DIRECTV vs Florida Department of Revenue – Florida's Communication Services Tax Violates the Commerce and Equal Protection Clauses
UPDATE - SUMMARY JUDGEMENT ISSUE IN FAVOR OF FL DOR ON 10-9-13. You can download a copy of the summary judgement HERE.
The reader should know that while this is an ongoing case at the trial level in Leon County, 2nd Judicial Circuit Court (Tallahassee), the case was originally filed in 2005. That being said, the case is apparently heating up because there are more than 40 court docket entries during 2011. Centered around Florida's Communication Services Tax, the case is a rather interesting issue not just in Florida and but also for constitutional law advocates. The author of this article was working for Arthur Andersen, LLP at the time Florida's Communication Services Tax ("CST") was implemented and wrote the initial draft of the "Manual on Florida CST" for the firm.
Prior to October 2001, both satellite and cable television where subject to Florida's sale tax at a 6% tax rate on any "TV system program service." See Section 212.05, Fla. Stat. (1999). After October 1, 2001, the sales tax on TV system programing services was repealed and the Simplified Communications Services Tax Act of 2001 (Chapter 2001-140) was implemented to impose a tax specifically on the sale of "communication services." However, at the heart of this case, is the fact that the new legislation subjected satellite television services to a significantly higher tax rate than local cable television services. Under Section 202.12(1)(c) Fla. Stat., satellite communication services are taxes at 10.8% while Section 202.12(1)(a) Fla. Stat. taxed local cable services at the much lower rate of 6.8%. Because satellite and cable TV companies are direct competitors with each other and because there is substantial cross-elasticity of demand between the two, the price between the two services can be a significant factor for consumers when choosing which type of TV service provider to use. As such, the lower tax rate on local cable companies provides a significant competitive advantage to local cable companies over out-of-state Satellite TV companies.
In May of 2005, DIRECTV (along with Echostar Satellite, LLC) filed suit against the Florida Department of Revenue. The suit alleges that by imposing the CST at a rate approximately 60% higher on out-of-state satellite TV companies versus in-state cable companies, the tax unfairly discriminates against out-of-state companies and, therefore, violates both the Commerce Clause and the Equal Protection Clause of the United State Constitution. (A COPY OF THE ORIGINAL COMPLAINT IS DOWNLOADABLE AS A PDF BELOW) The CST, on its face, taxes local companies at a lower rate than similarly situated out-of-state companies. DIRECTV estimates that by the time this case was filed, the company paid more than $76,000,000 additional taxes under the CST than DIRECTV would have if DIRECTV were subject to the lower rates of local cable companies (and a similar over payment of $31 million for Echostar). At this point, DIRECTV has an argument that almost anyone with a little bit of constitutional knowledge would be able to answer easily – the state CST is unconstitutional. However, the crux of the argument comes in at the local level.
Prior to the implementation of the CST, local cable companies were required to pay a local franchise fee to the local governments for the right to use the public rights of way for laying cables to deliver cable service to customers throughout the locality. The implementation of the CST abolished the local franchise fee on local cable operators by essentially renaming the local franchise fee a local communication services tax, granting the same rights and privileges (access to public rights of way) that the prior franchise fee provided. Florida argues that the local cable companies now pay an additional local communication services tax that is not imposed on satellite communication service companies and, therefore, the total taxes imposed on local cable companies approximates the CST paid by out-of-state satellite TV companies. DIRECTV counters Florida's position by arguing that the local communication services tax imposed on local cable companies is NOT a tax. The local franchise fee is the price local cable TV operators pay in order to receive the use of public rights of way to distribute the local cable services to the cable companies' customer base.
In fact, the old local franchise fee was 5% and, under the CST legislation in 2001, the new local CST rate is between 4.9% and 5.1%. DIRECTV argues that while local cable companies receive rights and privileges for the local franchise fee, the satellite TV providers neither use nor need local rights of way to provide services – therefore, Florida's attempt to guise as a tax what is really a local franchise fee compensating the local governments for the very valuable rights and privileges allowed local cable companies may not be similarly imposed as a general revenue raiser without conferring any benefits on the over taxed satellite companies. Essentially – the local cable companies are buying the very valuable right to use local rights of way and receiving the value of such a right while satellite cable companies are merely paying a higher tax and not receiving a benefit in return. This, DIRECTV very creatively argues, is discriminatory against out of state companies – and DIRECTV is probably right.
As irony would have it, prior to the implementation of the CST, in-state local companies and out-of-state satellite companies paid the same 6% state sales tax rate while only local cable companies paid the local franchise fee. This, one might argue, gave the out-of-state satellite companies a competitive advantage that was equalized when the CST added the franchise fee equivalent to the out-of-state satellite TV company's tax bill. Strangely enough, there is no constitutional requirement that prevents states from discriminate against in-state companies. However, this would be a great over simplification of the underlying economics. The satellite cable companies spend BILLIONS of dollars creating a network of on the ground and orbiting equipment to deliver the satellite TV services to a customer base all over Florida and the United States. The prior franchise fees imposed on local cable companies granted these companies rights of way to lay TV service providing cables allowing the local cable companies to avoid having to purchase extremely expensive rights of way crisscrossing all over every locality in the state.
Perhaps this is a case in which no good deed goes unpunished. With the implementation of the CST, Florida tried to simplify the taxing system on communication services throughout the state of Florida and provide a single return and (approximately) one tax rate for each company subject to the tax. At first blush – applying the same overall tax rate to an out-of-state satellite TV company and an in-state local cable company seems just and fair. However, the state's attempt to over simplify the tax rates and returns seems to have missed one of the constitutionally mandated requirements of not allowing states to discriminate against out of state companies – by disguising a granting of extremely valuable rights of way to local cable companies as a equalizing local tax that simply crossed that constitutional line, in my humble opinion. Or perhaps, on the other hand, if one researches hard enough, then one might find a state legislator or two that may have received generous lobbying donations from local cable companies during the legislative process coming up to the implementation of the CST in 2001. I'm not sure which possibly is true or maybe both are true. Either way, the state of Florida stands to lose a substantial amount of money if DIRECTV wins this case and you can rest assured that the case will not be finalized at the trial level.
CLICK BELOW TO DOWNLOAD THE ORIGINAL COMPLAINT: