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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.
Copyright
© 2007, Davis Wright Tremaine LLP.
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