Communications Advisory Bulletin
U.S. Court of Appeals Rejects DBS Challenge to
Kentucky Taxation of Multichannel Video Sales and Revenues
By Burt
Braverman, John
D. Seiver and Travis E. Litman
[June 2007]
On May 31, 2007, the United States Court of Appeals for the Sixth
Circuit issued a significant opinion1
for the cable industry, rejecting the constitutional challenge by
DirecTV and EchoStar (collectively, “DBS Plaintiffs”)
to taxes levied by the State of Kentucky on multichannel video programming
services (the “2005 Amendments”).2
Enacted against the backdrop of the tremendous growth of the DBS
industry and an increasingly complex system of local franchise fees
applicable to cable television systems, the 2005 Amendments sought
to impose a “fair, efficient, and uniform method of taxing
communications services sold” in Kentucky and to simplify
“an existing system that includes a myriad of levies, fees,
and rates imposed at all levels of government.”3
The DBS Plaintiffs filed suit in federal court seeking to enjoin
the taxes, alleging that they discriminated against DBS providers,
and interstate commerce, in violation of the dormant Commerce Clause
of Article I of the U.S. Constitution as they permitted cable operators
to offset their franchise fee payments against the taxes. On appeal
from the district court’s dismissal of the DBS Plaintiffs’
action, the Court of Appeals affirmed, holding that the 2005 Amendments
were lawful in purpose and effect, and did not discriminate against
interstate commerce. This ruling has added significance in that
various other states, including Florida, Tennessee, Ohio and North
Carolina, also have enacted taxes applicable to DBS, and such taxes
also have been challenged in court by DirecTV and EchoStar.
Although the Telecommunications Act of 1996 forbids localities
from taxing or assessing franchise fees on DBS service providers,
like those widely imposed on cable systems, the 1996 Act expressly
reserves to states whatever powers they otherwise may have
to tax DBS operations. Kentucky’s 2005 Amendments provided
for a 3.0 percent sales excise tax and a 2.4 percent gross revenues
tax on all multichannel video programming services, including
DBS, cable and wireless providers.4
At issue in this case, the 2005 Amendments also prohibited local
governments from any longer imposing franchise fees or taxes on
cable television systems, but provided localities with a proportional
share of the new state tax revenues in place of their lost franchise
fees.5
Conversely, localities that persisted in imposing franchise fees
or other taxes on cable systems, in contravention of the Amendments,
would not be entitled to a share of the state tax revenues, and
cable operators forced to pay such illegal franchise fees would
receive corresponding credits against the new state excise and gross
revenues taxes.6
The DBS providers challenged those provisions of the 2005 Amendments
that afforded cable operators relief from their prior franchise
fees or, alternatively, a credit against the new state excise and
gross revenues taxes. They alleged that, although the 2005 Amendments
were not facially discriminatory because they applied to
both DBS and cable, any tax credits or relief from franchise fees
afforded to cable television operators by this statutory mechanism
discriminated, in their practical effect, in favor of “intrastate”
cable operators and against “interstate” DBS providers,
“because revenues from the state excise and gross revenues
tax are used to pay franchise fees that cable operators would otherwise
have to pay local governments for access to local rights-of-way.”
In the DBS Plaintiffs’ view, “[t]his discriminates against
interstate commerce because cable companies, which provide service
via infrastructure necessarily located within the state, get the
tax preference while satellite companies, which provide service
via satellites inherently located out of the state, get no tax preference.”
The Court of Appeals unequivocally rejected these arguments. The
Court noted initially that state and local governments “are
under no mandate to charge for the use of local rights-of-way …
[and that] States have wide latitude to ‘encourage the growth
and development of intrastate commerce and industry.’”
Interestingly, the Court observed that the DBS Plaintiffs did not
contend that the State of Kentucky could not have solely banned
local governments from imposing franchise fees on cable companies,
and that it did not appear to the Court that doing so would have
violated the Commerce Clause.
Addressing the heart of the DBS Plaintiffs’ claims, the Sixth
Circuit found that Kentucky “has not otherwise altered any
competitive balance among in and out-of-state competitors”
and has “simply prevented localities from mulcting cable companies
through franchise fees.” Further, the Sixth Circuit recognized
that legitimate purposes underpin the 2005 Amendments, including
“simplifying the labyrinthine system of fees cable companies
currently face and collecting taxes from the previously untaxed,
burgeoning satellite industry.” The fact that satellite companies
would not benefit from the relief from franchise fees, because they
do not use local rights-of-way, was of no moment to the Court of
Appeals, as the Commerce Clause “does not protect[] the particular
structure or methods of operation” chosen by a company to
participate in a market. In the Court’s view, the 2005 Amendments
were not in the nature of a protective tariff whose only purpose
is to benefit in-state interests at the expense of out-of-state
interests, or the functional equivalent thereof, which it referred
to as the “paradigmatic example” of a law that violates
the dormant Commerce Clause. Finally, the Court noted that even
if a purpose of the 2005 Amendments had been to aid the
cable industry rather than the satellite industry because the former
has a larger in-state presence than the latter, “there were
clearly many other purposes” that legitimately could
have motivated the Kentucky legislature to enact the 2005 Amendments.
The DBS providers may now seek rehearing by the same panel of the
Sixth Circuit, rehearing en banc by the full Court of Appeals,
or petition the United States Supreme Court to review the Court
of Appeals’ decision.
The Kentucky Cable & Telecommunications Association, which
filed briefs as amicus curiae in the District Court and
Court of Appeals, was represented by Cole, Raywid & Braverman,
which merged with Davis Wright Tremaine in January 2007.
Footnotes
1
DirecTV, Inc. v. Comm’r for the Dep’t of Revenue
for the State of Ky., No. 06-5523, slip op. (6th Cir. filed
May 31, 2007).
2
See 2005 Ky. Acts 168, Ky. H.B. No. 272, 2005 Regular Session
(2005) (the “2005 Amendments”) (codified at various
sections of Chapter 136 of the Kentucky Revised Statutes).
3
KY. REV. STAT. § 136.600(1).
4
See KY. REV. STAT. §§ 136.604(2), 136.616(1),
(2)(a).
5
See KY. REV. STAT. § 136.660.
6
See id.
For further information, please contact:
This advisory is a publication of the Communications Group of Davis
Wright Tremaine LLP. Our purpose in publishing this advisory is
to inform our clients and friends of recent developments in the
communications industry. It is not intended, nor should it be used,
as a substitute for specific legal advice as legal counsel may be
given only in response to inquiries regarding particular situations.
Attorney Advertising. Prior results do not guarantee a similar outcome.
Thank you.
Copyright © 2007, Davis Wright Tremaine LLP.
return to bulletins main page
|
