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Taxation_satellite service_sales tax_commerce clause
The statute imposing a state sales tax on providers of direct-to-home satellite service
but not on cable television service, N.C.G.S. § 105-164.4(a)(6), does not violate the Commerce
Clause of the United States Constitution either facially or in practial effect because: (1) the
differential tax results solely from differences between the nature of the provision of satellite and
cable services, and not from the geographical location of the businesses; (2) neither satellite
companies nor cable companies are properly characterized as an in-state or out-of-state economic
interest; (3) the dormant Commerce Clause prohibits discrimination against the interstate
marketing for multichannel video programming, but it does not necessarily prohibit
discrimination against programmers in that market who deliver programming by satellite as
opposed to cable; (4) the imposition of the sales tax on satellite companies has equalized the
local franchise taxes already imposed on cable companies; and (5) the record is devoid of any
evidence that this tax has created an undue burden on interstate commerce. U.S. Const. art. I, §
8, cl. 3.
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.,
by James D. Blount, Jr., Walter R. Rogers, Jr., Christopher G.
Smith; and Steptoe & Johnson, by Betty Jo Christian and Mark
F. Horning for plaintiff-appellants.
Attorney General Roy Cooper, by Special Deputy Attorney General Kay Linn Miller Hobart and Assistant Attorney General Michael D. Youth for the State.
A tax statute does not violate the Commerce Clause of the
United States Constitution when the differential tax treatment of
two categories of companies results solely from differences
between the nature of their businesses, [and] not from the locationof their activities.
(See footnote 1)
In this case, Plaintiffs contend that
section 105-164.4(a)(6) of the North Carolina General Statutes,
which imposes a sales tax on [d]irect-to-home satellite service,
but not on cable television service,
(See footnote 2)
satellite providers and favors cable companies on its face and in
its practical effect. Because the differential tax results solely
from differences between the nature of the provision of satellite
and cable services, and not from the geographical location of the
businesses, we affirm the trial court's grant of summary judgment
to the State of North Carolina.
The facts pertinent to this appeal indicate that Plaintiffs DIRECTV, Inc. and EchoStar Satellite, L.L.C., provide direct broadcast satellite service to subscribers in North Carolina, as well as to subscribers throughout the nation. To distribute satellite services to their customers, satellite operators beam television programming to receiver dishes affixed directly to subscribers' homes from satellites stationed at fixed altitudes above the earth's equator. In contrast, cable companies provide television programming to their customers using local distribution facilities. Specifically, cable companies distribute their programming using coaxial or fiber optic cables that are laid across the state in a ground-based network. Notwithstanding thesedifferences in the provision of television programming to their customers, satellite and cable companies utilize satellites at some point to provide service to their subscribers, and both require ground equipment located in North Carolina and outside North Carolina to effect delivery of their programming to North Carolina subscribers.
Before 2001, North Carolina's sales tax did not apply to the retail sale of either satellite or cable service. In 2001, the General Assembly enacted a new law entitled Equalize Taxation of Satellite TV and Cable TV. 2001 N.C. Sess. Laws. 424, . 34.17. This new law, codified in section 105-164.4(a)(6) of the North Carolina General Statutes, amended the tax code to impose a state sales tax on providers of direct-to-home satellite service equal to five percent of the companies' gross receipts. Thus, section 105-164.4(a)(6) imposed a five percent sales tax on satellite companies, but did not impose a sales tax on cable companies. Since 1 January 2002, the effective date of section 105- 164.4(a)(6), Plaintiffs have paid the five percent sales tax, which they recouped from their subscribers in a line item on subscribers' monthly bills.
On 30 September 2003, Plaintiffs filed suit in Superior Court, Wake County, seeking a refund of nearly $30,000,000.00 in sales taxes paid pursuant to section 105-164.4(a)(6). In their complaint, Plaintiffs challenged the constitutionality of section 105-164.4(a)(6) on grounds that it (1) violates the Commerce Clause of the United States Constitution; (2) denies Plaintiffs equalprotection of the laws in violation of the Equal Protection Clause of the United States Constitution; and (3) violates the rule of uniform taxation of Article V, Section 2, of the North Carolina Constitution.
On 18 January 2005, Plaintiffs moved for summary judgment on the Commerce Clause claim of their complaint , and the State simultaneously cross-moved for summary judgment on Plaintiffs' Commerce Clause and equal protection claims. On 26 May 2005, the trial court denied Plaintiffs' motion for summary judgment and granted the State's cross-motion for summary judgment in its entirety, thereby dismissing Plaintiffs' complaint. Plaintiffs appeal to this Court contending that section 105-164.4(a)(6) of the North Carolina General Statutes facially discriminates against interstate commerce; and the satellite service tax violates the Commerce Clause in its practical effect.
In Exxon Corp., the United States Supreme Court reviewed a
Maryland statute that prohibited oil producers or refiners from
operating a retail service station within the state. Exxon Corp.,
437 U.S. 117, 57 L. Ed. 2d 91. Under the statute, all major oil
companies, including Exxon, had to divest themselves of their
retail service stations in the state. Id. at 125-26, 57 L. Ed. 2d
at 100. Exxon argued that the statute protected in-state
independent dealers in the gas retail market from out-of-state
competition. The Court, noting that there were several major
interstate marketers of petroleum that owned retail gas stations in
Maryland that did not produce or refine gasoline, held that the
relevant statute created no barriers, explaining,
[the statute] does not prohibit the flow of interstate goods, place added costs upon them, or distinguish between in-state and out-of- state companies in the retail market. . . . The fact that the burden of a state regulation falls on some interstate companies does not,by itself, establish a claim of discrimination against interstate commerce.
Id. at 126, 57 L. Ed. 2d at 100. Thus, in Exxon Corp., the Court determined that the dormant Commerce Clause prohibits discrimination against the interstate market for retail gasoline, but that it does not specifically protect retailers in the interstate market who are oil producers. See also Brown & Williamson Tobacco Corp. v. Pataki, 320 F.3d 200 (2d Cir. 2003) (relying on Exxon, the court held that the dormant Commerce Clause prohibits discrimination against the interstate market for retail cigarettes, but not discrimination against retailers in that market who sell cigarettes in a particular manner).
In the case sub judice, the relevant market is the interstate market for multichannel video programming. The relevant retailers are multichannel video programming service providers, including those companies that deliver programming by satellite and those that deliver programming by cable. Based on the United States Supreme Court's reasoning in Amerada Hess and Exxon Corp., we conclude that the dormant Commerce Clause prohibits discrimination against the interstate marketing for multichannel video programming, but that it does not necessarily prohibit discrimination against programmers in that market who deliver programming by satellite as opposed to cable.
Plaintiffs argue that their delivery of television programming is inherently out-of-state and, therefore, they are unfairly subjected to the tax imposed upon them in section 105-164.4(a)(6). Specifically, Plaintiffs contend that satellites are by definitionplaced in outer space and the tax imposed under section 105- 164.4(a)(6), therefore, always discriminates against out-of-state businesses. However, the United States Supreme Court rejected a similar argument in Amerada Hess. The Amerada Hess Court specifically noted that the oil producers could not move their oil- producing activities to New Jersey because no oil reserves exist there. Thus, the oil producing gas retailers in Amerada Hess were as inherently out-of-state as Plaintiffs are in this case. Indeed, the Court considered this fact to show that the statute could not have been intended to induce the plaintiffs to move their oil- producing activities to New Jersey because there were no oil reserves in New Jersey. Likewise, section 105-164.4(a)(6) could not have been implemented to induce Plaintiffs to move their provision of satellite services to North Carolina because satellites, by their nature, are inherently out-of-state businesses. Given this fact, it is difficult to see how [the statute] unconstitutionally discriminates against interstate commerce. Amerada Hess, 490 U.S. at 78, 104 L. Ed. 2d at 70.
Plaintiffs' reliance on Granholm, 544 U.S. 460, 161 L. Ed. 2d 796, is misplaced. In Granholm, the Court struck down a New York statute as violating the Commerce Clause where the statute forbade out-of-state wineries from making direct sales unless they first established a distribution operation in New York. Id. at 493, 161 L. Ed. 2d at 822. The United States Supreme Court concluded that this statute discriminated against interstate commerce because the mandate to build a distribution system in New York was anadditional step that drive[s] up the cost of [out-of-state] wine[,] that in-state producers did not have to incur. Id. at 474-75, 161 L. Ed. 2d at 810.
In the case sub judice, even if Plaintiffs were to establish an in-state distribution system for the delivery of satellite programming, they would still be subjected to the tax imposed under section 105-164.4(a)(6) because of the means that they use to deliver its services. Similarly, cable companies that have out-of- state distribution systems for the delivery of cable programming are still exempt from the tax imposed under section 105-164.4(a)(6) because of how they deliver their services. Thus, the geographical location of the business, whether in-state or out-of-state, has nothing to do with whether the business is subjected to the tax imposed under section 105-164.4(a)(6). Unlike the wineries in Granholm, whether a company is subjected to the tax under section 105-164.4(a)(6) depends only upon how companies deliver television programming services to its subscribers, and not whether the delivery of the programming services occurs inside or outside the state of North Carolina.
Plaintiffs further argue that section 105-164.4(a)(6) assesses a substantial cost disadvantage on satellite operators, and inhibits their ability to compete with cable companies. Specifically, Plaintiffs contend that the tax requires its subscribers to pay $30.00 per year more than cable subscribers. Plaintiffs' argument is not persuasive. The statute does not require Plaintiffs to recoup the sales tax from its subscribers. Plaintiffs have elected to pay this tax by passing the costs to its subscribers. Moreover, although cable subscribers do not pay $30.00 per year in the sales tax imposed under section 105-164.4(a)(6), cable companies recoup local franchise taxes, which are approximately thirty-dollars per year, from their subscribers that satellite subscribers do not pay. Thus, as the title of the legislation that created section 105- 164.4(a)(6) -- Equalize Taxation of Satellite TV and Cable TV -- suggests, see 2001 N.C. Sess. Laws. 424, . 34.17, the imposition of the sales tax on satellite companies has, in fact, equalized the local franchise taxes already imposed on cable companies.
Finally, the record is void of any evidence that this tax has created an undue burden on interstate commerce. Even after the imposition of the sales tax in 2002, Plaintiffs' number of subscribers and gross revenues have increased from 2001 to 2003 in North Carolina. Moreover, Plaintiffs' share of the North Carolina multichannel video programming market has continually increased and has remained higher than their share of the national multichannel video programming market. Therefore, Plaintiffs' success in this market with the imposition of the sales tax under section 105- 164.4(a)(6) defeats any claims that they are being discriminated against in its practical effect. Because Plaintiffs have failed to provide sufficient evidence that the tax discriminates against them in its practical effect, much less evidence so clear that no reasonable doubt can arise, section 105-164.4(a)(6) of the NorthCarolina General Statutes must be sustained against their constitutional challenge. See E. B. Ficklen Tobacco Co. v. Maxwell, 214 N.C. 367, 371, 199 S.E. 405, 408 (1938) (holding that an act of the General Assembly will not be held invalid as violative of the Constitution unless it so appears beyond a reasonable doubt).
Judges GEER and STEPHENS concur.
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