Texas to Generate Fees from Sexually-Oriented Businesses

Starting 1/1/08, Texas will charge a $5 per patron entrance fee based on visitors to sexually-oriented businesses providing live nude performances and serving alcohol (see USA Today story of 12/21/07). The business has the option of passing the fee onto customers. If the fee is added to the entrance fee, it is also subject to sales and use tax because it is an admission to an amusement service.

The first $25 million collected will go into the state's sexual assault program fund. Any amount beyond $25 million collected in a 2-year period goes to the state's health opportunity pool for health coverage assistance to low-income individuals. (See Texas Comptroller of Public Accounts information of July 2007 and information for businesses subject to the fee.) If a business is not sure it owes the fees, Texas provides a questionnaire to help it answer that question.

Newspapers have called this a "pole tax." However, it was enacted as a fee. Does it matter if it is a tax or fee? Yes.

In California, a fee only requires a majority to be enacted while a 2/3 majority is needed to enact a tax.

If a state constitution or other law prohibits a tax, such as on income, it can also matter whether the exaction is a fee or tax. In addition, generally, only a legislature has authority to create a tax while an agency might have authority to impose a fee (such as a fee on making copies of documents).

There is both federal and state court decisions on the issue of tax versus fee. For a summary of some of these, see pages 32 - 33 of the following documents (prepared by the author of this blog) - here.

Court decisions in California (Sinclair Paint, 15 Cal. 4th 866 (1997), and Calif. Assoc. of Professional Scientists v. Dept. of Fish & Game, 79 Cal. App. 4th 935) held that a “charge” is a fee rather than a tax if:

• The fee does not exceed the reasonable costs of providing the services for which the fee is charged. It is permissible for the fee to be a fixed amount without it being a tax where the cumulative fees collected do not exceed the costs of administering the associated regulatory program and there is a reasonable basis for distributing the costs among the payers of the fee.
• The fee relates to the purpose for which it is charged (it is not being used for some other purpose).
• There is a connection or relationship between the payer and the purpose of the fee assessed.

Is there a connection between the sexually-oriented businesses (such as a strip club) and the purpose of the fee?

Is this mainly a creative way to get funds for state programs? Is it legal? Perhaps we'll see a future court decision on this in 2008.

Does the new Texas fee help move Texas' tax system into the 21st century? Not really. This is a very narrow reform and perhaps not as well targeted as it could be. Certainly, governments should look at fees as appropriate to help cover its costs and not economically detrimental to payers. Texas has instituted other tax reforms, but would benefit from an overall review of its tax (and fee) systems to determine how to most effectively raise revenue while maintaining a tax system that is simple, equitable and promotes economic efficiency. [For more on economic efficiency, see pages 35 - 44 of this 2005 GAO report.]