DAN MORALES 

ATTORNEY CEh’ERAL 

@ffice of the !Zlttornep @eneral 

&date of Ilf;exae 

August II,1995 

Mr. Doyne Bailey 

Administrator 

Texas Alcoholic Beverage Commission 

P.O. Box 13127 

Austin, Texas 78711-3127 

Dear Mr. Bailey: 

OpinionNo. DM-361 

Re: Whether a requirement in the 

Alcoholic Beverage Code that an applicant 

for a liquor license or petmit have been a 

resident of Texas for at least one year 

Wore submitting the application violates 

the United States Constitution (RQ-747) 

Various provisions of the Alcoholic Beverage Code (the “code”) require an 

applicant for an alcoholic beverage* permit or hcense to have resided in the State of Texas 

for a period of one year prior to submitting the application. You ask whether the one-year 

residency requirement violates the United States Constitution. You particularly ask that 

we consider your question in light of a decision of the United States Court of Appeals for 

the Pii Ciit concluding that a similar three-year residency requirement was 

wnsthutionally invalid. 

The code requires any individual who de&es to manufacture, sell, transport, or 

warehouse Liquor to first obtain from the Alcoholic Beverage Commission (the 

“commission”) an appropriate permit. Alto. Bev. Code 0 11.01(a). Section 11.46(a)(ll) 

of the code authorizes the commission or the administrator of the commission to retirse to 

grant an original or renewal permit if the applicant has not been a citizen of Texas for a 

period of one year immediately preceding the date he or she tiled the application. 

Siiy, section 61.01 requires an individual who desires to manufacture or brew beer 

for commercial purposes to obtain a license or permit, as appropriate, from the county in 

which the individual desires to conduct business. See &o id. 5s 61.3 I- .32. In general, a 

county judge must deny an application for a license as a distributor or retailer if the county 

judge 6nds that the applicant has not been “a citizen of Texas for a period of one year 

immediately preceding the IIing of his application.” Id. 8 61.42. Other provisions of the 

code contain similar residency requirements. See id. 0s 11.61@)(19), 109.53. 

Prior to September 1, 1993, the Alcoholic Beverage Code required that an 

applicant for a permit or license have resided in Texas for three. years preceding the Sling 

of the application. See id. $5 11.46,61.42, amended by Act of May 29, 1993,73d Leg., 

*For proposes of the cede, “alcoholic beverage” means “alcdoi. or any beverage containing snore 

tbm ooehlf of one percent of alcohol by volume, which is capable of use for beverage purposes, either 

alone or when diluted.” Ako. Bev. Code 6 1.04(l). 
Mr. Doyne Bailey - Page 2 (DM-36 1) 

RS., ch. 934, 3s 21, 50, 1993 Tex. Sess. Law Serv. 3954, 3960-61, 3970-71. Under the 

previous version of the law, two individuals who were not Texas residents and whose 

applications for a mixed beverage permit the commission therefore denied filed a lawsuit 

claiming that the statutory residency requirement violated the United States Constitution. 

See Cooper v. McBeaih, 11 F.3d 547, 547 (5th Cir.), ceri. denied, 114 S. Ct. 2675 

(1994). As partners, the two individuals sought to purchase a nightclub in San Antonio 

from a Texas corporation, K.S. Enterprises, Inc. (“KSE”). Id. at 549. Toward this end, 

they established and wholly owned a Tennessee corporation, Bexar County Enterprises 

(“BCE’), which purchased forty-nine percent of KSE’s stock. Id. BCE also acquired an 

option to purchase the remaining shares when the stock transfer could occur without 

jeopardixing KSE’s permit to sell alcoholic beverages at the nightclub. Id. 

One facet of the three-year residency requirement forbade the issuance of a permit 

to any corporation “unless at least 5 1 percent of the stock of the corporation is owned at 

all times by citizens who have resided within the state for a period of three ye@.]” Id.; 

Alw. Bev. Code 8 109.53, ameAd by Act of May 29, 1993, 73d Leg., RS., ch. 934, 

3 90, 1993 Tex. Sess. Law Serv. 3954, 3983-84. Thus, the Alcoholic Beverage 

Commission refbsed even to conduct background investigations on the owners of BCE 

because th9 were not Texas residents. Coorper, 11 F.3d at 549. Apparently, the owners 

filed suit challenging the statute’s three-year residency requhement in general, not just the 

“5 1 percent rule.” See id. (listing challenged code provisions). The United States District 

Court for the Western Diict of Texas held the three-year residency requirement 

tmconstitutional. Wikan v. McBeafh, No. A-go-CA-736, 1991 WL 540043, at * 11, afd 

sub nom. Cooper v. McBeath, 11 F.3d 547 (5th Cu.), cert. denied, 114 S. Ct. 2675 

(1994). 

On appeal to the United States Court of Appeals for the Fii Ciicuih the 

plaintit%-appellees argued that the durational residency requirements in the codes violated 

the Commerce Clause, U.S. Const. art. I, 8 8, cl. 3, or the Privileges and Immunities 

Clause, id. art. IV, 5 2. Cooper, 11 F.3d at 549. The Fii Ciicuit specifically considered 

the constitutionaiity of the durational residency requirement in the “5 1 percent rule.” Id. 

The Commerce Clause. empowers Congress to regulate commerce among the 

several states. Id. at 552 (quoting U.S. Const. art. I, 5 8, cl. 3). The court in Cooper 

noted that, in addition to bestowing powers upon Congress, the Commerce Clause “abso 

contains a ‘dormant’ facet that serves as ‘a substantive restriction on permissible state regulation of interstate commerce.“’ Id. (quoting Dennis v. Higgins, 498 U.S. 439, 447 

(1991)). The dormant aspect of the Commerce Clause “‘prohibits economic protectionism-that is, regulatory measures designed to benetit in-state economic interests by 

burdening out-of-state competitors.“’ Id. (quoting New Energv Co. v. Limbach, 486 U.S. 

ZThe United States Court of Appeals for the Fib Circuit Wed several pvisio~ in the cude that 

amtaincd the-year residency requirements: sections 11.46@)(11). 11.61@)(19), 28.04, and 109.53. 

Cooper, 11 E3d at 549. 

p. 1939 
Mr. Doyne Bailey - Page 3 (DM-361) 

269,273-74 (1988)). The Cooper court also noted that the United States Supreme Court 

has struck down a state’s efforts to grant its own residents preferred rights of access over 

nonresidents to resources located within its borders. Id. at 552-53 (citing Hughes v. 

Oklahoma, 441 U.S. 322, 337-38 (1979)). 

In Cooper the court explained that, when analyzing whether a particular state law 

codifies economic protectionism and thus violates the Commerce Clause, the United 

States Supreme Court uses a two-tiered approach. Id. at 553. 

Under this framework, state statutes that diiy discriminate against 

interstate commerce, or whose effects favor in-state economic 

interests at the expense of out-of-staters, are routinely struck 

down. . . “unless the discrimination is demonstrably justified by a 

valid factor unrelated to economic protectionism.” . . 

When, however, a statute regulates in an evenhanded manner 

and had only direct3 effects on interstate commerce,~ we assess 

“whether the State’s interest is legitimate. and whether the burden on 

interstate commerce clearly exceeds the local beneSts.” 

Id. (citations omitted) (footnote added). 

The court reasoned that the le@lature originaUy did not intend the tit&one 

percent requirement to be protectionist because the legislature enacted the statute 

immediately following the repeal of the Eighteenth Amendment to the United States 

Constitution in 1933 and, thus, no liquor industry existed in Texas that needed protection. 

Id. However, the court found that the Texas law was not entitled to the lower standard of 

scrutiny articulated in the second tier of the Supreme Court’s approach because the effect 

was protectionist: the statutory requirements resulted in “overt, m-state favoritism [that] 

cannot be ignored.” Id. According to the court, the fifty-one percent requirement created 

an “impenetrable barrier” to out-of-staters who wished to enter the Texas liquor industry 

on terms substantially equal to those Texans enjoyed. Id. 

Thus, the court found that the fitly-one percent requirement was in the category of 

statutes that the United States Supreme Court routinely strikes ,down, “‘unless the 

d&imination [against out-of-state residents] is demonstrably justitied by a valid factor 

unmlated to economic protectionism.“’ Id. (quoting New Energy Co., 486 U.S. at 274). 

As the court said, “even plainly discriminatory statutes may survive a Commerce Clause 

challenge ifthe State can demonstrate that the statutes advance ‘a legitimate local purpose 

3For the proposition that a ceurt will apply a lesser standard to review a statute that regulates 

co- in an evenhanded manner, the Cooper court cited BnnmFonmm Distillers v. New York, 416 

U.S. 573, 579 (1986). ln Brown the United States Supreme Court said, ‘[w]han . . . a statute has only 

indirect clfects on interstate commera and regulates evenhandedly, we have examined whether the 

State’s interest is legitimate and whether the burden on interstate cemmerce clearly exceeds the local 

be&its.” (Emphasis added.) 

0. 1940 
Mr. Doyne Bailey - Page 4 (DM-361) 

that cannot be adequately served by reasonable nondiscriminatory alternatives.“’ Id. 

(quoting New Energy Co., 486 U.S. at 278). The state bears the burden of proof Id. 

Before the Fifth Circuit, the State of Texas contended that it established the 

statutory system for the distribution of alcoholic beverages “‘to protect the health, safety, 

welfare, morals and temperance”’ of Texas cit~hzens. Id. at 554 (quoting Alto. Bev. Code 

Q 1.03). The court found, however, that “[s]uch boilerplate enabling language hardly 

explains the State’s particular restrictions on out-of-state ownership of various liquor 

licenses.” Id. The State next contended that the residency requirements are necessary so 

that the commission may conduct “an intensely local scmening of each applicant’s 

reputation in the community plus a complete, thorough business and financial 

investigation.” Id. Moreover, according to the State, the commission’s “abiity to 

investigate an out-of-state applicant’s reputation and qualifications is severely limited.” 

Id. While this ultimate goal may be legitimate, according to the court, the State may not 

pursue it through a “flat proscription of non-Texans.” Id. 

In addition to demonstrating that a valid factor unrelated to economic 

protectionism justifies a discriminatory statute, a state must prove that neutral alternatives 

adequate to protect the interests at stake are unavailable. Id. The court believed that, 

“[i]n this age of split-second communications by means of computer networks, fax 

machines, and other technological marvels,” other neutral, less burdensome options are 

available that will allow the State sufliciently to check the backgrounds of applicants for 

alcoholic beverage permits and licenses.4 Id. 

Thus, the court concluded that the State failed to demonstrate “‘the unavailabiity 

of nondiscriminating alternatives adequate to preserve the local interests at stake.“’ Id. 

(quoting Wyoming v. Oklahoma, 502 U.S. 437, 456 (1992)). Indeed, according to the 

court, “[s]o long as an applicant meets the necessary qualiications and comports himself 

according to the governing standards, the State would be hard-pressed to offer a 

justification substantial enough to authorize a wall prohibiting equal competition of nonTexans in the retail liquor business.” Id. 

‘In the words of the United States Court of&peals for the Fii Circuit: 

Nonresident liquor lioznse applicants may be squired to timdsh whatever 

information the state dcms wcemaly, togdhet with a telease to permit rigomus 

vc-thieation checks. The ststc’s pens&s for dupIieity should apply equally to 

resident or nonresident Pertnit-holders, as may its provisions requiring the 

furnishing of bonds by permit holders. Out-of-state applicants may be required to 

file a consent to suit in Texas wuts. Texas law already denies applications to 

anpotations not organized under the laws of Texas, [Alan. Bev. Code 0 109.531, 

and a holder-corporation that violates the State’s laws faas revocation of its 

permit, dissolution of its corporate charter, and other civil and criminal penaJties. 

The entity’s employees or supmisors can, of anuq be criminally prosmted 

rcgardks where they reside. 

Cooper, 11 F.3d at 554. 

p. 1941 
Mr. Doyne Bailey - Page 5 (DM-36 1) 

The State of Texas also argued in Cooper that the Twenty-first Amendment to the 

United States Constitution provides the states “carte blanche authority to manage the flow 

of alcohol within their borders.” Id. Section 2 of the Twenty-first Amendment provides: 

“The transportation or importation into any State. for delivery or use therein of 

intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” U.S. Const. 

amend. XXI, 5 2, quotedin Cocper, 11 F.3d at 554-55. 

The wurt acknowledged that, for a time, the United States Supreme Court held 

the Twenty-first Amendment to grant the states “almost unfettered authority to regulate 

wmmerce in intoxicating liquors unwnstrained by” dormant Commerce Clause 

restrictions. Id. at 555 (citing, as an example, State Bd. of Equalization v. Young’s 

Market Co., 299 U.S. 59,62-63 (1936)). More recently, however, the Supreme Court has 

concluded that the Twenty-first Amendment does not completely remove state regulation 

of alcoholic beverages from the realm of the Commerce Clause. Id. (citing Bacchs 

Imports, Ltd. v. Dias, 468 U.S. 263,275 (1984)). 

To determhte whether the Twenty-first Amendment bmmmizes a particular state 

statute from invalidation under the Commerce Clause, the state must demonstrate that tbe 

inte-rests implicated by its regulation “‘are so closely related to the powers reserved by the 

Twenty-tirst Amendment that the regulation may prevail, notwithstandmg that its 

requirements directly wutlict with express federal policies.*” Id. (quoting Gpikzl Cities 

Cable, Inc. v. Crisp, 467 U.S. 691, 714 (1984)). The court found unpersuasive the 

. State’s asserttons that the State’s interest in investigating the background of applicants for 

alcoholic beverage permits and licenses by discriminating against nonresidents was within 

the “‘core wncerns” of the Twenty-first Amendment. Id. Consequently, the court 

concluded that the residency requirements were subject to the Commerce Clause’s 

nondiscrimination requirement and were, therefore, unwnstitutional.5 Id. at 555-56. 

During the pendency of the appeal in Cooper, the Seventy-third Legislature 

amended the residency requirements throughout the code to require an applicant for a 

permit or license to have resided in Texas for one year prior to the date the individual 

submits the application.6 See Act of May 29, 1993, 73d Leg., R.S., ch. 934, $4 21, 24, 

%r light of the court’s conclusion in Cooper, the court did not consider the validity of the 

=id-Ynq uirements mdet the privilege6 and Immwities Clause, U.S. Const. art IV, g 2. Cooper, 11 

F.3d at 5% 11.10. 

ti Cooper court recognized the le&lature’s actions in r&ion to its decision that the 1993 

am&memstothcmdedidnotmootthecase. Id.at550-51. Thecomtstatcdthstthecnaumentofthe 

amendments would not prevent the legistamre from matoting the three-year residency requiremutt if the 

court in Cooper found the requirement constitntional. Id. at 551. Furtlxem~on, the taut said that, 

atthough the one-year residency requirement may leasen the hmden placed on out-of-state applicants. the 

cdde continues to treat applicants who are not Texas cittzens differently from applicants who am Texas 

r&tents. Id. We assume the court did not nde on the merits of the cnrrent one-year residency 

mqnirement because the come discussed the one-year residency reqnirement in the context of its threshold 

p. 1942 
Mr. Doyne Bailey - Page 6 (DM-36 1) 

90, 1993 Tex. Sess. Law Serv. 3954,3960-61,3962,3983-84. The legislature also added 

section 6.03 to the code, summa&i ng the history of the code’s durational residency 

requirement and articulating a rationale for continuing the residency requirement, although 

shortening the period to one year: primarily, to keep organized crime from infiltrating the 

state’s alcoholic beverage industry.7 See id. 3 16, at 3957-58 (codified as Alto. Bev. 

(footnote mntinocd) 

mnch&n that the amended law did not moot the cast; the court did not discuss it in addmssing the 

merits. See id. at 550-51. 

%ection 6.03 of the mdc provides in p&tincnt part as follows: 

(a) It is the public policy of this state and a purpose of this section to 

sequin that, accept as provided in Subsection (k) of this section or othcrwisc in 

thiscode,apamitorliccnsemaynotbeissuedtoapeMnwhowasnotacitizm 

uf this state for a one-yrar period preceding the date of the filing of the person’s 

application for a license or permit. In that rrgard, the lcgislatnm makca the 

findings in Subsections @I) thm& (i) of this section. : 

(II) Betwrm 1920 and 1933, the &ion and mnmmption of alcoholic 

w was pmhibited in the United States. While the idcal&ic motivca 

behind Pmhiition were n&k, a law enf ormmentntgbtInamensucd. otherwise 

law-abiig citizens rodnely violated the law by buying and mnanning 

aImbolic beveragea. The demand for the illegal pmduds created an opportunity 

for criminal elements to develop a nationst nmrk for the supply and 

distriition of alcoholic kverages to the pop&m. Massive criminal empirca 

were built on illicit pmfits fmm these unlwvful activities and organized crime 

openly flourished in Chicago, New York, New Orleans, and other cities. 

(c) Daring prohibition, the illegal cntcrprisea used their nationsl wholesale 

distribution networks to exert control over their customers. A common operating 

proctdurewastoscllalcoholicbcvo‘agetoa~onlibcraltmnsto 

ensnarl the owner in a web of debt and control with the aim of forcing the owner 

to engage in other ille8al busincas enterprizea on the premises including 

gamblin& prostitution, and the d&ribution of illegal drugs. 

(d) In 1935, when the sale of alcoholic bcvem8es was legalized in this state 

following the adoption of the Twenty-first Ammdment to the united states 

ConstiMion, the state was faoed with building an entirc fmmewurk for (hc 

distriiution of alcoholic bevcra8e products. An important mncwn was that sincc 

crhnb& owned and mntrollcd the oxis@ ilh+ alcoholic borage 

distriition system, aiminals would attempt to own and control the newly 

legalized huhtry. In an effort to prcvcnt this situation, mmpmbensivc laws 

werc~tocnsunthataaalcoholickveragcpmnitorLicenscmuldbe 

ismcdonlytocitizcnsofthestatewhohadlivedinthisstateforatlcastthree 

years, thns, long enongb to be known by their mmmunity and neighbors. 

(e) Under the newly de&ned rc8ulato~ scheme, permits and licenses 

issued by the state did not grant the holda a right Rather, the holder was 

gmntcd a privilege that mold be challenged a1 both the county and the state level 

if the character or qoaUimtions of the applicant were mspcct.. . . 

(0 The alcoholic beverage laws adopted by the legislah~~ in the 1930s to 

free the industry from the influence of organized crime have been successful in 

p. 1943 
Mr. Doyne Bailey - Page 7 (DM-361) 

Code § 6.03(a) - (9)). Additionally, the legislature voiced some concern about preventing 

“unfair competition” and “decreased opportunities for small businesses.” See id. 5 16, at 

3958 (codified as Alto. Bev. Code § 6.03(g)). 

In our opinion, a court would assess the constitutionalii of the one-year residency 

requirement about which you ask using an analysis similar to that which the court used in 

Cooper. Preliminarily, we think the court would ascertain whether the statute fell within 

the scope of the Twenty-first Amendment and was thereby immuniz..ed from invalidation 

under the Commerce Clause. The court’s analysis would center upon whether the state 

law serves interests “closely related to the powers” the Twenty-first Amendment reserves 

to the states. See Cooper, 11 F.3d at 555. If not, the court would proceed to analyze the 

statute under the Commerce Clause, using the. two-tiered analysis the Supreme Court has 

set forth. See id. at 553. 

The court would determine whether the statute directly discriminates a@nst outof-state residents or whether the statute evenhandedly re.gulates in-state residents and outof-state residents. See id. If the court finds that the statute is among the former, the state 

must demonstrate to the court’s satisfaction that a valid factor unrelated to economic 

protectionism justifies the discrimination and that an adequate neutral alternative is 

unavailable. See id. at 554. On the other hand, if the court finds that the statute is among 

the latter, the court must assess whether the statute linthers a legitimate state interest and 

(feotnete continued) 

this state. The almbolic beverage industry in this state is Rot domiaated by 

organized crime. However, the legislature dees find that organized crime 

mntinuea to be a threat tbat should aever be allowed to establiih itself in the 

almbolic beverage industry in this state. 

(g) To accemmodate the interests of the mnmmtag public, the expamion 

of popular nationwide busineasea, aad the increasing state interest la tonrism, 

andatthesametimetoguardagainstthethreatsoforganizedcrime,unfair 

mmpctition, and deueased opp~rtunitiea for small busi-, the legislahue 

lid that there is no longer neat for the Wee-year residency requirements with 

regard to those segments of the industry that sell alcoholic beverages to the 

ultimate consumer only. The legislature finds that it is d&able to retain a oneyear residency requiremat for businesses that sell to the cemumer padrasad 

liquor and fort&d wine capable of being used te supply legal or illegal bars and 

clnhs. The legislature also tinds it reasoaable, desirable, aad in the best intmsts 

uf the state to provide a one-year reatdeney requirement for basiaesses engaged in 

the wholesale disnibution of beer, malt liquor, or wine or in the manw%cture and 

distribution of distilled spirits and fordtied wines at both the wholesale aad the 

retail levels where those beverages, in unopened mntainers, are sold to mixed 

beverage pcrmitteea and private club regisuation pcmttttees as well as to the 

general poblic. Adequate pmtection is deemed to be provided by mntmlling 

these sources of supply for distilled spirits and fortified wina. 

p. 1944 
Mr. Doyne Bailey - Page 8 (DM-361) 

whether the burden on interstate commerce clearly exceeds the local benefits.8 See id. at 

553. 

Ah of the issues involved in a court’s analysis of the constitutionality of the oneyear residency requirement in the Alcoholic Beverage Code involve the resolution of fact 

questions. The resolution of fact-based questions is inappropriate to the opinion process. 

E.g., Attorney General Opinions DM-98 (1992) at 3; H-56 (1973) at 3; M-187 (1968) at 

3; O-291 1 (1940) at 2. 

SUMMARY 

All of the issues involved in a court% analysis of the 

constitutionality of the Alcoholic Beverage Code’s one-year 

residency requirement involve the resolution of fact questions. 

DAN MORALES 

Attorney General of Texas 

JORGE VEGA 

Fii Assistant Attorney General 

SARAH J. SHIRLEY 

chair, opiion committee 

Prepared by Kymberly K. Oltrogge 

Assistant Attorney General 

8A mart atso might consider whether the statute violates the Privileges aad Immunities Clause, 

U.S. Gxst. an. IV, 8 2. See supro note 5. 

p. 1945