the prohibition within the alcoholic beverage

code, where it appears alongside other provisions allowing TABC to regulate the sale of alcohol.

482 F.3d at 309; see also id. at 308 (concluding “that § 32.03(k) is subject to intermediate scrutiny
 TABC is authorized to “exercise all powers, duties, and functions conferred by” the 10

alcoholic beverage code, and “shall inspect, supervise, and regulate every phase of the business of

manufacturing, importing, exporting, transporting, storing, selling, advertising, labeling, and

distributing alcoholic beverages, and the possession of alcoholic beverages for the purpose of sale

or otherwise.” Tex. Alco. Bev. Code Ann. § 5.31 (West 2007). 

We note also that chapter 183 of the tax code, which imposes a tax on gross receipts derived

from the sale of “mixed beverages,” includes a “conflict of rules” provision to govern conflicts

between regulations issued byTABC and those issued by theComptrollerin the collection of the tax.

See Tex. Tax Code Ann. § 183.052 (West 2008). No similar provision appears in the SOB tax

statute, suggesting that the legislature did not contemplate the exercise of TABC’s regulatory

authority in connection with the SOB tax.

13

because its predominant purpose, as exhibited by its plain text and its place within the

Texas Alcoholic Beverage Code, is unrelated to the suppression of speech”).

The SOB tax, on the other hand, is not part of a “web” of alcohol regulations imposed

by the alcoholic beverage code, but appears in chapter 47 of the business and commerce code, which

governs sexually oriented businesses. The SOB tax is remitted to the Comptroller, see Tex. Bus.

& Com. Code Ann. § 47.053, and, unlike the statutory provision at issue in Illusions, does not

involve the regulatory oversight of TABC. The original version of the SOB tax proposed in the 10

legislature and passed by the House of Representatives made no mention of alcohol at all. See

Tex. H.B. 1751, 80th Leg., R.S. (2007) (as passed by House, May 9, 2007). The bill was later

amended in the Senate to restrict the pool of taxpayers to those sexually oriented businesses that

allowed alcohol on the premises. See S.J. of Tex., 80th Leg., R.S. 3043 (2007). As TEA and Karpod

point out in their briefs, this change mirrored a similar amendment originally proposed in the House,

see H.J. of Tex., 80th Leg., R.S. 3573 (2007), after a hearing before the House Ways and Means

Committee, in which there was some discussion regarding the additional audit burden that the SOB
 During the hearing, a representative from the Comptroller’s office testified that the SOB 11

tax would create “an additional audit burden” and stated that “these particular establishments are

regulated by the TABC and they are subject to audit already by the TABC,” so “[h]opefully we can

join forces with the TABC.” When asked, “Is the bill specifically tied to those entities that are

selling liquor? If it is not, how are you going to [audit] the entities that don’t sell liquor?” the

Comptroller’s representative answered, “Well, I believe we would be on our own on that case.”

14

tax would impose on the Comptroller’s office, the convenience of “joining forces” with TABC for

audit purposes, and the logistical difficulties in auditing sexually oriented businesses that are not

regulated by TABC. See Hearing on Tex. H.B. 1751 Before the House Comm. on Ways & Means,

11

80th Leg., R.S. 39-42 (March 14, 2007). Beyond this discussion regarding the efficiency and

convenience of combining the audit resources of TABC and the Comptroller’s office, the legislative

history of subchapter B of chapter 47 of the business and commerce code includes no references to

the regulation of alcohol.

Reviewing the SOB tax provisions in their statutory context, we conclude that, unlike

the provision at issue in Illusions, the predominant purpose of the SOB tax is not to regulate the

service of alcohol. See 482 F.3d at 309, 310 n.7 (concluding that statute has predominant purpose

of regulating alcohol and is therefore content-neutral because “the text of the statute and its statutory

context” suggest that it “is more in the nature of a typical alcohol regulation” and less in the nature

of a law suppressing 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. See, e.g., Arkansas Writers’ Project, 481 U.S. at

230 (stating that such tax burdens are “entirely incompatible” with First Amendment). 
 Even if we were to consider the SOB tax to be content-neutral, it would fail constitutional 12

muster under the intermediate-scrutiny standard because it is not narrowly tailored to further a

substantial governmental interest. See Clark v. Community for Creative Non-Violence, 468 U.S.

288, 294 (1984) (citing United States v. O’Brien, 391 U.S. 367, 376 (1968)). In determining whether

a restriction on speech is narrowly tailored, “the validity of the regulation depends on the relation

it bears to the overall problem the government seeks to correct.” Ward v. Rock Against Racism,

491 U.S. 781, 801 (1989). In the present case, the majority of the proceeds resulting from the SOB

tax are allocated for a purpose that, while laudable, bears no relation to the overall problem that the

State claims it is seeking to correct—the negative secondary effects of nude dancing when combined

with alcohol. While the first $25 million in revenue per biennium is allocated to the sexual assault

program fund, the remainder—and the vast majority—of the revenue is dedicated to providing health

insurance to low-income individuals. See Tex. Bus. & Com. Code Ann. §§ 47.054-.055 (West Supp.

2008). The Comptroller presented no evidence at trial of a link between a lack of health insurance

and nude dancing where alcohol is consumed. Because the State has imposed a tax on protected

speech and allocated only a fraction of the proceeds to combat secondary effects, there is “an

inadequate nexus between the regulation and the interest sought to be served.” Clark, 468 U.S. at

299 n.8; see also Ward, 491 U.S. at 799 (“Government may not regulate expression in such a manner

that a substantial portion of the burden on speech does not serve to advance its goals.”). 

15

The Comptroller concedes that the SOB tax cannot withstand strict scrutiny. As the

trial court stated in itsjudgment, “Defendantsfailed 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. The Comptroller’s first issue is overruled. Having found the SOB tax

12

unconstitutional under the First Amendment, we need not reach the Comptroller’s second issue

regarding Karpod and TEA’s state constitutional claims.

Sovereign Immunity

In its third issue on appeal, the Comptroller argues that TEA, as an organization that

is not subject to the SOB tax, is barred from bringing suit on the basis of sovereign immunity. See
 The Comptroller argues that Caldwell contradicts the Texas Supreme Court’s decision in 13

W.D. Haden Co. v. Dodgen, 308 S.W.2d 838 (Tex. 1958). However, in Dodgen, the court expressly

distinguished between suits “to compel performance of or to enforce rights arising out of a contract

with a state agency,” which are considered suits against the State for purposes of sovereign

immunity, and suits seeking a determination of a person’s rights when state officials act outside their

lawful authority, which are not considered suits against the State for sovereign-immunity purposes.

308 S.W.2d at 840. This Court’s holding in Caldwell is consistent with this distinction.

16

State v. Holland, 221 S.W.3d 639, 643 (Tex. 2007) (“Absent an express waiver of its sovereign

immunity, the State is generally immune from suit.”). The Comptroller asserts that TEA cannot take

advantage of the waiver of sovereign immunity found in the tax-protest provisions of the tax code

because these provisions apply only to taxpayers. See Tex. Tax Code Ann. §§ 112.052, .101

(West 2008); see also Rylander v. Bandag Licensing Corp., 18 S.W.3d 296, 302 (Tex. App.—Austin

2000, pet. denied) (“The Tax Code provides a statutory remedy for taxpayers who contend a tax is

unlawful or may not legally be demanded.”). 

While the tax code does provide a remedy for taxpayers seeking to challenge the

legality of a tax, such a challenge may also be brought in a suit for declaratory relief under the

Texas Uniform Declaratory Judgments Act (UDJA), Tex. Civ. Prac. & Rem. Code Ann. §§ 37.001-

.011 (West 2008), as TEA has done in the present case. See Bandag Licensing, 18 S.W.3d at 303.

This Court has held that “[a] suit seeking a declaratory judgment that a state agent is acting pursuant

to an unconstitutional law is not an action against the State barred by sovereign immunity.”

Rylander v. Caldwell, 23 S.W.3d 132, 136 (Tex. App.—Austin 2000, no pet.). Declaratory- 13

judgment actions against state officials challenging the constitutionality of a statute “do not implicate

the sovereign-immunity doctrine” because they are not considered “suits against the State.” Texas

Natural Res. Conservation Comm’n v. IT-Davy, 74 S.W.3d 849, 855 (Tex. 2002). Because the
 On appeal, the Comptroller does not contest TEA’s associational standing to bring suit. 14

See Hunt v. Washington State Apple Adver. Comm’n, 432 U.S. 333, 343 (1977) (requirements for

associational standing).

 Chapter 112 also allows taxpayers to bring a refund suit, see Tex. Tax Code Ann. 15

§ 112.151 (West 2008), which is distinct from a tax-protest suit, see id. § 112.052 (West 2008).

Karpod did not seek a refund under section 112.151.

17

present case falls within this category of cases for which the sovereign-immunity doctrine does not

apply, we hold that TEA is not barred from bringing suit. The Comptroller’s third issue on appeal 14

is overruled.

Attorneys’ Fees

In its fourth issue on appeal, the Comptroller argues that Karpod is not entitled to

attorneys’ fees under the UDJA because its UDJA claim is redundant to the legal remedy provided

by the tax-protest provisions of the tax code. See Tex. Tax Code Ann. §§ 112.052, .101. The

Comptroller contends that Karpod improperly brought its UDJA claim solely as a vehicle to obtain

attorneys’ fees. See Texas State Bd. of Plumbing Exam’rs v. Associated Plumbing-Heating-Cooling

Contractors of Tex., Inc., 31 S.W.3d 750, 753 (Tex. App.—Austin 2000, pet. dism’d by agr.) (“It

is an abuse of discretion . . . to award attorney’s fees under the UDJA when the statute is relied upon

solely as a vehicle to recover attorney’s fees.”).

Chapter 112 of the tax code allows taxpayers to seek a return of taxes paid under

protest, see Tex. Tax Code Ann. § 112.052, and an injunction prohibiting the assessment or

collection of a tax, see id. § 112.101. If a party requests a declaration under the UDJA that goes

15

beyond its request pursuant to the tax code, the UDJA claim is not considered a redundant remedy.

See Strayhorn v. Raytheon E-Systems, Inc., 101 S.W.3d 558, 572 (Tex. App.—Austin 2003,
 The trial court’s judgment declaring the tax unconstitutional was issued on 16

March 28, 2008, and the order awarding attorneys’ fees was issued April 11, 2008. Karpod did not

pay the tax under protest or file its written protest letter until April 21, 2008, the date that the first

SOB tax payments became due.

TEA, for that matter, had no access to a tax-protest suit at any time during this litigation 17

because it is not a taxpayer for SOB tax purposes. As a result, TEA’s claim under the UDJA is not

a redundant remedy preventing an award of attorneys’ fees.

18

pet. denied) (distinguishing between taxpayer that “requested a statutory interpretation that went

beyond its request for a tax refund,” for which UDJA claim would not be redundant, and taxpayer

seeking declaration that denial of refund claim was unlawful, for which UDJA claim would be

redundant). In addition, the issues to be determined in a tax-protest suit “are limited to those arising

from the reasons expressed in the written protest as originally filed.” Tex. Tax Code Ann.

§ 112.053(b) (West 2008). At the time of trial, Karpod had not paid the SOB tax under protest or

filed a written protest as contemplated by section 112.053 because the first SOB tax payments were

not yet due. Therefore, when Karpod’s UDJA claim was filed, the constitutionality of the SOB tax 16

was not yet a “reason[] expressed in the written protest” that could be raised in a tax-protest suit.

17

Id. The Texas Supreme Court has held that taxpayers have a constitutional right to obtain judicial

review of tax liability by means of a prepayment declaratory action. See R Commc’ns, Inc. v. Sharp,

875 S.W.2d 314, 317-18 (Tex. 1994) (holding tax code provision prohibiting declaratory actions and

requiring taxpayers to seek relief through protest suit to be unconstitutional); see also Bandag

Licensing, 18 S.W.3d at 305 (tax code provision prohibiting award of attorneys’ fees in declaratoryjudgment action is “an unconstitutional barrier to access to the courts”). At the time Karpod’s

UDJA 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. As
19

a result, the trial court did not abuse its discretion in awarding attorneys’ fees under the UDJA. The

Comptroller’s fourth issue is overruled.

CONCLUSION

We affirm the trial court’s judgment declaring that subchapter B of chapter 47 of the

business and commerce code is unconstitutional and permanently enjoining assessment and

collection of the tax. 

___________________________________________

Diane M. Henson, Justice

Before Chief Justice Jones, Justices Puryear and Henson;

 Concurring Opinion by Chief Justice Jones

 Dissenting Opinion by Justice Puryear

Affirmed

Filed: June 5, 2009