On December 14, 2015, the Supreme Court of the State of Utah issued its ruling in the case of DIRECTV and DISH Network v. Utah State Tax Commission. At issue in this case was a tax scheme that provided a sales tax credit for “an amount equal to 50%” of the franchise fees paid by pay-TV providers to local municipalities for use of their public rights-of-way.
The franchise fees were imposed for the running of cable and the construction of hubs on public property. Therefore, it is exclusively cable providers who pay franchise fees and qualify for the credit. Meanwhile, satellite providers such as DIRECTV are not subject to franchise fees and do not qualify for the tax credit.
DIRECTV argued that the tax credit was a violation of the dormant commerce clause of the Constitution. The dormant commerce clause is a legal term that means that states cannot either discriminate against interstate commerce or unduly burden interstate commerce because the power to do is in the hands of Congress. From a practical perspective, allowing 50 states to regulate interstate commerce differently would cause complete chaos, so the federal government wants to reserve that power for itself. Furthermore, states’ motivation to help their own local businesses would weaken the national economy as a whole.
First, DIRECTV argued that a discriminatory effect existed because the tax credit differentiated between two types of businesses on the basis of whether a provider conducted a specific economic activity within the state. Specifically, they argued that the policy favored in-state cable providers because they used ground distribution equipment in the State’s public rights-of-way to deliver programming signals to subscribers. In other words, cable providers left a “local footprint” on the community that satellite providers did not. Second, DIRECTV argued that the law was specifically drafted with the purpose of favoring cable companies, which provide substantially more economic benefits to the state and its residents.
However, the court upheld the tax credit program. The court found that the variation in tax treatment was based solely on differences in business models. Geographic location, they determined, had nothing to do with it.
In its opinion, the Court discussed the potential “can of worms” that would open if the Court held in DIRECTV’s favor. As technology advances and new methods are developed to provide the same services, varying business models are emerging in nearly every industry. The court held that the federal government should determine to what extent all states should be able to regulate these variations.
Ultimately, the fact that this was a tax credit surely influenced the decision of this court. After all, the cable companies who produce a “local footprint” are receiving tax credits exactly for those “local footprints” they create. However, DIRECTV, in its litigation war against cable and state taxes, hasn’t always been on the losing side. In Florida, DIRECTV won in the First District Court of Appeals on a case in which the state taxed satellite companies at higher rates than cable companies to compensate for the local taxes paid by cable companies. While this tax variation leveled the playing field so that both business models were taxed the same, the court in that case held that there was a discriminatory effect on interstate commerce as the satellite companies were out of state and cable companies were local.
Only time will tell how other states will deal with these competing business models and the tax consequences of them. But one thing is for certain: as technology complicates nexus issues, states are increasingly willing to fight in favor of local businesses over whom they have the unambiguous power to tax.
About the Authors: Gerald “Jerry” Donnini II is a partner of the Law Offices of Moffa, Sutton, & Donnini, P.A. Mr. Donnini concentrates in the area of Florida and Federal tax matters, with a heavy emphasis on the tobacco, convenience store and petroleum industries . He also handles a myriad of multi-state state and local tax issues. Mr. Donnini is a co-author for CCH’s Expert Treatise Library: State Sales and Us Tax and writes extensively on multi-state tax issues for SalesTaxSupport.com.
Jeanette Moffa is an associate attorney with Moffa, Sutton, & Donnini, PA, joining the firm in 2015. Jeanette earned her law degree from Florida International University College of Law. Previously Jeanette was an adjunct professor at Palm Beach State College where she teaches a variety of English courses as well as at both Broward College and Miami-Dade College. Prior to law school, she received a Master of Fine Arts in Creative Writing with a specialization in creative nonfiction from Florida Atlantic University. Before that, she attended the University of Florida for her B.A. in English