### 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 ofthe cede,“alcoholic

beverage” means “alcdoi. or anybeverage

containingsnore tbm ooehlf of one percentof alcoholby volume,whichis capableofuse for beverage purposes, either aloneor whendiluted.” Ako. Bev.Code6 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 UnitedStates

CourtofAppeals

for the Fib CircuitWed several pvisio~ in the cudethat amtaincd the-year residencyrequirements: sections11.46@)(11). 11.61@)(19),

28.04, and 109.53. Cooper,11E3d at 549.

p. 1939Mr. 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. (citationsomitted) (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

3Forthe proposition

that a ceurt will apply a lesser standard to reviewa statutethat regulates

co- in an evenhanded manner, the Cooper court cited BnnmFonmm Distillers v. New York, 416 U.S. 573, 579 (1986). ln Brownthe United StatesSupreme Courtsaid, ‘ [w]han

. . . a statutehas only indirect clfects on interstate commera and regulatesevenhandedly, we have examined whether the State’ s interestis legitimateand whetherthe burden on interstatecemmerce clearly exceeds

the local be&its.” (Emphasis

added.)

0. 1940Mr. 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 thewords

ofthe UnitedStates

Courtof&peals for theFii Circuit:
Nonresidentliquor lioznse applicants may be squired to timdsh whatever information

the state dcms wcemaly,togdhet with a telease to permitrigomus vc-thieation

checks. The ststc’ spens&s for dupIieityshouldapply equally to resident or nonresident Pertnit-holders, as may its provisionsrequiring the furnishing ofbonds by permitholders. Out-of-state applicants mayberequired

to file a consentto suit in Texaswuts. Texas law alreadydeniesapplications to anpotations not organized

underthe lawsof Texas,[Alan. Bev.Code0 109.531, and a holder-corporation

that violates the State’ s laws faas revocationof its permit, dissolution

of its corporate

charter,and othercivil and criminalpenaJties. The entity’ s employees

or supmisors can, of anuq be criminallyprosmted rcgardks where

theyreside. Cooper,11

F.3dat 554.

p. 1941Mr. 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-restsimplicated 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 conclusionin Cooper,the court did not considerthe validity of the =id-Ynq uirements

mdet the privilege6

and ImmwitiesClause,

U.S.Const.art IV, g 2. Cooper, 11 F.3dat 5% 11.10.
ti Coopercourt recognized the le&lature’ s actionsin r&ion to its decisionthat the 1993 am&memstothcmdedidnotmootthecase. Id.at550-51. Thecomtstatcdthstthecnaumentofthe amendments

would not preventthe legistamre

frommatoting

the three-year

residency requiremuttif the court in Cooper found the requirement constitntional. Id. at 551. Furtlxem~on, the taut said that, atthough the one-year

residency requirement

mayleasen

the hmdenplaced

on out-of-state

applicants.

the cddecontinues

to treat applicantswho are not Texascittzensdifferently from applicantswho 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 contextof its threshold

p. 1942Mr. 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 amendedlaw did not mootthe cast; the courtdid not discussit in addmssing the 

### merits. Seeid.at 550-51.
%ection6.03ofthe mdc provides in p&tincnt

part as follows: (a) It is the public policy of this state and a purposeof this section to sequin that, accept as provided in Subsection

(k) of this section

or othcrwiscin thiscode,apamitorliccnsemaynotbeissuedtoapeMnwhowasnotacitizm uf this statefor a one-yrarperiodpreceding the dateofthe filing of the person’ s applicationfor a license or permit. In that rrgard, the lcgislatnmmakcathe findingsin Subsections

@I) thm& (i) ofthis section. : (II) Betwrm 1920

and 1933, the &ion and mnmmptionof alcoholic
w was pmhibited in the United States. While the idcal&ic motivca behindPmhiition weren&k, a lawenf ormmentntgbtInamensucd.otherwise law-abiig citizens rodnely violated the law by buying and **mnanning** aImbolicbeveragea.The demand for the illegalpmdudscreated an opportunity for criminal elements to develop a nationst nmrk for the supply and distriition of alcoholickverages to the pop&m. Massive criminal empirca
werebuilt on illicit pmfits fmm theseunlwvful activitiesand organizedcrime openly flourished in Chicago,

NewYork,

New Orleans, andothercities. (c) Daringprohibition,

the illegalcntcrprisea

usedtheir nationslwholesale distribution

networks to exertcontrolovertheir customers. A common

operating proctdurewastoscllalcoholicbcvo ‘ agetoa~onlibcraltmnsto ensnarlthe ownerin a webofdebtand controlwiththe aim offorcing the owner to engage in other ille8al busincas enterprizeaon the premises including gamblin& prostitution,

and the d&ributionofillegaldrugs. (d) In 1935,

whenthe saleof alcoholic

bcvem8es waslegalized

in this state following the adoption of the Twenty-first Ammdmentto the united states ConstiMion, the state was faoed with building an entirc fmmewurk for (hc distriiution ofalcoholic

bevcra8e products.An important

mncwn wasthat sincc crhnb& owned and mntrollcd the oxis@ ilh+ alcoholic borage distriition system, aiminals would attempt to own and control the newly legalizedhuhtry. In an effort to prcvcnt this situation, **mmpmbensivc** laws werc~tocnsunthataaalcoholickveragcpmnitorLicenscmuldbe ismcdonlytocitizcnsofthestatewhohadlivedinthisstateforatlcastthree years,thns,long enongbto beknown bytheir **mmmunity**

and neighbors. (e) Under the newly de&ned rc8ulato~ scheme,permits and licenses issuedby the state did not grant the holda a right Rather, the holder was gmntcda privilegethat mold be challenged a1 boththe county

andthe state level if the character

or qoaUimtionsofthe applicant were mspcct..

. . (0 The alcoholicbeverage lawsadopted

by the legislah~~

in the 1930sto free the industryfrom the influenceof organized crimehavebeen successful in

p. 1943Mr. 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 industryin this state is Rot domiaatedby organized crime. However,the legislature dees find that organized crime mntinueato be a threat tbat should aever be allowedto establiih itself in the almbolicbeverage

industry in this state. (g) To accemmodate

the interestsof the mnmmtag public,the expamion of popular nationwidebusineasea, aad the increasingstate interest la tonrism, andatthesametimetoguardagainstthethreatsoforganizedcrime,unfair **mmpctition,**

and deueased opp~rtunitiea for small busi-, the legislahue lid that there is no longerneat for the Wee-yearresidency requirements

with regard to those segmentsof the industrythat sell alcoholic beverages to the ultimateconsumer

only. The legislature

findsthat it is d&able to retain a oneyear residencyrequiremat for businesses that sell to the cemumer padrasad liquorand fort&d winecapable ofbeingusedte supply

legal or illegal bars and clnhs. The legislature

alsotinds it reasoaable,

desirable, aad in the best intmsts ufthe stateto provide

a one-year reatdeney requirement

forbasiaesses

engaged in the wholesale

disnibutionofbeer,malt liquor,or wineor in the manw%cture and distribution

of distilled spirits and fordtiedwinesat both the wholesale aad the retail levels where those beverages, in unopened

mntainers, are sold to mixed beveragepcrmitteeaand private club regisuationpcmtttteesas well as to the general poblic. Adequatepmtectionis deemedto be providedby mntmlling these sources

of supply for distilledspiritsand fortified **wina.**

p. 1944Mr. 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

8Amart atso might considerwhether the statute violatesthe Privileges

aad Immunities

Clause, U.S.Gxst. an. IV, 8 2. Seesupro note5.

p. 1945