                           @ffice      of the !Zlttornep         @eneral
                                         &date of Ilf;exae
DAN MORALES
 ATTORNEY
      CEh’ERAL                              AugustII,1995
     Mr. Doyne Bailey                                 OpinionNo.     DM-361
     Administrator
     Texas Alcoholic Beverage Commission              Re: Whether a requirement in the
     P.O. Box 13127                                   Alcoholic Beverage Code that an applicant
     Austin, Texas 78711-3127                         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)

     Dear Mr. Bailey:

             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.,

              *Forproposesof the cede, “alcoholicbeverage”means“alcdoi. or any beveragecontaining snore
     tbm ooehlf of one percentof alcohol by volume,which is capableof use for beveragepurposes,either
     alone or whendiluted.”Ako. Bev. Code6 1.04(l).
Mr. Doyne Bailey - Page 2                (DM-361)




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 challengedcode 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 reg-
ulation of interstate commerce.“’ Id. (quoting Dennis v. Higgins, 498 U.S. 439, 447
(1991)). The dormant aspect of the Commerce Clause “‘prohibits economic protec-
tionism-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.


       ZTheUnitedStatesCourtof Appealsfor the Fib Circuit Wed severalpvisio~ in the cudethat
amtaincd the-year residency requirements: sections11.46@)(11).11.61@)(19),28.04, and 109.53.
Cooper,11E3d 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 propositionthat a ceurt will apply a lesser standardto reviewa 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 SupremeCourt said, ‘[w]han. . . a statute has only
indirect clfects on interstate commera and regulates evenhandedly,we have examined whether the
State’sinterest is legitimateand whether the burden on interstatecemmerceclearly exceedsthe local
be&its.” (Emphasisadded.)


                                           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 non-
Texans in the retail liquor business.” Id.

       ‘In the wordsof the United StatesCourtof&peals for the Fii Circuit:

          Nonresident liquor lioznse applicants may be squired to timdsh whatever
          informationthe state dcms wcemaly, togdhet with a teleaseto permit rigomus
          vc-thieationchecks. The ststc’s pens&s for dupIieityshould apply equally to
          resident or nonresident Pertnit-holders,as may its provisions requiring the
          furnishingof bondsby permitholders. Out-of-stateapplicantsmaybe requiredto
          file a consent to suit in Texas wuts. Texas law alreadydenies applicationsto
          anpotations not organizedunder the laws of Texas,[Alan.Bev.Code0 109.531,
          and a holder-corporationthat violates the State’s laws faas revocationof its
          permit,dissolutionof its corporatecharter,and other civil and criminalpenaJties.
          The entity’s employeesor supmisors can, of anuq be criminallyprosmted
          rcgardks wherethey reside.
Cooper,11F.3dat 554.

                                          p. 1941
Mr. Doyne Bailey - Page 5                  (DM-361)




        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 uirementsmdet the privilege6and Immwities Clause,U.S.Const.art IV, g 2. Cooper, 11
F.3dat 5% 11.10.

         ti  Cooper court recognizedthe le&lature’s actions in r&ion to its decision that the 1993
am&memstothcmdedidnotmootthecase.           Id.at550-51. Thecomtstatcdthstthecnaumentofthe
amendmentswouldnot preventthe legistamrefrom matotingthe three-yearresidencyrequiremutt if the
court in Cooper found the requirementconstitntional. Id. at 551. Furtlxem~on,the taut said that,
atthoughthe one-yearresidencyrequirementmay leasenthe hmden placedon out-of-stateapplicants.the
cddecontinuesto treat applicantswho are not Texascittzensdifferentlyfrom applicantswho am Texas
r&tents. Id. We assume the court did not nde on the merits of the cnrrent one-year residency
mqnirementbecausethe comediscussedthe one-yearresidencyreqnirementin the contextof its threshold

                                          p.   1942
Mr. Doyne Bailey - Page 6                   (DM-361)




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.

(footnotemntinocd)
mnch&n that the amendedlaw did not moot the cast; the court did not discussit in addmssingthe
merits.Seeid. at 550-51.

       %ection 6.03of the mdc providesin p&tincntpart as follows:

                (a) It is the public policy of this state and a purposeof this section to
          sequin that, accept as providedin Subsection(k) of this sectionor othcrwiscin
          thiscode,apamitorliccnsemaynotbeissuedtoapeMnwhowasnotacitizm
          uf this state for a one-yrar periodprecedingthe date of the filing of the person’s
          applicationfor a license or permit. In that rrgard, the lcgislatnmmakca the
          findingsin Subsections@I)thm& (i) of this section.        :
                (II) Betwrm 1920and 1933,the &ion         and mnmmptionof alcoholic
          w           was pmhibited in the United States. While the idcal&ic motivca
          behind Pmhiition were n&k, a law enformmentntgbtInamensucd.otherwise
          law-abiig citizens rodnely violated the law by buying and mnanning
          aImbolicbeveragea. The demandfor the illegal pmduds createdan opportunity
          for criminal elements to develop a nationst nmrk for the supply and
          distriition of alcoholic kverages to the pop&m. Massivecriminal empirca
          were built on illicit pmfits fmm these unlwvfulactivitiesand organizedcrime
          openlyflourishedin Chicago,NewYork,NewOrleans,and other cities.
                (c) Daring prohibition,the illegal cntcrpriseausedtheir nationsl wholesale
          distributionnetworksto exertcontrolover their customers.A commonoperating
          proctdurewastoscllalcoholicbcvo‘agetoa~onlibcraltmnsto
          ensnarl the ownerin a webof debt and controlwith the aim of forcingthe owner
          to engage in other ille8al busincas enterprizeaon the premises including
          gamblin&prostitution,and the d&ributionof illegaldrugs.
                (d) In 1935,whenthe sale of alcoholicbcvem8eswas legalizedin this state
          following the adoption of the Twenty-firstAmmdment to the united states
          ConstiMion, the state was faoed with building an entirc fmmewurkfor (hc
          distriiution of alcoholicbevcra8eproducts. An importantmncwn 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, mmpmbensivclaws
          werc~tocnsunthataaalcoholickveragcpmnitorLicenscmuldbe
          ismcdonlytocitizcnsofthestatewhohadlivedinthisstateforatlcastthree
          years,thns, long enongbto be knownby their mmmunityand 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
           gmntcda privilegethat mold be challengeda1both the countyand the state level
           if the characteror qoaUimtions of the applicantweremspcct.. . .
                 (0 The alcoholicbeveragelaws adoptedby the legislah~~in the 1930sto
           free the industry from the influenceof organizedcrime have been successfulin


                                            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..edfrom 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 out-
of-state residents or whether the statute evenhandedly re.gulates in-state residents and out-
of-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




(feotnetecontinued)
           this state. The almbolic beverageindustry 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 beverageindustryin this state.
                (g) To accemmodatethe interestsof the mnmmtag public, the expamion
           of popular nationwidebusineasea,aad the increasing state interest la tonrism,
           andatthesametimetoguardagainstthethreatsoforganizedcrime,unfair
           mmpctition,and deueased opp~rtunitieafor small busi-,             the legislahue
           lid that there is no longer neat for the Wee-yearresidencyrequirementswith
           regard to those segmentsof the industry that sell alcoholic beveragesto the
           ultimateconsumeronly. The legislaturefinds that it is d&able to retain a one-
           year residency requiremat for businessesthat sell to the cemumer padrasad
           liquor and fort&d wine capableof being usedte supplylegal or illegal bars and
           clnhs. The legislaturealso tinds it reasoaable,desirable,aad in the best intmsts
           uf the state to providea one-yearreatdeneyrequirementfor basiaessesengagedin
           the wholesaledisnibutionof beer, malt liquor,or wine or in the manw%cture    and
           distributionof distilled spirits and fordtied wines at both the wholesaleaad the
           retail levels where those beverages,in unopenedmntainers, are sold to mixed
           beveragepcrmitteeaand private club regisuation pcmttttees as well as to the
           general poblic. Adequatepmtection is deemedto be providedby mntmlling
           these sourcesof supplyfor distilledspiritsand fortifiedwina.


                                             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 one-
year 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 considerwhetherthe statuteviolatesthe Privilegesaad ImmunitiesClause,
U.S.Gxst. an. IV, 8 2. Seesupro note 5.


                                        p. 1945
