Federal District Court Upholds Kentucky MVPD Tax on DBS
Yesterday, the U.S. District Court for the Eastern District of Kentucky dismissed a lawsuit brought by DirecTV and Echostar challenging last year’s new Kentucky law imposing state excise and gross revenues taxes on all multichannel video program distributors (“MVPDs”) providing service in Kentucky, including DBS providers, while relieving Kentucky cable operators of local franchise fee and public, educational and government fee obligations. The DBS providers alleged that the legislation discriminated against interstate commerce because it favored in-state providers of cable service, by relieving them from the costs of doing business in-state, while subjecting DBS providers, who use out-of-state distribution facilities to deliver their services, to the new taxes, but without corresponding relief from their out-of-state operating “costs”—federal satellite transmission fees. The Court dismissed the challenge finding that the DBS providers had failed even to state a claim. The court’s ruling is a major defeat for the DBS industry’s nationwide attack on the constitutionality of existing and proposed state taxes on DBS.
In upholding Kentucky’s MVPD tax, the court concluded that: (1) the tax did not discriminate on the basis of geographic location; (2) the Commerce clause protects only interstate markets, not particular delivery mechanisms, and (3) the tax did not encourage economic activity in Kentucky or discourage the same economic activity in other states. The Court did not reach the issue of whether a tax fairness scheme like the one Kentucky adopted improperly considers franchise fees to be the equivalent of excise or gross revenue taxes as distinct from payments for the use of rights-of-way.
Significantly, the Court rejected the distinction urged by DBS in all of its constitutional challenges to state taxes that cable represents only in-state economic interests while DBS providers are entirely out-of-state. The Court noted that both cable companies and DBS companies have employees in the state, that some local cable companies are headquartered out-of-state (just like these DBS providers), and that both sell video services in-state. The Court found it particularly significant that even if a DBS provider moved its headquarters to Kentucky, incorporated in Kentucky, and provided services only in Kentucky, the state could not, through legislation, relieve any DBS provider of its obligation to pay federal satellite transmission fees—its cost of doing business—so Kentucky’s scheme for substituting the MVPD tax and relieving cable operators of franchise fee and PEG fees was not a reflection of the in-state or out-of-state location of the companies, but rather of their different delivery mechanisms.
The Court’s second major point was that the Commerce Clause protects interstate markets, not particular delivery mechanisms. The Court noted that both cable and DBS operate in-state and out-of-state, receiving and distributing in-state and out-of-state services, and that even if the DBS providers’ transmission systems were entirely out-of-state, and cable’s transmission systems were entirely in-state, the tax scheme would still not violate the Commerce Clause simply because it effects an economic activity performed out-of-state.
Finally, the Court found the new tax provisions would not have the effect of inducing economic activity within Kentucky while discouraging economic activity in other states, a typical basis for striking down legislation under the Commerce Clause. The Court concluded by noting that the DBS Plaintiffs had not provided “any evidence that the statute will have any effect on interstate commerce.”
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