U.S. Judge: Kentucky Satellite Tax Fair

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The issue of whether it’s legal for a state to tax satellite-delivered video services was muddied last week, as a federal judge in Kentucky ruled that an excise tax there is fair and nondiscriminatory.

U.S. District Court Judge Karen Caldwell of the Eastern District of Kentucky in Frankfurt was clear and final in her decision, dismissing a lawsuit filed by DirecTV Inc. and EchoStar Communications LLC, which owns Dish Network, against Mark Treesh, the state’s commissioner of the Department of Revenue.

But Caldwell’s decision differs from a federal judge’s opinion in Ohio last October. The direct-broadcast satellite companies, which have filed challenges against state taxes in many jurisdictions, including Florida, North Carolina and Tennessee, argue that local cable operators are subjected to franchise and other fees because they use local infrastructure. As satellite programming is beamed down from the sky, there is no local presence to tax.

The Ohio court agreed, ruling in a partial summary judgment that the state’s 5% satellite sales tax was discriminatory.

EQUITY ARGUMENT FAILED

But the satellite companies were unsuccessful in using those arguments in Kentucky. The companies alleged the state’s 2-year-old excise tax of 5.4%, applied to cable and satellite providers, is discriminatory because, as “local” companies, cable operators get to offset it with franchise fees.

Since satellite companies don’t pay franchise fees, they are ineligible for the offset. This violates federal law, the satellite providers argued, because it constitutes different treatment of local and non-local companies.

Caldwell disagreed, writing that the tax does not discriminate geographically. Cable operators are headquartered outside the state and are no more “in-state” businesses than satellite providers are, she wrote in her March 30 opinion. Cable, too, gets its entertainment product from out-of-state vendors via satellite, she noted.

The satellite operators’ decision to deliver local broadcast signals may have hurt their case in Kentucky. The Kentucky Cable Telecommunications Association, which supported application of the tax, argued that satellite companies do have local infrastructure in the state — the receivers used to deliver over-the-air television signals to their subscribers. Judge Caldwell mentioned that local infrastructure in her opinion.

The KCTA sought the new tax formulation two years ago, to even the tax burden paid by the customers of its major members, including Insight Communications Co., Charter Communications Inc. and Adelphia Communications Corp., when compared with the satellite providers.

Spokespeople for DirecTV and EchoStar offered virtually the same response to suit’s failure. Both said their companies believe the Kentucky decision is “wrong on the law,” citing the opposing precedent in the Ohio case.

HOPES FOR APPEAL

DirecTV spokesman Robert Mercer added that the appellate courts should ultimately decide the issue. Kentucky is in the 6th U.S. Circuit Court of Appeals, a court which DirecTV believes may view its arguments favorably based on its past decisions regarding business issues.

Pending any further challenge, the Kentucky decision lets stand a 3% excise tax applied to retail purchases and passed through to consumers; and a 2.4% tax on multichannel video programmers, which is paid by the content providers.

Cable operators are able to offset the total of their franchise fees, so an operator paying a 5% franchise fee pays only 0.4% in excise taxes.

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