[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
STATE VIDEO TAX FAIRNESS ACT OF 2007
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
H.R. 3679
__________
FEBRUARY 14, 2008
__________
Serial No. 110-170
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
------
Subcommittee on Commercial and Administrative Law
LINDA T. SANCHEZ, California, Chairwoman
JOHN CONYERS, Jr., Michigan CHRIS CANNON, Utah
HANK JOHNSON, Georgia JIM JORDAN, Ohio
ZOE LOFGREN, California RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts TOM FEENEY, Florida
MELVIN L. WATT, North Carolina TRENT FRANKS, Arizona
STEVE COHEN, Tennessee
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
----------
FEBRUARY 14, 2008
Page
THE BILL
H.R. 3679, the ``State Video Tax Fairness Act of 2007''.......... 3
OPENING STATEMENT
The Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 1
WITNESSES
Mr. Mike Palkovic, Executive Vice President, Operations, DIRECTV
Group, Inc.
Oral Testimony................................................. 8
Prepared Statement............................................. 10
Howard J. Symons, Esq., Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo PC
Oral Testimony................................................. 23
Prepared Statement............................................. 25
Ms. Kristina Rasmussen, Director of Government Affairs, National
Taxpayers Union
Oral Testimony................................................. 37
Prepared Statement............................................. 38
Mr. David C. Quam, Director of Federal Relations, National
Governors Association
Oral Testimony................................................. 42
Prepared Statement............................................. 43
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and Ranking
Member, Subcommittee on Commercial and Administrative Law...... 5
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Commercial and Administrative Law........................... 47
APPENDIX
Material Submitted for the Hearing Record
Letter from Gary Shapiro, President and CEO, the Consumer
Electronics Association (CEA).................................. 54
Letter from Andrew Jay Schwartzman, President and CEO, Media
Access Project................................................. 55
Letter from Pete Sepp, Vice President for Communications, the
National Taxpayers Union (NTU)................................. 56
Letter from Gigi B. Sohn, President, Public Knowledge............ 57
Prepared Statement of the Federation of Tax Administrators....... 58
Letter from Chris Murray, Senior Counsel, Consumers Union........ 60
Letter from Niel Ritchie, Executive Director, League of Rural
Voters......................................................... 61
Letter from Mark C. Ellison, Senior Vice President, Business
Affairs & General Counsel, the National Rural
Telecommunications Cooperative (NRTC).......................... 62
Response to Post-Hearing Questions submitted to Mike Palkovic by
the Honorable Linda T. Sanchez, a Representative in Congress
from the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 63
Response to Post-Hearing Questions submitted to Howard Symons,
Esq., by the Honorable Linda T. Sanchez, a Representative in
Congress from the State of California, and Chairwoman,
Subcommittee on Commercial and Administrative Law.............. 72
Response to Post-Hearing Questions submitted to Kristina
Rasmussen by the Honorable Linda T. Sanchez, a Representative
in Congress from the State of California, and Chairwoman,
Subcommittee on Commercial and Administrative Law.............. 74
Response to Post-Hearing Questions submitted to David Quam by the
Honorable Linda T. Sanchez, a Representative in Congress from
the State of California, and Chairwoman, Subcommittee on
Commercial and Administrative Law.............................. 75
STATE VIDEO TAX FAIRNESS ACT OF 2007
----------
THURSDAY, FEBRUARY 14, 2008
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:15 p.m., in
room 2141, Rayburn House Office Building, the Honorable Linda
T. Sanchez (Chairwoman of the Subcommittee) presiding.
Present: Representatives Sanchez, Conyers, Johnson, Cannon,
Keller, and Franks.
Staff Present: Norberto Salinas, Majority Counsel; Adam
Russell, Majority Professional Staff Member; and Stewart
Jeffries, Minority Counsel.
Ms. Sanchez. This hearing of the Committee on Judiciary,
Subcommittee on Commercial and Administrative Law will now come
to order. And I apologize for the late start, but we had votes
across the street, and we are expecting more, so we have
decided to press on with the hearing and get as much done as we
can before the next votes. I would like to recognize myself
first for a short statement.
In an era where genre-specific networks rule the airways
and the public wants their entertainment on demand, cable and
satellite services are more popular than ever. Nearly 100
million U.S. households receive their television programming
either from cable or satellite providers. Consumers choose
their television service provider based on a variety of
factors, including the benefits offered, the availability in
the particular location and the cost. No matter which other
considerations are important, for most consumers the total cost
of a subscription will always be one of the deciding factors.
State and local taxes and fees are often overlooked by
consumers trying to make smart choices. Because consumers don't
know how much those fees might be or how those fees might
change if the chosen service provider changes few can make an
informed decision between satellite and cable on the basis of
price. Many simply are not aware that, depending on the State,
a consumer may pay more depending on the chosen television
service. Considering the current economic outlook the
differences in the taxes could lead some consumers in a
particular State to choose one television programming service
provider over another to save money. Such decisions taken
together could reduce competition for all consumers and
therefore lead to higher prices. Today's hearing will discuss
whether there is discriminatory tax treatment by State
governments in the video programming services industry.
Additionally we will examine what accounts for the differences
in tax treatment between the two industries.
Finally, we will examine H.R. 3679, the ``State Video Tax
Fairness Act of 2007,'' and whether this approach ensures
competition in the industry for the benefit of consumers.
Accordingly, I look forward to hearing today's testimony.
[The bill, H.R. 3679, follows:]
Ms. Sanchez. At this time, I would now like to recognize my
colleague, Mr. Cannon, the distinguished Ranking Member of the
Subcommittee and co-author of the legislation, for his opening
statement.
Mr. Cannon. I thank you, Madam Chair. And I want to thank
you for holding the hearing in my--or holding the beginning of
the hearing in my absence. And I apologize to our panelists for
being late. In light of the shortness of time that we
encounter, I would ask unanimous consent to have my statement
included in the record.
[The prepared statement of Mr. Cannon follows:]
Prepared Statement of the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Ranking Member, Subcommittee on
Commercial and Administrative Law
I am pleased that we are holding this hearing after the passage of
the Internet Tax Freedom Act Amendments Act of 2007. As the Chairwoman
well knows, while I am supporter of this bill, I was also a supporter
of the Internet tax moratorium. I am pleased that we are finally having
a hearing on this bill, and equally pleased that its consideration did
not slow the passage of the Internet tax moratorium extension.
Multichannel video programming distribution services such as cable
television and direct broadcast satellite (DBS) providers are the
methods by which most Americans receive their television programming.
There are currently two DBS providers: DirecTV and EchoStar, which
operates the DishNetwork. In addition, a number of the large phone
companies, such as Verizon and AT&T, are beginning to roll out new
television services over the Internet, which are frequently referred to
as IPTV. Each of these platforms for providing television is subject to
various state and local taxes.
For example, some states have the same sales tax rate for both DBS
and cable providers. Some states have differing rates. Under federal
law, DBS providers are exempt from the collection and remittance of
local taxes and fees. However, DBS providers must collect and remit
sales taxes to the states, which are free to send a portion or all of
that money to the localities. By contrast, both cable and phone
companies are subject to a multitude of local taxes and fees. It should
be noted that in all cases the applicable sales taxes and franchise
fees are passed directly onto the consumer.
One of those fees is the franchise fee that cable companies pay
localities for the right to do business in that community. In several
jurisdictions around the country, including Utah, cable companies have
successfully lobbied state legislatures to adopt discounts in the state
sales tax for the franchise fees that cable companies pay. These
franchise fees are paid by cable companies for the right-of-way that
they must use to lay down their infrastructure for delivering cable TV
to consumers' homes. But satellite TV does not tear up the streets of a
town in order to deliver satellite TV to consumers. Yet satellite
consumers still have to pay a higher tax even though their service does
not utilize a locality's rights of ways and telephone poles.
In still other jurisdictions, satellite TV subscribers face a
higher state sales taxes rate than do cable customers. In Florida,
satellite customers pay 13.17% in state sales tax whereas cable
customers pay 9.17% in state sales tax--a difference of 4%. In Ohio,
only satellite customers pay a 5% state sales tax; cable subscribers
pay no sales tax, and this tax was recently struck down as a violation
of the Commerce Clause but is under appeal.
The cable companies will argue that they are merely trying to
equalize the state and local tax burden that their customers must bear.
That, at least, is an argument I can understand. On the other hand, the
evidence suggests that at least in some jurisdictions, cable companies
are lobbying the state legislatures to raise their competitors' costs.
While understandable, that is a bad deal for consumers. In the long
run, I would agree most with our witness from the National Taxpayers'
Union, who argues that we should be lowering taxes for all customers.
The states will certainly argue that they should be free to tax
corporate entities in any way that they see fit. However, state
legislatures and Congress should not be picking technological winners
and losers. That is for the market to decide. If satellite TV provides
better picture and service at a lower price, then consumers will move
toward satellite TV. If cable is the better service provider, consumers
will flock to cable. Government should not be advantaging--or
disadvantaging--one platform over the other in the form of tax policy.
I think this bill goes a long way to establishing that platform tax
neutrality, and I support it.
Madam Chairwoman, I commend you for holding a hearing on this
legislation, there are yet other issues affecting interstate commerce
that I hope we will consider. To that end, may I suggest that the
Subcommittee hold hearings on bills that prevent states from imposing
discriminatory taxes on pipelines, rental cars, and cell phones, just
to name a few. In the case of wireless industry, I would like to put on
the record that discriminatory and regressive taxes imposed on this
industry are estimated to be nearly $5 billion a year. An astonishing
number and something that warrants study by this Committee.
I thank the Chair for her indulgence and yield back.
Ms. Sanchez. Without objection, so ordered.
Mr. Cannon. I will yield back.
Ms. Sanchez. Thank you.
Without objection, the Chair will be authorized to declare
a recess of the hearing at any point.
I am now pleased to introduce our witnesses for today's
hearing. Our first witness is Mike Palkovic. Did I pronounce
that correctly?
Mr. Palkovic. You did.
Ms. Sanchez. Thank you.
Mr. Palkovic is executive vice president of operations for
DIRECTV, Inc. In his role, Mr. Palkovic oversees primary
contacts with customers from the initial point of sale through
the life of the customer's programming service, including
customer service, field services and supply chain management.
Prior to his current role, Mr. Palkovic was executive vice
president and chief financial officer of DIRECTV. He also
served as the director of financial planning for DIRECTV. Prior
to joining DIRECTV, Mr. Palkovic spent 14 years at Times Mirror
Cable Television, where he held a number of positions,
including director of business operations; director of contract
negotiations and pricing; and director of financial planning
and analysis; and corporate accounting manager.
Welcome to our panel today.
Our second witness is Howard Symons. Mr. Symons is a member
of Mintz, Levin, Cohen, Ferris, Glovsky and Popeo. Is that
correct?
Mr. Symons. Yes.
Ms. Sanchez. Thank you. And practices in the communications
section where he represents a wide range of cable, wireless and
telecommunication companies and trade associations in
regulatory and legislative matters, including implementation of
the Telecommunications Act of 1996. Before joining the firm,
Mr. Symons served as senior counsel to the Energy and Commerce
Subcommittee on Telecommunications in the U.S. House of
Representatives. During his 4 years in that capacity he was
responsible for the development of legislation on matters
ranging from domestic, telephone policy to cable franchising
and international communications. He was also responsible for
the Subcommittee's oversight of Federal Communications
Commission activities in the areas of telephone and cable
policy. Welcome to you as well. From 1978 to 1981, Mr. Symons
was a staff attorney with Public Citizen's Congress Watch where
he was responsible for telecommunications policy issues. And
for 10 years, he was an adjunct professor of the National Law
Center of George Washington University, teaching a course in
telecommunications law and regulations. That is quite a
background.
Our third witness is Kristina Rasmussen. Is that correct?
Ms. Rasmussen. Rasmussen.
Ms. Sanchez. I am sorry, can you repeat that again?
Ms. Rasmussen. Rasmussen.
Ms. Sanchez. Rasmussen. Thank you.
Ms. Rasmussen serves as the National Taxpayers Union's
director of government affairs. Her primary duties are lobbying
on Federal and State issues; conducting policy research and
analysis; assisting in taxpayer education efforts; and
formulating reports and opinion editorials. Ms. Rasmussen has
been with the National Taxpayers Union since the summer of
2005. Ms. Rasmussen--pardon me, repeat that again.
Ms. Rasmussen. Rasmussen.
Ms. Sanchez. Rasmussen. I will get that correct by the end
of the hearing. Ms. Rasmussen previously hailed from the
National Federation of Independent Business, where she served
as a Federal public policy assistant and intern for former
Congresswoman Katherine Harris. In 2003, Ms. Rasmussen traveled
to Copenhagen, Denmark, to serve as a research fellow for the
Organization for Security and Cooperation in Europe. Ms.
Rasmussen's opinion pieces have been featured in the Washington
Post, Forbes Magazine, National Review online, Investor's
Business Daily, The Hill and the Baltimore Sun, among others.
Her television appearances include CNN and C-SPAN, and she has
been a guest on numerous radio shows.
Our final witness is David Quam, director of the Office of
Federal Relations for the National Governors Association. Mr.
Quam manages NGA's legal and advocacy efforts, working closely
with Governors, Washington D.C. Representatives and NGA's
standing committee to advance the association's legislative
priority. Prior to working at NGA, Mr. Quam served as director
of International Affairs and general counsel of the
International AntiCounterfeiting Coalition, Inc. He was also an
associate of the law firm, Powell, Goldstein, Frazer and
Murphy, LLP. Additionally, Mr. Quam was counsel on the U.S.
Senate Subcommittee on the Constitution, Federalism and
Property Rights for the Committee on the Judiciary.
I want to thank you all for your willingness to participate
in today's hearing. Without objection, your written statements
will be placed into the record. And we are going to ask that
you limit your oral remarks to 5 minutes. You will note that we
have a lighting system on the table. And it begins with a green
light when your testimony time starts. At 4 minutes, you will
get a yellow indicator light letting you know you have about a
minute to finish your testimony. And then the light will turn
red when your time has expired. If the light turns red and you
are in mid sentence, we will allow you to complete your final
thought before moving on to our next witness. After each
witness has had an opportunity to present his or her testimony,
Subcommittee Members will be permitted to ask questions subject
to the 5-minute limit.
With that, I am going to try to squeeze in Mr. Palkovic's
testimony prior to the next series of votes. So would you
please begin your testimony.
TESTIMONY OF MIKE PALKOVIC, EXECUTIVE VICE PRESIDENT,
OPERATIONS, DIRECTV GROUP, INC.
Mr. Palkovic. Thank you. Good afternoon.
Chairwoman Sanchez, thank you for the opportunity to
comment today in support of Chairman Conyers and Ranking Member
Cannon's proposed State Video Tax Fairness Act, the bill that
would benefit all 100 million paid TV subscribers in the United
States.
The essence of this fight is a clear matter of consumer
welfare; 30 million of your constituents have fled cable
largely because satellite companies have offered them more
channels, better customer service, better picture quality and
typically do it all at a lower price. Now cable is fighting
back, but not by competing in the marketplace. Rather cable is
persuading State legislatures to raise consumer prices by
asking satellite customers to subsidize one of the cable
industry's costs of doing business, a franchise fee. It makes
no sense, and this Committee and Congress have rejected this
premise once before.
H.R. 3679 is a simple amendment to current law that
proclaims no discrimination. That is all this bill says.
Consumers should be free to choose TV service based on what
they care about: price, quality and service. States should not
be allowed to punish consumers for their choices by hitting
them with higher taxes. Congress has long accepted this
nondiscrimination principle clarifying just last fall in a
protected IP video from discriminatory State taxes. It should
do the same for all competitors in the market. Congress has
repeatedly embraced the premise of this bill.
Fair competition benefits everyone. Congress bet on fair
competition 16 years agowhen they bet on satellite TV at a time
when cable was the only game in town. Competition has kept
prices down and improved the quality of service, spurring
innovations that consumers now take for granted, like all
digital programming, hundreds of Spanish and multicultural
channels, DVR technology and a recent explosion in the number
of high definition channels. Competition is taking hold, and
consumers of video programming are increasingly price-
sensitive. Thus, adding 5 percent or more to a satellite
subscriber's bill to compensate the cable industry for their
franchise fees hurts the competitive balance.
When cable urges you to vote no on H.R. 3679, it is arguing
that States should be allowed to discriminate against
satellite, literally. Just look at the language of the bill. It
is that simple. Cable calls it tax parity. What does tax parity
mean to cable? It means that satellite customers should pay
higher taxes in order to offset a cost that is unique to cable.
The cost comes in the form of local franchise fees. Cable
companies voluntarily negotiate these payments with local
governments for the privilege of digging up public streets and
running cable on public property to subscribers' homes. So
franchise fees are not taxes; they are rent.
Don't take my word for it. NGA says it in their written
testimony. And cable repeatedly tells its shareholders in their
SEC filings, franchise fees are not taxes; they are payments
for highly valuable property rights worth billions of dollars.
Should satellite TV customers pay franchise fees? Of course
not. Their service does not rely on an infrastructure built by
digging up public streets or hanging wires on utility poles.
This is particularly unfair for those rural customers who do
not even have the option of choosing cable.
Congress understood all of this. In the Telecommunications
Act of 1996, Congress made it illegal for local governments to
impose franchise fees on satellite, even while continuing to
allow local governments to collect franchise fees from cable.
The House report explained the difference, quote, unlike other
video programming distribution systems, satellite-delivered
programming services do not require the use of public rights-
of-way or physical facilities or services of a community,
unquote.
In short, Congress prohibited local governments from
charging rent for property rights satellite TV providers don't
use and don't need. The latest trend of discriminatory State
taxes in six States with more following suit is an end run
around congressional intent. The States act as the local
government's collection agent, essentially collecting the same
franchise fees from satellite that they collect from cable and
handing the proceeds right back to their local governments.
In conclusion, we urge you to close this loophole. We are
not alone. Groups across the political spectrum support H.R.
3679. You will hear from the National Taxpayers Union
momentarily. They are joined by the National Rural
Telecommunications Cooperative, Consumers Union, The Media
Access Project, Public Knowledge and the Consumer Electronics
Association in urging you to adopt this nondiscrimination
policy. These diverse consumer groups all understand what is
going on here. They know the difference between discrimination
and parity. They know the difference between rent and taxes.
They know cable once again is angling for an unfair advantage,
a way to win in the marketplace without actually competing.
Congress has prohibited these ploys before, and it should
prohibit them now by passing H.R. 3679.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Palkovic follows:]
Prepared Statement of Mike Palkovic
ATTACHMENT
Ms. Sanchez. Thank you very much for your testimony. We
have been called across the street for votes, so we will stand
in recess. We will return immediately following the last vote.
[Recess.]
Ms. Sanchez. The Subcommittee will come to order. And I
believe we left off with Mr. Symons. And I have been advised
that I have been mispronouncing your name, and my apologizes.
Mr. Symons. That is quite all right, Madam Chairwoman.
Ms. Sanchez. I would invite you to please give your
testimony at this time.
TESTIMONY OF HOWARD J. SYMONS, ESQ., MINTZ, LEVIN, COHN,
FERRIS, GLOVSKY AND POPEO PC
Mr. Symons. Thank you very much, Madam Chairwoman, and
Members of the Subcommittee.
My name is Howard Symons, and I am here today on behalf of
the National Cable and Telecommunications Association. Thank
you for inviting NCTA to testify today. We strongly oppose H.R.
3679. We believe it represents an unjustified interference into
efforts being undertaken by State legislatures to ensure that
consumers have a choice of video providers that is neutral as
to government-imposed taxes and fees.
The Telecommunications Act of 1996 exempted DBS operators
from the administrative burden of collecting and remitting
local taxes and fees, but it did not exempt the DBS industry
from having to pay taxes that benefit local governments. In
practice, however, the law has resulted in a significant
disparity between what DBS pays and the taxes and fees imposed
on cable operators. In many States, for instance, both DBS and
cable operators are subject to State sales taxes, but only
cable operators pay additional taxes and fees to localities. In
Santa Monica, California, for instance, local taxes and fees
add $7.50 to a monthly cable bill of $50.00. Six States have
determined that this situation is unfair to cable customers,
and they have enacted legislation that equalizes the tax burden
between cable and DBS providers taking into account all taxes
and fees that both providers pay at the State as well as at the
local level. The DBS industry unsuccessfully opposed
legislation in these six States. And its subsequent court
challenges have likewise been unsuccessful save for one local
trial court.
Unable to prevail in the State legislatures or in Federal
Court, the DBS industry has come to Congress asking you to
substitute your judgment for the judgment of State
legislatures. We do not believe such a radical step is
necessary or appropriate. The DBS industry has ample
opportunity to argue against tax parity. In each State
legislature that considers this issue, it simply prefers not to
do so. DBS argues that States should be federally foreclosed
from considering local taxes and fees when determining cable's
overall tax burden. It claims that local franchise fees are
nothing more than payments for local public resources and that
allowing an offset to State tax is unfair to DBS operators who
do not use these resources. But State governments should be the
final arbiters of the tax structure in their own States as long
as they exercise that judgment within constitutional bounds, as
they have.
And DBS's core assertion that franchise fees represent no
more than a payment for rights-of-way is incorrect. As the
Fourth Circuit noted in rejecting this claim, franchise fees
are spread among a wide proportion of the population because
they are passed through to all cable subscribers. And the
proceeds go to general operating funds of localities, not for
rights-of-way maintenance. In fact, cable operators generally
pay separately for any repairs to the rights-of-way related to
the installation and upgrade of their networks. DBS also argues
that franchise fees must be rent for rights-of-way because
businesses don't get rights-of-way for free, but that is simply
not true. Telephone companies, for instance, generally do not
pay for public rights-of-way. And as a Sixth Circuit explained,
State and local governments are under no mandate to charge for
rights-of-way. This is readily apparent from the fact that not
every road is a toll road. And there are other taxes imposed on
cable operators at the local level that are separate and apart
from franchise fees that have no link whatsoever to the use of
rights-of-way. There is certainly no rationale for excluding
such fees from a comparison of cable and DBS's tax burdens.
Today, DIRECTV and Echostar are the second and third
largest video distributors in the United States with more than
30 million subscribers and $25 billion in annual revenue. They
certainly don't need an unfair tax advantage over cable, phone
and wireless competitors. It is wholly appropriate for State
legislatures to let the marketplace rather than artificial
distinctions in taxes and fees drive consumer choice from among
multichannel video alternatives. The Federal Courts, having
found that the States are acting appropriately, there is simply
no problem that requires congressional intervention. Thank you
very much, and I would be happy to answer any questions.
[The prepared statement of Mr. Symons follows:]
Prepared Statement of Howard J. Symons
Ms. Sanchez. Thank you very much for your testimony.
Ms. Rasmussen, I would invite you to give your testimony at
this time.
TESTIMONY OF KRISTINA RASMUSSEN, DIRECTOR OF GOVERNMENT
AFFAIRS, NATIONAL TAXPAYERS UNION
Ms. Rasmussen. Thank you. Once again, my name is Kristina
Rasmussen. I am director of government affairs for the National
Taxpayers Union. We are a grassroots organization of taxpayers
with 362,000 members nationwide.
NTU believes that H.R. 3679, the ``State Video Tax Fairness
Act of 2007,'' would help ensure that consumers, not State
governments, pick marketplace winners and losers. Americans
really expect nondiscriminatory tax treatment; yet six States,
that of Ohio, Florida, Kentucky, North Carolina, Tennessee and
Utah, levy discriminatory taxes on satellite TV. In the case of
Ohio, lawmakers approved a special tax on satellite TV viewers
but completely exempted cable users. As a result, satellite
consumers paid over $26 million in extra taxes in 2005. In
Tennessee, the first $15 of monthly cable service charges is
exempted from a tax paid by both cable and satellite. For
price-sensitive consumers, these differences can determine
which service they ultimately purchase. At the end of the day,
consumers shouldn't have to pay higher taxes just because they
use satellite instead of cable or vice versa.
Now the need for this bill rests largely on how we measure
and compare the various government-imposed burdens on the video
services industry. Defining a franchise fee as a cost of doing
business as opposed to an outright tax has much to do with
reconciling the situation at hand. Yes, a franchise fee remains
a mandatory burden that customers, employees and shareholders
ultimately bear. However, NTU believes that the recovery of an
actual and legitimate expense of a given government service,
especially those for which an entity voluntarily avails itself,
can meet the definition of a user cost rather than a tax. We
have a long record of opposing unreasonable fees, especially
when they have no connection to the resulting services.
However, there are distinct benefits received in exchange for
cable franchise fees, such as rights-of-way for laying cable
and, historically, exclusive rights to provide service within a
given jurisdiction.
If cable companies believe they are being overcharged by
localities, they should negotiate to reduce their fees. If
franchise fees are used solely as revenue spigots for local
governments, we support efforts to change existing law to
remedy that. Until then, NTU believes that H.R. 3679 provides a
logical starting place, the State level, for reconciling some
of these tax burdens to ensure that no one is put at a
competitive disadvantage. From NTU's viewpoint, our laws should
reflect low taxes and free markets. We are not ignorant of the
federalism concerns involved with this issue. However, we need
to recognize the urgency of protecting residents of all 50
States from predatory taxes at the non-Federal level. As a
practical matter, States and localities can sometimes be
oblivious to the blight of consumers and businesses facing
unfair taxation. Until citizen activists can establish
comprehensive tax limitation and reduction measures in their
communities, we believe it is perfectly reasonable for Congress
to set some sensible boundaries through Federal law and the
Constitution's commerce clause. We have seen this occur with
great success with the Internet Tax Freedom Act, and similar
nondiscrimination protection for wireless service is being
pursued in this Congress. Consumers of video services should
not be forgotten.
Now, much of this debate over tax discrimination has
focused on a form of fairness that only fills government
coffers further. That is making sure providers of similar
services suffer the misery of equally harsh taxes. While we
recognize that some States could abuse H.R. 3679 and raise
taxes on cable instead of lowering them on satellite systems,
we understand the bill's intent as one that would keep any
additional taxes on television service at bay when we would
welcome language clarifying this point. But at the very least,
State governments should not discriminate among products or
services by disadvantaging one with heavier taxes.
Thank you for allowing me to submit this testimony. While
we see merits on both sides of the discussion, we ultimately
feel that satellite consumers should not be forced to pay
additional taxes to reach or surpass parity with franchise
fees. At this time, we would classify a vote in favor of H.R.
3679 as the pro-taxpayer position in our annual rating of
Congress.
Thank you very much.
[The prepared statement of Ms. Rasmussen follows:]
Prepared Statement of Kristina Rasmussen
I. INTRODUCTION
Chairwoman Sanchez and Members of the Committee, my name is
Kristina Rasmussen. I am Director of Government Affairs for the
National Taxpayers Union (NTU), a grassroots organization of taxpayers
with 362,000 members nationwide. I encourage you to find out more about
NTU on our website: www.ntu.org.
I offer this testimony in support of H.R. 3679, the State Video Tax
Fairness Act. This bill would address the issue of discriminatory video
services tax policy by prohibiting inequitable state taxes that are
dependent on the mode of programming delivery.
NTU approaches this bill not from the corporate or government
perspective, but that of the taxpayer and the consumer. We look for
indications of neutrality, simplicity, and transparency when we review
proposals to change tax policy, and we believe all three goals are
furthered by this bill. In deciding to support H.R. 3679, we were
particularly mindful of tax/fee distinctions and issues of federalism,
as evidenced by the following testimony. NTU believes that passage of
H.R. 3679 would help ensure that consumers--not the states--pick
marketplace winners and losers.
II. TELECOM TAXATION VERSUS OTHER PRODUCTS AND SERVICES
Telecommunication services of all varieties have been targets for
disproportionate and punitive taxes since the Spanish-American War.
These taxes have slowed much of the progress and productivity that
could have emerged to enrich our society sooner.
Indeed, a recent survey completed by researchers at the Heartland
Institute found that taxes and fees on telecommunication services
(e.g., TV and telephone) were typically more than twice as high as
those on other retail goods. The average difference was a rate of 13.4
percent for telecommunication, versus 6.61 percent for other products.
The same study noted that taxes and fees on communication services
directly cost taxpayers more than $37 billion annually, not to mention
the yearly ``deadweight loss'' to the economy of more than $11 billion.
There is a clear need to reduce overall telecommunication tax
burdens, promote consumer choice, and provide a neutral playing field
among similar products. As such, NTU regularly supports efforts to cut
or eliminate telecommunication taxes and fees. We have also advocated
in favor of statewide franchising reforms that allow the entry of new
competitors into the video, voice, and data delivery markets. At the
federal level, we have endorsed efforts to prevent discriminatory
taxation of Internet and wireless services (specifically, the Permanent
Internet Tax Freedom Act of 2007 and the Cell Phone Tax Moratorium
Act), and we support the application of this principle to video
services.
III. STATE TAXATION AMONG VIDEO SERVICES
``Playing favorites'' is an accusation often leveled at authority
figures like bosses and teachers, but TV fans never expected
discriminatory treatment to come from a state's Tax Code. Currently,
six states (Ohio, Florida, Kentucky, North Carolina, Tennessee, and
Utah) levy state video service taxes on satellite TV that are higher
than those levied on cable TV or other similar consumer products.
In the case of Ohio, lawmakers approved a special 5.5 percent tax
on TV viewers getting their signal from a satellite service. Cable
users, on the other hand, are completely exempt from the tax. So a
viewer and his neighbor could be enjoying the same TV program, but one
would be paying more in taxes if he uses a satellite dish while the
other viewer uses cable. And the resulting bill isn't insignificant--
satellite consumers in Ohio paid $26.2 million in extra taxes in 2005.
In Florida, satellite TV is taxed by the state at a higher rate than
cable (13.17 percent versus 9.17 percent).
In the state of Kentucky, recent statewide reforms levied a
combined 5.4 percent tax on both satellite and cable, and then sent
revenues back to localities proportionate to the franchise fees they
had been receiving from cable prior to the reform. North Carolina
employs a similar set-up. We are concerned that satellite consumers are
now being squeezed by new taxes to pay funds toward fee totals they
would never have had to pay. We believe this system violates Congress's
intent in the Telecommunications Act of 1996 to keep local franchise
fees off satellite service.
In Utah, both cable and satellite pay a 6.25 percent tax, but cable
can apply half of any franchise fees paid toward this burden, thereby
lowering the operative tax rate. In Tennessee, both cable and satellite
consumers pay a sales tax of 8.25 percent, but the first $15 of monthly
cable service charges are exempted from this tax (charges above $27.50
are taxed at a 7 percent state rate). For price-sensitive taxpayers,
these differences can determine which service they ultimately purchase.
Imagine paying a higher tax rate if you received your salary via
direct deposit instead of a check. Or paying taxes on chocolate ice
cream but not vanilla. The same thing goes with TV service: Consumers
shouldn't have to pay higher taxes just because they use satellite
instead of cable, or vice versa.
IV. TAX PARITY AND FRANCHISE FEES: A DIFFICULT RECONCILIATION
The need for H.R. 3679 rests largely on how the various government-
imposed burdens of the video services industry are measured--which, in
turn, could help determine what types of taxes are discriminatory in
nature. The answer is, admittedly, not a simple one. Yet, this very
question is reason to embrace rather than shun enactment of H.R. 3679.
Opponents of the legislation contend that the ``franchise fees''
local governments often extract from cable companies are not
sufficiently accounted for when comparing state-level tax policies
toward cable and satellite television products. Defining a franchise
fee as a ``cost of doing business'' as opposed to an outright tax has
much to do with reconciling differences at the state level. While this
fee remains a mandatory burden that customers, employees, and
shareholders ultimately bear, NTU believes that the recovery of an
actual and legitimate expense of a given government service, especially
those for which an entity voluntarily avails itself, can meet the
definition of a user cost rather than a tax.
We recognize that a franchise fee is a form of extraction by the
government, and we have supported and will continue to support efforts
to reduce this cost. NTU has a long record of opposing fees and efforts
to increase them, especially when they bear little relation or have no
connection to the services they are supposed to support. For example,
NTU recently opposed attempts to prolong the existence of a special
Virginia vehicle registration fee that had been created to fund the
now-concluded Jamestown 2007 celebration. The extension of this fee
beyond the life of the event it was created to fund would be a clear
example of a fee bearing no relation to the promised service.
However, there are distinct benefits received in exchange for cable
franchise fees, such as ``rights of way'' for laying cable necessary
for delivering a product. As an aside, we note the strange logic
between tying a company's right-of-way cost to an unrelated measurement
such as gross revenues. Presumably the cost of ``renting'' space to run
cable is fixed to local property values, so why should the cost be a
set portion of their earnings? Regardless, if cable companies believe
they are being overcharged by localities for this benefit, we strongly
believe they should be working to convince state and local governments
to reduce their fees.
There is, however, another important consideration in the debate
over H.R. 3679. Unlike many user charges, which entities simply figure
as a baseline necessity in order to do business, franchise fees
actually deliver a reverse benefit to the payer: historically, in the
case of cable TV, the exclusive right to provide service within a given
jurisdiction. Surely the value of these franchises is considerable to
their holders. Despite various government pricing and service-provision
regulations, a franchise fee confers protection from competitors using
the same mode of transmission and, in the case of competition from
other modes of transmission, serves as a way to muddy the fiscal waters
and argue for higher taxation.
In truth, comparing the tax burdens of video providers depends upon
many variables. Cable companies contend that the franchise fees they
pay constitute a dollar-for-dollar tax burden that their competitors
don't face, but the situation is not cut and dry. Some states provide a
credit for franchise fees paid in order to offset other taxes.
Meanwhile, for many years, satellite providers have had to
competitively bid for the use of federally owned spectrum over which
they can transmit their signals. One could argue that this ``right of
way'' through space is somewhat analogous to the terrestrial rights of
way cable companies are paying for under franchise agreements. For
their part, however, satellite providers do not seem to be operating
under the premise that cable companies should pay an equivalent of
spectrum auction costs in order to ``level the playing field.''
Certainly, satellite companies also pay a ``cost of business'' in
preparing, launching, and maintaining their satellites as a
precondition of getting their products into homes and businesses. This
cost is reflected in the price of their product as opposed to a
separate line-item charge on a cable bill. We don't begrudge the right
of cable companies to pass along their business costs to consumers. NTU
recognizes that visibility and transparency of government costs are
good things for the consumer and the tax reform movement as a whole.
However, satellite consumers shouldn't be forced to pay an additional
tax for the appearance of parity, especially when satellite's delivery
costs are already accounted for in its price.
Insomuch as franchise fees are used solely as revenue spigots for
local governments instead of a payment rendered in exchange for certain
tangible benefits, we support efforts by the cable industry to change
existing law to reflect this actuality.
Until then, NTU must work toward parity for taxpayers among truly
comparable costs. NTU believes that H.R. 3679 provides a logical
starting place--the state level--for reconciling some of these tax
burdens to ensure that no one is put at a competitive disadvantage.
V. FEDERALISM AND COMPETITION ISSUES
From NTU's viewpoint, the color of law should always take on a hue
that reflects low taxes and free markets, which is a major reason why
we support H.R. 3679. However, we are not unmindful of federalism
considerations surrounding this measure. During NTU's nearly 40-year
history, we have often observed the benefits of tax competition in
America's vibrant ``laboratory of the states.'' This phenomenon has,
among other things, kept taxpayers in nine states free from a homegrown
income tax, and, in five states, unburdened by a general sales tax.
Some elected officials have raised an objection to H.R. 3679 on the
grounds that the legislation would further curtail the ability of
states and localities to craft tax policy that can be tailored to the
specific conditions and outcomes they seek. This concern is not
completely devoid of merit, but it does not approach the urgency of
protecting residents of all 50 states from predatory taxes at the non-
federal level.
Surely, state and local officials would concede that their current
taxation powers are far from unlimited, and are often proscribed by
other levels of government. California, Oregon, and Washington, for
example, limit the rate of tax and/or the annual growth of assessments
allowable under city and county property tax systems. Other states,
such as Colorado, Michigan, Missouri (and again, California),
specifically compel localities to seek the approval of voters prior to
levying some or all types of new taxes. Further limitations are
established through regulatory decisions, one of the more notable being
the California Franchise Board's ruling earlier in this decade that the
Los Angeles County Assessor could not claim situs for property tax
purposes on satellites in permanent earth orbit simply because they
were once manufactured in the County.
There are more direct analogies to the legislation before us today.
For all of its regulatory drawbacks and lack of clarity in some areas,
the federal Cable Communications Act has for nearly 25 years capped the
level of franchise fees that local governments can charge at 5 percent.
This provision, incidentally, had strong support from the cable
industry, which at the time made many of the same arguments on behalf
of a federal limit that we are making today.
Established law has long recognized--sometimes to the detriment but
mostly for the good of taxpayers--that telecommunications services can
often defy state boundaries as well as the jurisdiction of taxing
authorities. Subsequent FCC rulings and legislative acts in the 1970s
and 1980s lifted the restrictions on cable operators that traditional
broadcasters sought to impose so as to avoid competition.
The federal Internet Tax Freedom Act, which became law in 1998 and
has been renewed under various names since, has shielded online
consumers from discriminatory tax burdens on Internet access. Current
legislation in Congress, H.R. 436, would provide for a three-year
moratorium on new mobile telephone service taxes whose rates exceed
those on comparable non-mobile products. Both approaches have strong
support from NTU.
But why should federal intervention be the solution to taxpayer
protection issues such as these? Don't citizens have other options,
including the electoral process, to effect change? In several senses
they do. In addition to participating in elections, citizens can--in
some states--initiate binding statewide legislation through the
petition process.
As a practical matter, however, states and localities can sometimes
be oblivious, and often contemptuous, toward the plight of consumers
and businesses facing unfair taxation. The City of Corvallis, Oregon
provides but one example of where elected leaders resorted to a noxious
tax scheme to make wireless phone services far less affordable. Voters
demolished this proposal when it was referred to them in 2006, but this
laudable outcome entailed extraordinary efforts on the part of local
residents (including our own members) to beat back the tax hike. Until
citizen activists can establish comprehensive tax limitation and
reduction measures in their communities, it is perfectly reasonable for
Congress to set some sensible boundaries under federal law and the
Constitution's Commerce Clause.
What about cases in which tax collusion, dressed up as tax
competition, poses a direct threat to the well-being of taxpayers and
consumers across the nation? For example, many officials are seeking
Congress's blessing for a ``Streamlined Sales and Use Tax Agreement''
(SSUTA) that would establish a common regime for the application of
sales taxes across state borders.
Yet, the SSUTA battle is not being fought over the small share of
retail sales that are not subject to direct purchase taxes; the
ultimate objective is to dramatically increase sales tax rates and
their reach through interstate collusion, and put a padlock on the
``laboratory of the states.'' Such an action may not be on the
immediate horizon for taxes on cable and satellite television service,
but legislation that would increase discrimination between these modes
of video is being introduced throughout the nation. Moreover, federal
jurisprudence in this area is not as well established as it has been on
the question of state taxation of remote sales. These factors argue in
favor of an ``insurance policy,'' in the form of H.R. 3679, to prevent
harm to taxpayers in the future.
VI. FAIRNESS, COMPLEXITY, AND TRANSPARENCY
The fight over what does and does not constitute a tax, an offset,
and so forth, reflects the complexity found in our tax laws. Many of
the taxpayers who make up our membership believe that the entire Tax
Code is desperately in need of an overhaul that promotes simplicity and
transparency. Although H.R. 3679 is aimed at one narrow area of our tax
laws, NTU supports it because it provides for a crisp prohibition
against discrimination and sets up strong ``base rules'' for future
reform efforts.
Much of the debate over tax discrimination in the video services
community has improperly focused on a form of ``fairness'' that only
fills government's coffers further--that is, making sure providers of
similar services suffer the misery of equally harsh taxes. Policymakers
would do well to remember that the ``fairest'' fee or tax rate--for
providers and taxpayers alike--is zero.
Failing the most far-sighted tax policy of a zero rate (which
happens to be simple and transparent), at the very least, state and
local governments should not discriminate among products or services by
disadvantaging one with heavier taxes. Yet, as I just mentioned,
inflicting the same measure of pain on all entities is no solution to
the question of ``fairness.'' Rather, taxes should be eased across the
board. This is why NTU has championed reforms that would lower the tax
burdens on all participants in the video services market.
While we recognize that states could abuse H.R. 3679 and raise
taxes on cable instead of lowering them on satellite systems, we
understand the bill's intent as one that would keep any additional
taxes on television service at bay.
VII. CONCLUSION
Thank you, Chairwoman Sanchez, for allowing me to submit this
testimony. Many issues of interest to taxpayers are found within the
debate over state tax treatment of video services. While we see merit
on both sides of the discussion, we ultimately feel that satellite
consumers should not be forced to pay additional taxes that demand
``parity''--or more--with fees imposed for unrelated benefits.
If the House and Senate were to consider the State Video Tax
Fairness Act today, we would classify a vote in favor of H.R. 3679's
original language as the ``pro-taxpayer'' position in our annual Rating
of Congress.
And again, on behalf of our 362,000 members, NTU is pleased to
offer our thoughts to the Subcommittee as you move forward with this
important measure.
Ms. Sanchez. Thank you Ms. Rasmussen, is that correct? By
the end of this hearing I promise you I will have that down.
Mr. Quam.
TESTIMONY OF DAVID C. QUAM, DIRECTOR OF FEDERAL RELATIONS,
NATIONAL GOVERNORS ASSOCIATION
Mr. Quam. Chairwoman Sanchez, Representative Cannon, and
Members of the Subcommittee. Thank you for inviting NGA,
National Governors Association, to testify here again. It seems
like I was here just a few months ago. Since I think we all
have maybe Valentines reservations we have to get to, I will be
brief.
NGA opposes H.R. 3679 because decisions about State and
local taxes must be made by State and local elected officials,
not the Federal Government. It is a common refrain I have had
before this Committee on several issues. Today I am also joined
in opposition to this particular bill by the National
Association of Counties, the U.S. Conference of Mayors and the
National League of Cities. I should note that I believe it was
2 years ago I was before this Committee, and we were having a
general discussion on communications taxes and what needed to
be done to reform them. There was a lot of recognition that the
silos that we currently have with regard to communications, and
I would say video services as well, do not necessarily serve us
in the current climate that we face, both from a competitive
standpoint, a regulatory standpoint and a tax standpoint. We
discussed the need for possibly technology neutrality,
competitive neutrality and also finding solutions that are
revenue neutral for State and local government. From those
basic principles, the NGA had hosted several industry meetings
trying find some solutions that could work at the State and
local level to address those concerns.
One thing that became very clear, and it is one thing that
I think we face with this particular bill, is that, from an
industry standpoint, industry stakeholders either want to
preserve any advantage they currently have or disadvantage
their competitor if they can. The bill today, unfortunately, I
think mirrors more of those concerns rather than finding
technology neutrality, competitive neutrality and revenue
neutrality for States.
What I would argue is that several States have actually
taken the steps since that hearing to try to find a more
competitive framework, to try to bring the taxation or the
treatment of two different types of video services into a
single solution at the State level that works for both State
and local government. This bill unfortunately would undo some
of those solutions. Because we have a system whereby cable
traditionally has been subject to franchise fees and satellite
services have not--as a matter of fact, it is the Federal
Government who said local governments cannot tax DBS service--
we have a natural unbalance that was caused really under
Federal law. When you have apples and oranges, it becomes very
difficult to reconcile those in some single one-size-fits-all.
Leaving the solutions to State and local government and
allowing State and local government to create parity is the
solution to moving this forward and to finding a way to either
get out from under a traditional silo approach or to move
forward with something that is more streamline and ultimately
can encompass all communications technologies, both on the
video side and ultimately communications. Because I think that
is where States and localities will have to go, I believe that
is where they have started to go.
Unfortunately, the bill before us, because it is unclear,
because some of its definitions are not well-founded,
ultimately what it would do is increase litigation; it would
actually discourage State efforts to create tax parity; and
together with existing Federal prohibitions, it would further
entrenchestablished disparities between multichannel video
providers. At the end of the day, Governors and State
legislators, when you are talking about State taxes, need to
make the decisions and find the solutions. You don't need
another Federal restriction that would actually hamper those
efforts at the State level. I think that is what this bill
does, and that is why you see opposition from NGA and several
of the local and national groups. Thank you.
[The prepared statement of Mr. Quam follows:]
Prepared Statement of David C. Quam
Chairwoman Sanchez, Ranking Member Cannon, and members of the
Subcommittee, thank you for inviting the National Governors Association
(NGA) to testify today.
My name is David Quam, and I am the Director of Federal Relations
for NGA. I am pleased to be here on behalf of the nation's governors to
discuss the organization's perspective on H.R. 3679, the ``State Video
Tax Fairness Act of 2007.''
NGA opposes H.R. 3679 because decisions about state and local taxes
must be made by state and local elected officials--not the federal
government. The ability of states to structure their revenue systems is
a core element of sovereignty that must be respected. If H.R. 3679 were
to become law, it would effectively remove the authority of states to
craft common-sense solutions that modernize existing state and local
tax systems. If Congress is truly interested in encouraging states to
reform taxes on multichannel video services, it should remove federal
barriers to reform rather than imposing new restrictions.
Although the U.S. Constitution grants Congress broad authority to
regulate interstate commerce, the federal government, historically, has
been reluctant to interfere with states' ability to raise and regulate
their own revenues. State tax sovereignty is a basic tenet of our
federalist system and is fundamental to the inherent political
independence and viability of states. For this reason governors
generally oppose any federal legislation that would interfere with
states' sovereign ability to craft and manage their own revenue
systems.
The problem H.R. 3679 purportedly seeks to address--inequality in
the taxation of multichannel video services--stems from the long-
standing tax treatment of cable television and satellite services.
Historically, cable services have been required to obtain franchises
from local governments to operate and provide multichannel video
services in specific areas. Franchise fees, which cover the costs of
using local rights-of-way and provide compensation for the franchise,
are capped by the federal government at 5 percent of gross receipts.
Revenues from franchise agreements typically flow into the general
funds of local governments and support a wide range of government
operations and services.
In contrast, federal law prohibits local governments from imposing
taxes or fees on multichannel video services delivered by direct
broadcast satellite (DBS) providers. Federal law does, however, allow
states to tax such services and distribute a portion of the proceeds to
local governments. This prohibition on local government taxation was
enacted as part of several 1996 telecommunications reforms to spur
growth of DBS services and increase competition for incumbent cable
service providers. Today DirecTV and Echostar, the two predominate
providers of DBS services, serve more than 30 million subscribers and
earn $25 billion in annual revenue.
The differing federal treatment of cable and satellite services has
resulted in a variety of state and local tax scenarios: 47 states
authorize local governments to impose franchise fees on cable services;
29 states tax DBS services; 24 states impose a sales tax on video
services provided by cable companies; and 18 states allow local
governments to impose sales taxes on cable video services.
Recently, several states worked within the framework of existing
federal restrictions to modernize their tax systems and create parity
in the tax treatment of multichannel video providers. Specifically,
some states have used their authority to impose taxes on satellite
services to craft a new tax on both DBS and cable services. The tax
replaces traditional local franchise fees in return for the states
redistributing a portion of the taxes to local governments to
compensate for lost local revenues. This is the case in North Carolina
where in 2006 the state legislature replaced the authority of local
governments to charge franchise taxes on cable service providers with a
7 percent state sales tax on gross receipts of both cable and DBS
providers. The state uses a portion of the proceeds to compensate local
governments that formerly collected franchise fees and provides
revenues on a formula basis to non-franchise localities.
Alternatively, some states have chosen to retain the local
franchise system, while imposing a new tax on all multichannel video
providers. To help equalize the payments of satellite and cable
providers, the state allows a cable provider to credit a portion of the
franchise fees it pays against the state tax. This is the system in
Utah, where the state imposes a 6.25 percent sales tax on all
multichannel video services, but allows cable providers to credit 50
percent of its franchise fees against the tax. These different
approaches to taxing multichannel video services reflect the fiscal and
political realities of individual states and their local governments
and have withstood constitutional challenges in both state and federal
court. (See DirecTV, inc, et al. v. Treesh, No. 3:05-CV-00024 (2007),
and DirecTV, inc, et al. v. Treesh, No. 05-CI-01623 (2007); and
DirecTV, Inc. v. Tolson, No. 07-1250 (4th Cir., Jan. 10, 2008)).
H.R. 3697 would disrupt state efforts to streamline and modernize
their tax systems by imposing yet another restriction on the authority
of states to develop and manage their own systems of taxation. H.R.
3697 would prohibit a state from imposing a discriminatory tax on any
provider multichannel video service regardless of the technology used
to provide the service. The bill defines a discriminatory tax as, ``any
form of direct or indirect tax that results in different net State
charges being imposed on substantially equivalent multichannel video
programming services.'' The terms ``net State charge'' and
``substantially equivalent'' are not defined. It is unclear how the net
charge would be calculated or what type of taxes and charges it would
include. This uncertainty would generate increased litigation,
discourage state efforts to create tax parity, and together with the
existing federal prohibition on local taxation of satellite services,
further entrench established tax disparities between multichannel video
providers.
CONCLUSION:
Governors remain steadfast in their insistence that decisions
regarding state and local taxation should remain with state and local
officials. The independent and sovereign authority of states to develop
their own revenue systems is a basic tenet of self government and our
federal system. Governors also support and promote competition and
encourage the development of tax and regulatory frameworks that are
technology neutral, level the playing field for all competitors and
provide necessary revenues to promote the public interest and support
government services. Governors oppose H.R. 3697 because it
unnecessarily interferes with state and local efforts to craft
reasonable and constitutional tax systems that reflect market realities
and serve the interests of state and local governments and consumers.
Ms. Sanchez. I want to thank the panel for their testimony
and for their patience with respect to our voting schedule. We
will now begin our round of questioning. And I will begin by
recognizing myself first for 5 minutes.
Mr. Palkovic, how do you respond to Mr. Quam's assertions
that H.R. 3679 would remove the authority of States to
modernize existing State and local tax systems?
Mr. Palkovic. It is our view that that is not the case. It
is not what we are asking them to do. What we are asking them
to do, whether it is modernizing the tax system or whether it
is entertaining any tax of any kind, to simply not discriminate
against satellite. This is simply a bill that we support
because it eliminates their right to take into their own hands
and apply their judgment on interpreting what Congress intended
to do. So if they do it in a fair basis and a nondiscriminatory
basis, we have got no argument with them.
Ms. Sanchez. Okay.
Mr. Symons, a Fifth Circuit decision in 1977 held that a
franchise fee is not a tax but in fact a form of rent. Other
courts and even Congress have agreed, if that is true, then
franchise fees should be considered simply a cost of conducting
business and therefore not related to tax. Why should we or
States consider taxes and fees when determining parity in the
tax treatment of video programming providers?
Mr. Symons. Well, Madam Chairwoman, in fact, franchise fees
really are much more closely akin to a tax than to a fee for a
particular benefit. They go into general revenues, and cities
use them for whatever they want to use them for. They are
called franchise fees. That is what the Cable Act calls them,
but in fact, they bear no relationship to the cost of rights-
of-way or rent. They are simply a fee for doing business, which
really amounts to the same thing as a tax. And we think that it
is completely fair and in fact just for the States to take
those into account in determining the total taxes and fees that
cable operators have to pay. In fact, they are wholly unrelated
to being a regulated cable operator. If you are a deregulated
cable operator, you still pay a franchise fee. There is simply
another way for a city to collect money from an entity doing
business in a town, and we believe that for these purposes are
appropriately treated as a tax. And this is an issue that was
presented to the courts in this particular context, putting
aside the Fifth Circuit case. And in each case, five, four or
five Federal Courts disagreed with the DBS industry's
characterization of these as fees that shouldn't be counted and
found that they should be counted as taxes as part of the
overall burden that cable operators pay within a State.
Ms. Sanchez. Thank you.
Ms. Rasmussen, am I getting there, am I getting close?
Ms. Rasmussen. Rasmussen.
Ms. Sanchez. Can I just call you Ms. R?
Ms. Rasmussen. That would be fine.
Ms. Sanchez. I think that would eliminate a lot of trouble
on my part.
You represent a grassroots organization of taxpayers and
therefore have the interest of consumers in mind. And you
indicated in your written testimony that H.R. 3679 provides a
logical starting place for reconciling some of the tax burdens
placed on taxpayers. How would you improve this legislation to
minimize or at least equalize the burden on all cable and
satellite providers?
Ms. Rasmussen. Well, as I indicated in my oral remarks, I
definitely think it could benefit from the conclusion that this
is not meant to equalize upwards. We don't want taxpayers to
have to suffer the misery of equally harsh taxes. We are trying
to keep their burdens as low as possible.
Ms. Sanchez. Okay. Thank you.
And Mr. Quam, welcome back to our humble little
Subcommittee. Do you think that franchise fees should be
considered a form of tax instead of a license to conduct
business or rents for right-of-ways.
Mr. Quam. Franchise fees, really, I think the discussion
before sort of points out, they are somewhat of a hybrid
really. You have got the courts saying that they should be
treated more like a tax and actually look like a tax in the way
they are collected; they are based on gross revenues, or gross
receipts, and go into general funds, especially of local
governments, much more akin to a tax. At the same time, there
is a strong argument to say that this is for rent, rent of the
use of the public right-of-way. And so I don't think really you
can characterize them as one or another.
However, one thing is true, and that is, ultimately the
decision as to how franchise fees, franchises in particular,
are handled, really again it has to be done--it has been done
at the local level because it was with regard to local rights-
of-way. Right now you are seeing many more States take up the
mantle and do it on a statewide basis. I think it is critical
that in this time of transition, both on a technology
standpoint and a competitive standpoint, that decision has got
to remain with the State and local government.
Ms. Sanchez. Even when adding taxes and fees in some
States, such as Ohio, still imposes a higher burden on
satellite providers. Can you explain the rationale for that
disparity?
Mr. Quam. I think you would have to ask the Ohio State
legislature for where they came up. But ultimately the decision
rests with the elected officials. And much as the debate we had
before, if they make the wrong decision, that is what votes and
elections are for. But ultimately those decisions on taxation
and tax systems at the State level need to be made with the
State.
Ms. Sanchez. Thank you. And I thank you all.
At this time, I would recognize the distinguished Ranking
Member, Mr. Cannon, for questions.
Mr. Cannon. Madam Chair, I would just as soon pass and come
back and do my questions last if that is okay with you. But I
thought I would make a comment first. I think I am the first
Cannon in my family that married a Dane, and so the name
Rasmussen comes easily to me. I am happy to help you out with
that. She is in fact a Rasmussen a generation or two back.
Thank you.
Ms. Sanchez. I think that is the only name in the history
of this Subcommittee which has truly stumped me. I usually get
it by the end of the----
Mr. Cannon. It is a culture that ought to be separated from
the rest of us, except through their Viking ships that invaded
my----
Ms. Rasmussen. I will be sure to tell my Danish husband all
of this tonight.
Ms. Sanchez. Okay, so Mr. Cannon will pass until later. I
would invite the Chairman of the full Committee and
distinguished Member of the Subcommittee, Mr. Conyers, for 5
minutes.
Mr. Conyers. Well, I was here to celebrate the Ranking
Member and I being back on the same track, and now he's backing
out on me.
Mr. Cannon. I was just going to make sure that everything
works out fine. In fact, if you are going to take the last
question, I will go now and you can wrap up.
Mr. Conyers. Well, actually, there is another Subcommittee.
And since you and I are all on board, and we even have Trent
Franks, I am feeling pretty good about this.
The one we don't know about is the Chairperson herself. I
mean, she's been holding her cards pretty close here.
Ms. Sanchez. I am waiting for a full and fair hearing on
the matter before I determine which position to take.
Mr. Conyers. Oh, gosh. This is wonderful. But I will put my
statement in the record.
Ms. Sanchez. Without objection.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and Administrative
Law
Some economists suggest that our Nation may be on the verge of a
recession in light of tightening credit in the financial marketplace,
the growing mortgage foreclosure crisis, and the uncertain employment
sector, among other concerns.
In this climate of economic insecurity, American families are
increasingly forced to pay even more attention to how they spend their
money. Sadly, these decisions sometimes must be made based on the
difference of only a few cents or dollars.
For example, many households that pay for television programming
service can choose to receive very similar services from cable or
satellite providers. In certain states, however, consumers who receive
television programming from satellite providers pay more in taxes than
subscribers of cable television.
Discriminatory taxes imposed on one type of service provider not
only increases the cost to the consumer, but undermines the benefits of
competition. Less competition usually means higher prices for all
consumers.
To address this imbalance with respect to the imposition of these
taxes, I introduced--along with my colleagues from Utah (Representative
Chris Cannon) and Arizona (Trent Franks)--H.R. 3679, the ``State Video
Tax Fairness Act of 2007.''
This bipartisan legislation accomplishes three critical goals.
First, it will allow consumers to benefit from the lower prices that
will result when a state imposes a fair and nondiscriminatory tax on
all providers.
Second, it will reinvigorate competition in the paid television
programming industry by ensuring a level playing field for all
providers.
Third, it will preserve a state's ability to raise revenue.
Although taxes constitute a significant state and local revenue source,
they should be imposed evenly within an industry.
This legislation is supported by various consumer rights groups,
including the Consumers Union and the Media Access Project as well as
the National Taxpayers Union, which is represented at our hearing
today.
Discriminatory taxation among similarly situated providers in an
industry creates an economically unbalanced marketplace of winners and
losers that is based on who receives the most favorable tax treatment,
rather than who provides the best value to consumers.
H.R. 3679 addresses this imbalance in imposed state taxes so that
consumers will be the winners.
Accordingly, I look very much look forward to hearing from the
witnesses today.
Mr. Conyers. And I am going to ask for a debriefing from
the rest of our staff when I get back.
But I am happy about the fact that we're keeping our word.
We said when we'd introduce the legislation we would hold a
hearing. And this looks like a very representative group of
witnesses you've brought forward, Madam Chair. Thank you very
much.
Ms. Sanchez. Thank you, Mr. Chairman. We strive to be fair
on this Committee.
My distinguished colleague from Florida--the State eluded
me for a moment--Mr. Keller, you are recognized for 5 minutes
of questions.
Mr. Keller. Thank you, Madam Chairwoman.
Mr. Quam, you said that you'd be brief because of your
Valentine's Day reservations. That really hurt my feelings. The
fact that you would rather be at a romantic dinner with your
wife instead of discussing comparative tax policy with a bunch
of middle-aged politicians is just shocking.
Ms. Sanchez. Hey, hey, hey, middle-aged, that's quite a
stretch.
Mr. Keller. All right.
Mr. Cannon. Madam Chair, he has averaged the two of us.
Mr. Keller. Mr. Palkovic, let me start with you, tell you
what my concerns are. Just to simplify the issue a bit, you
look at Florida. The cable TV service is taxed at 6.8 percent,
and satellite is at 10.8 percent. And it's your position,
essentially, that that is an unfair discriminatory tax, because
they pay substantially more, correct?
Mr. Palkovic. That's correct.
Mr. Keller. Mr. Symons, your view is that it's really not
fair because the cable companies, unlike the satellite
companies, also have to bear the burden of paying the local
franchise fee, is that correct?
Mr. Symons. That's correct.
Mr. Keller. And Mr. Palkovic says, yeah, but that's for
right of way and other issues that you guys don't have to buy,
whereas you guys have to go through the big expense of
purchasing and maintaining satellites, correct?
Mr. Palkovic. That's correct.
Mr. Keller. All right. Now, with that as background, my
concern, Mr. Palkovic, if we pass this legislation--and it
sounds good on the face--is that instead of cable paying 6.8
and satellite paying 10.8 in my State, I would be worried about
the State legislature saying, ``Okay, you want it fair? Then we
will then turn around and increase the cable service tax rate
up to 10.8 as well.'' And that would cause me grief, because I
don't want taxes to go up on anyone.
How would you alleviate that concern?
Mr. Palkovic. Well, we don't want that either. We're not
here saying that we're in favor of higher taxes for consumers.
There are other ways that you could resolve the issue in
Florida. You could average the tax. You could lower the 10.8 to
6.8. You know, you could do a number of things that would not
affect the consumer. And if it is a revenue issue for the
State, you could align them both at 8.8 percent. And we would
live with whatever it is, as long as it's fair.
Mr. Keller. So if we amended this language to essentially
make sure that type of scenario didn't happen, that there was
equalization but not through mandatory tax increases, is that
something you could live with?
Mr. Palkovic. Yes, we would live with that. We just want it
to be fair.
Mr. Keller. Mr. Symons, same question. Would you be
concerned, if we passed this legislation, that instead of in
Florida paying cable 6.8 and satellite 10.8, the response from
the legislature was just an increase to make you guys now pay
10.8 on top of the local fees?
Mr. Symons. Well, we would certainly object to that. The--
--
Mr. Keller. I mean, I know you'd object to that, but is
that one of your concerns?
Mr. Symons. Sure, if this bill passed, it would require--
or, it would require all equalization to be equalization up.
Mr. Keller. Okay.
Mr. Symons. And if you would indulge me for a second. In
Florida, in fact there are two taxes imposed on cable, and the
taxes are in fact equal. There is a pending challenge right now
in the Florida courts to the tax scheme that the Attorney
General down there, a former Member of this Committee, is
defending against these very kinds of claims, I think very
compellingly, I might add.
Mr. Keller. Well, the 10.8 stat that I'm giving you versus
6.8, that's Congressional Research Service, so I'm just going
to use that for now for the sake of argument.
Let me ask you a question, though, since I have you here.
One the major points in your testimony is that Congress
shouldn't interfere with the State's power to tax here. But
isn't it true, in the interest of straight talk, that cable
companies have supported legislation before this Committee that
prevent States from enacting discriminatory taxes, such as the
Internet Tax Freedom Act?
Mr. Symons. Absolutely, Mr. Keller. We strongly supported
the Internet Tax Freedom Act. And we believe that, when you are
talking about the Internet and maintaining the competitiveness
of that very important medium, the action of this Committee and
Congress is very appropriate. By contrast, passing a tax break
for the DBS industry doesn't rise to the level of justifying
preemption.
Mr. Keller. Okay.
Ms. Rasmussen, I saw that you spent some time working for a
Florida congresswoman there. You, as someone who is known to be
a champion of taxpayers, your organization, I know you want low
taxes for everybody. Are you concerned at all that in a State
like Florida that the response of the legislature may be just
to increase taxes on the cable companies versus lowering the
satellite taxes? And if so, what are your thoughts about how we
deal with that?
Mr. Rasmussen. That's absolutely a concern of ours. And you
can be guaranteed that, were that situation were to be
suggested, we would be on the ground with our many, many
thousands of Florida members, fighting such an increase. But as
it stands right now, the status quo isn't acceptable to
taxpayers either.
Ms. Sanchez. The time of the gentlemanhas expired.
Mr. Keller. Thank you. I yield back.
Ms. Sanchez. Thank you.
I would now like to recognize Mr. Johnson for 5 minutes of
questions.
Mr. Johnson. Thank you, Madam Chair.
The satellite TV industry feels that it is being
discriminated against by States that would tax satellite
service as those States tax cable TV service, either through
franchise fees or through other fees or taxes, whatever you
would call them.
What I want to ask is, does the satellite TV industry
consider franchise fees to be in the nature of taxes? Of course
it's been described as a hybrid, but isn't it a fee that's in
the nature of a tax?
Mr. Palkovic. No, we do not agree with that. We think it's
fundamentally an operating cost that is required to negotiate a
franchise agreement to get the right to provide service.
There's a number of things in any of the franchise agreements
that the cable operators signed. They have a number of
obligations that they step up to in order to get the right to
be the--if not the legal exclusive provider, the de facto
exclusive provider of cable in these communities. And that's a
cost they have been paying for decades. Literally decades
they've been paying franchise fees and agreeing to that every
time they renew these agreements.
Mr. Johnson. And the States and localities to which they
pay those franchise fees, the money goes into the general fund
or for some other public purpose; is that correct?
Mr. Palkovic. I believe that statement is correct. Our view
is----
Mr. Johnson. And so those services for the people are paid
for through taxes, fees, whatever you call them, but it is a
stream of income to the State and/or local governments?
Mr. Palkovic. Typically it is the local.
Mr. Johnson. And there are some States that, I suppose,
States and localities, that do not levy a tax in addition to
the franchise fee.Would that be accurate?
Mr. Palkovic. That's correct.
Mr. Johnson. And in those cases, would it not be fair to
conclude that satellite TV would have a competitive pricing
advantage over cable TV providers, because they don't have to
pay any fees to the State for a public purpose?
Mr. Palkovic. Well, we have our own set of operating costs
that are different in terms of the way we deliver the signal.
The cable industry doesn't have to put billions of dollars of
satellites up and pay fees to the FCC to secure satellite
spectrum to operate those satellites.
Mr. Johnson. And, of course, there is no benefit to the
State and local governments from the standpoint of fees or
taxes that would be levied on the satellite TV provider if
there is not the same fees being levied or the same tax being
levied on the cable providers.
Mr. Palkovic. Well, our issue today that we're talking
about is not about various taxes that are applied at the local
level. We're talking about----
Mr. Johnson. Well, I know, but I'm just trying to get to
the--I guess what I'll say is this. States and local
governments benefit from the cable TV fees, franchise fees that
are paid. And some States and localities also benefit from
taxes that are paid. But when you have a situation where cable
TV franchise fees are being paid, no taxes are being paid by
the cable TV providers, it puts the satellite industry in a
superior competitive position, but it leaves the taxpayers
without the benefit of the services that they would get from
the fees generated by the provider.
Mr. Palkovic. Yes, that's correct. I think that's what
Congress intended when they wrote the law the way they did.
Mr. Johnson. And so now we're faced with a situation where
the satellite industry is asking Congress to prevent States
from imposing discriminatory taxes, or, in other words, taxing
the satellite TV but not taxing cable TV to the same extent,
with no offset for franchise fees.
Mr. Palkovic. That's correct. We believe that's unfair.
Mr. Johnson. And isn't it unfair to the taxpayer that--
isn't it unfair to the taxpayer that the cable franchise fees
would subsidize the general fund in such a way that the
satellite TV does not?
Mr. Palkovic. Well, you're describing what the local
communities decide to do with the money that they charge. Our
view is that----
Mr. Johnson. Well, they would actually have no money to
decide how to allocate if----
Mr. Palkovic. They negotiated a fee in exchange for
allowing a cable operator the rights to provide cable service
to that community. It was a negotiated agreement between the
cable operator and the local community.
Ms. Sanchez. The time of the gentleman has expired.
I would now like to recognize Mr. Cannon, batting clean-up
for the Subcommittee in the area of questioning. You're
recognized for 5 minutes.
Mr. Cannon. You know, one of the really nice things about
many of the hearings we had this year, including this one, is
that we've had great witnesses that have different viewpoints
and have expressed them all pretty well.
Is there any point that any of you feel like you need to
make still? Because I think it has been a pretty darn good
hearing and a very clarifying hearing.
I am not seeing any looks or hands on the table, so I would
yield back my time, Madam Chair.
Ms. Sanchez. That's a first.
Mr. Cannon. Actually, in defense, it's not a first. But
this is a great panel.
Ms. Sanchez. It feels like a first.
I think we have had tremendous testimony from the
witnesses. And, again, I want to thank you all for your
patience, in particular with the delays, given the votes that
we had across the street.
Without objection, Members will have 5 legislative days to
submit any additional written questions, which we will forward
to the witnesses and ask that you answer as promptly as you
can, so they, too, can be made a part of the record.
And, without objection, the record will remain open for 5
legislative days for the submission of any other additional
materials.
Again, I thank everybody for their time and their
participation. And this hearing of the Subcommittee on
Commercial and Administrative Law is adjourned.
[Whereupon, at 4:45 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Letter from Gary Shapiro, President and CEO,
the Consumer Electronics Association (CEA)
Letter from Andrew Jay Schwartzman, President and CEO,
Media Access Project
Letter from Pete Sepp, Vice President for Communications,
the National Taxpayers Union (NTU)
Letter from Gigi B. Sohn, President, Public Knowledge
Prepared Statement of the Federation of Tax Administrators (FTA)
The Federation of Tax Administrators (FTA) is an association of the
tax administration agencies in each of the 50 states, the District of
Columbia, Puerto Rico, and New York City. We are pleased to have the
opportunity to present our views on legislation that would authorize
states to require certain remote sellers to collect state and local
sales taxes on goods and services sold into a state.
FTA opposes The State Video Tax Fairness Act of 2007 (H.R. 3679) as
an unwarranted intrusion into state sovereignty. The bill would:
Result in significant litigation,
Reverse state action upheld by state and Federal
appellate courts to reach parity in the tax treatment of cable
and video service providers,
Freeze into place and exacerbate the preferential tax
treatment that satellite video service providers currently have
over cable video service providers.
BACKGROUND.
Cable Video Service Taxes. Twenty-four states impose a sales tax on
video services provided by cable companies. Local governments in 18
states impose sales taxes on cable video services. In addition, 47
states authorize local governments to impose a franchise fees on cable
services. Such fees are capped at 5 percent of gross revenues by
federal law. Franchise fees are intended, in part, to capture the costs
of using the public rights of way by the cable companies and to provide
compensation for the franchise granted to the cable company.\1\ From an
economic standpoint, franchise fees operate like a tax in that they are
based (in most cases) on gross receipts from sales of cable services
and are assumed to be shifted forward to the consumer.
---------------------------------------------------------------------------
\1\ The ``fee'' rationale is weakened as states and localities
allow other video service providers (e.g., telecommunications
companies) to provide video services via fiber optic cable they have in
place, making the franchise fee even more like a tax.
---------------------------------------------------------------------------
Satellite Video Service Taxes. Federal law (P.L. 104-104, Title VI,
Sec. 602, Feb. 8, 1996) prohibits the imposition of local taxes and
fees (i.e., sales taxes and franchise fees) on direct broadcast
satellite services, but it preserves the ability of states to tax such
services and distribute a portion of the proceeds of the taxes to local
governments. Twenty-seven states impose a sales tax on satellite video
service providers. Some states rebate a portion of the state sales tax
to local governments. One state, Ohio places a sales tax on satellite
companies that is higher than the regular state sales tax and pays over
the extra amount to local governments.
Legislative Analysis. The State Video Tax Fairness Act of 2007
(H.R. 3679) prohibits a ``discriminatory tax,'' which is defined as any
direct or indirect tax that ``results in different net State charges''
on substantially equivalent video services based on the means by which
those services are delivered. The term ``net State charges'' has no
meaning in state tax law, which will undoubtedly lead to litigation.
H.R 3679 seeks to prohibit the two different approaches that
several states have used to provide parity of tax treatment between
cable and satellite service providers. The prohibition of these
approaches would eliminate the steps taken to provide parity and freeze
into place the preferential tax treatment of satellite service
providers. The two approaches addressed in the legislation are:
(1) Some states have used the authority granted in
602 to levy a state sales or excise tax on satellite
services that is roughly equivalent to the combined state and
local sales or excise tax on cable television services and have
redistributed a portion of the state tax back to localities.
(2) Some states have considered a portion of the franchise fee
levied against cable service providers to be a tax and allowed
a portion of the franchise tax to be taken as a credit against
the state sales tax in an effort to bring the rate of combined
taxes and franchise fees on cable services into closer
alignment with the tax on satellite services.
Judicial History. There have been several state and Federal
judicial decisions that have ruled the various aspects of laws
regulating the taxation of cable and satellite video service providers.
All Federal and state appellate decisions have upheld the approaches
taken by the states to the taxation of cable and satellite video
service providers. H.R. 3679 would reverse the appellate decisions. The
following is a summary of the various judicial decisions[F1].
FEDERAL APPELLATE DECISIONS
In DirecTV Inc. and Echostar Satellite, L.L.C. v. State of North
Carolina, 632 S.E.2d 543 (N.C. Ct. App., 8/1/06) two satellite
companies contended that North Carolina's sales tax on satellite
providers discriminated against interstate commerce in violation of the
Commerce Clause, by favoring the cable companies against which they
compete. The sales tax was not applicable to cable service, although
cable companies had to pay a local franchise tax that did not apply to
satellite companies. The satellite companies contended that they use
satellites, which they characterized as ``out-of-state facilities,'' to
deliver their programming, while cable companies use ``in-state
facilities,'' their transmission facilities and cable infrastructure,
to deliver their programming. The appellate court ruled that the tax
did not discriminate against satellite providers. The court determined
that whether a company is subject to the tax ``depends only upon how
companies deliver television programming services to its subscribers,
and not whether delivery of the programming services occurs inside or
outside the state of North Carolina.\2\
---------------------------------------------------------------------------
\2\ North Carolina has since revised its tax laws to prohibit local
taxation of both cable and satellite TV and substituted a state level
sales tax in its place.
---------------------------------------------------------------------------
In DirecTV, Inc. and Echostar Satellite, L.L.C. v. Tolson, No. 07-
1250 (4th Cir., 1/10/08) the Fourth Circuit Court of Appeals has upheld
the dismissal of a case that rejected claims by satellite companies
that the elimination of a franchise fee by the State of North Carolina
violated the Commerce and Supremacy Clauses of the U.S. Constitution.
Previously the Court of Appeals of North Carolina rejected claims that
a five-percent state sales tax on satellite subscriber service violated
the federal and state constitutions. Two satellite companies had
claimed that North Carolina's sales tax on satellite providers
discriminated against interstate commerce in violation of the Commerce
Clause, by favoring the cable companies against which they compete. The
tax was not applicable to cable service, although cable companies had
to pay a five-percent local franchise fee that did not apply to
satellite companies.
STATE APPELLATE DECISION
In Treesh v. DirecTV, Inc.n et al., No. 2006-CA-001983-MR (Ky. Ct.
App., 9/7/07) the Kentucky Court of Appeals ruled the Federal
Communications Act does not prevent the imposition of a school district
utilities gross receipts license tax can be imposed on a satellite
company. The Court determined that the Act contemplated the Kentucky
tax structure. The Act exempts satellite video services from local
taxes but does not prevent a state from taxing such services. The Act
allows local governments to receive revenues from the state tax. The
state required school districts to impose the tax unless the district
opted out. The tax was paid to the state and the state distributed the
revenues.\3\
---------------------------------------------------------------------------
\3\ State law in Kentucky has been amended to subject both
satellite and cable services to the same system of state taxation.
---------------------------------------------------------------------------
STATE TRIAL COURT DECISION
In Ohio Judge Daniel Hogan of the Franklin County Court of Common
Pleas in Columbus ruled Nov. 7 that the state's four-year-old 5% sales
tax on satellite television is unconstitutional for it does not apply
to cable. The ruling was not unexpected; in October 2005 the judge
issued a summary judgment on some of the issues in the case, finding
before trial that there were enough facts to invalidate the tax. Ohio's
Department of Taxation has indicated it will appeal the judge's
decision, and ask the court to allow the tax to be collected as the
appeal is pending.
Conclusion. To a considerable degree, the state efforts at which
H.R. 3679 addresses were intended to promote a greater degree of parity
between the total taxation (including franchise fees) of cable services
vs. satellite video service providers. FTA believes such decisions
should be within the authority of states and localities as long as
constitutional standards of non-discrimination are not violated. By
dealing only with state level taxation, H.R. 3679 could prohibit the
methods of achieving parity between state and local taxes on satellite
and cable video service providers and lead to a higher local and state
tax burden on cable companies than satellite companies.
Letter from Chris Murray, Senior Counsel, Consumers Union
Letter from Niel Ritchie, Executive Director, League of Rural Voters
Letter from Mark C. Ellison, Senior Vice President, Business Affairs &
General Counsel, the National Rural Telecommunications Cooperative
(NRTC)
Response to Post-Hearing Questions submitted to Mike Palkovic by the
Honorable Linda T. Sanchez, a Representative in Congress from the State
of California, and Chairwoman, Subcommittee on Commercial and
Administrative Law
Response to Post-Hearing Questions submitted to Howard Symons, Esq., by
the Honorable Linda T. Sanchez, a Representative in Congress from the
State of California, and Chairwoman, Subcommittee on Commercial and
Administrative Law
Response to Post-Hearing Questions submitted to Kristina Rasmussen by
the Honorable Linda T. Sanchez, a Representative in Congress from the
State of California, and Chairwoman, Subcommittee on Commercial and
Administrative Law
Response to Post-Hearing Questions submitted to David Quam by the
Honorable Linda T. Sanchez, a Representative in Congress from the State
of California, and Chairwoman, Subcommittee on Commercial and
Administrative Law