By Larry Jones
May 5, 2008

The Supreme Court on April 15 denied a request for appeal from Direct TV, Inc. and Echostar Satellite, two companies seeking to overturn lower court rulings that held that Kentucky’s 2005 communications tax reform law, which prohibits local franchise fees and imposes a new tax on both cable and satellite multi-channel video services, does not violate the Commerce Clause of the U.S. Constitution. The action is viewed as a victory for state and local governments, particularly those considering reforming their communications tax laws to tax more equitably all forms of multi-channel video programming services.

In 2005, Kentucky decided to amend its communications tax law to address multi-channel video programming. The legislature passed amendments to provide for a fair, efficient and uniform method of taxing communications services in the state. Cable companies providing these services like Comcast that used local rights-of-way (ROW) to lay their cables were required to pay a local franchise fee, while satellite companies like Direct TV and Echostar that do not use the ROW were not. Further, prior to 2005 neither cable nor satellite companies were required to pay the state sales tax.

In an attempt to achieve a more equitable tax system, the Kentucky legislature passed amendments in 2005 that prohibit local governments from imposing a franchise fee, and impose a new 5.4 percent tax on the retail purchase of multi-channel video programming service including cable, satellite and wireless cable. Funds from the state tax are placed in a special fund and redistributed to local governments. If a cable company pays a franchise fee under the new law, the company would be entitled to a credit against any state taxes due in the amount of the fee paid. Satellite companies claim that the provisions providing cable companies this credit “unconstitutionally discriminate against interstate commerce in violation of the Commerce Clause.”

Satellite companies also claimed that cable companies receive a tax preference because the revenues from the tax are used to pay the franchise fees that cable companies would otherwise have to pay to local governments. Satellite companies claim this is discriminatory because they receive no such tax preference. But the U.S. District Court in Frankfort and the Sixth U.S. Circuit Court of Appeals disagreed. They made clear in their decisions that state and local government are under no mandate to charge for use of the local rights-of-way and have wide latitude to encourage the growth and development of interstate commerce and industry.