TALLAHASSEE – The Florida State Supreme Court recently began wading into the issue of differences in local communications services tax rates levied on satellite TV and cable TV services providers.
In June 2015, a 1st District Court of Appeal panel in St. Petersburg voted 2-1 in favor of plaintiffs DirecTV and DISH Network's contention that the higher local communications services tax rates levied on satellite TV services providers were discriminatory and violated the U.S. Constitution's Commerce Clause.
In addition to shifting the competitive pay-TV market landscape, the Florida Supreme Court's ruling is likely to have substantial impacts on the state treasury. The appeal court's decision raised the prospect of the state having to issue refunds to the satellite TV companies as a result.
Cases such as this are being adjudicated in states across the U.S., Jim Kranjc, Ryan communications tax practice group leader, told the Florida Record. What differentiates the case in Florida is that the court came down on the side of the satellite TV providers – most others have ruled in favor of cable companies, he noted.
Whether from the perspective of cable or satellite TV services or regulators, the motivation in these cases is to at least "give the perception of leveling the playing field from a tax perspective," Kranjc explained.
Different states tax communications services differently, he pointed out. Some don't tax them at all. In Florida, cable pay-TV providers are levied a state communication services tax at a rate of 4.92 percent. Satellite pay-TV providers are assessed at a 9.07 percent rate. The taxes are actually passed on and paid by pay-TV customers. The pay-TV providers collect the money and remit it to the state.
However, cable companies also pass on and collect local communications services taxes that aren't assessed on satellite TV companies and subscribers. Those rates vary, but typically amount to approximately 5 percent of subscriptions fees, the Department of Revenue explained in the 1st District Court brief. In sum, those cable service taxes are higher than those levied on satellite TV services, according to the Department of Revenue.
"Cable companies pay local franchise fees, as well as 'in-kind' compensation, so governments typically tax satellite services at higher rate," Kranjc said. "From a cable company's perspective, it's along the lines of an 'equal protection' argument."
Satellite TV providers have a valid argument in questioning the constitutionality of Florida's state communications tax, he continued, "one that really held water with the judge," Kranjc said. "There is an external inconsistency regarding tax rates on a satellite provider in comparison with a local, 'bricks and mortar' cable provider."
Attorneys for the satellite TV providers in their 1st District Court brief described the higher local communications services tax rates as "economic protectionism" for cable pay-TV providers. Hence, they violate what's known as the "dormant" Commerce Clause of the U.S. Constitution.
State Department of Revenue attorney Jonathan Williams disagreed in his testimony before Florida Supreme Court justices, saying that the state's communications services tax doesn't discriminate and does not violate the U.S. Constitution's Commerce Clause by conferring an unfair advantage on cable service providers, which maintain extensive operations inside Florida.
Satellite companies' attorney Eric Shumsky countered by pointing out that cable companies take advantage of local rights of way in order to install network infrastructure, and that local taxes are appropriate as a result. In drafting the legislation, the state legislature recognized that satellite TV providers beam pay-TV services from outside Florida and hence granted the industry an exemption.
First District Court of Appeals Judge L. Clayton Roberts ruled that Florida's communications services tax contravene state law in that it confers an unfair advantage on cable service providers and discriminates against their satellite television competitors whose operations are by and large located outside the state. That violates the U.S. Constitution’s Commerce Clause, Judge Roberts wrote for the majority in a 20-page opinion.
“A state law is discriminatory in effect if it affects similarly-situated entities in a market by imposing disproportionate burdens on out-of-state interests and conferring advantages upon in-state interests,” Roberts wrote.
“Here, the sales tax portion of the CST is discriminatory in effect because it affects similarly situated entities, cable and satellite companies, by imposing a disproportionate burden on satellite service and conferring an advantage upon cable services, which use in-state infrastructure.”
For the minority, Judge Simone Marstiller wrote that no discriminatory purpose was inherent in the state's communications services tax law.
“I do not agree the satellite and cable providers are similarly situated entities for purposes of dormant Commerce Clause analysis; in my view, the majority opinion fails to fully consider all the differences between the two.”
Now it's up to the Florida State Supreme Court to decide.