Directv, Inc. v. State

• Citation: 632 S.E.2d 543
• Decision Date: 01 August 2006
• Docket Number: No. 05-1250.,05-1250.
• Parties: DIRECTV, INC. and EchoStar Satellite, L.L.C., Plaintiffs, v. STATE of North Carolina, the North Carolina Department of Revenue, and E. Norris Tolson, in his official capacity as Secretary of Revenue, Defendants.
• Court: Court of Appeal of North Carolina (US)

632 S.E.2d 543

DIRECTV, INC. and EchoStar Satellite, L.L.C., Plaintiffs, v. STATE of North Carolina, the North Carolina Department of Revenue, and E. Norris Tolson, in his official capacity as Secretary of Revenue, Defendants.

No. 05-1250.

Court of Appeals of North Carolina.

August 1, 2006.

COPYRIGHT MATERIAL OMITTED

Appeal by Plaintiffs from judgment entered 26 May 2005 by Judge Clarence E. Horton, Jr., in Superior Court, Wake County. Heard in the Court of Appeals 9 May 2006.

Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., by James D. Blount, Jr., Walter R. Rogers, Jr., Christopher G. Smith, Raleigh; and Steptoe & Johnson, by Betty Jo Christian and Mark F. Horning, Washington, DC, for plaintiffs-appellants.

Attorney General Roy Cooper, by Special Deputy Attorney General Kay Linn Miller Hobart and Assistant Attorney General Michael D. Youth, for the State.

WYNN, Judge.

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 location of their activities."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,² discriminates against 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 these differences 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 equal protection 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.

I.

The United States Constitution expressly grants to Congress the power to "regulate [c]ommerce with foreign [n]ations, and among the several [s]tates[.]" U.S. CONST. art. I, § 8, cl. 3. "[T]he Commerce Clause is more than an affirmative grant of power; it has a negative sweep as well" in that "`by its own force' [it] prohibits certain state actions that interfere with interstate commerce." Quill Corp. v. North Dakota, 504 U.S. 298, 309, 112 S.Ct. 1904, 1911, 119 L.Ed.2d 91, 104 (1992) (quoting South Carolina State Highway Dep't v. Barnwell Bros., Inc., 303 U.S. 177, 185, 58 S.Ct. 510, 514, 82 L.Ed. 734, 739 (1938)). The United States Supreme Court has explained that the "dormant" Commerce Clause means that "[a] State is ... precluded from taking any action which may fairly be deemed to have the effect of impeding the free flow of trade between States." Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 278 n. 7, 97 S.Ct. 1076, 1079 n. 7, 51 L.Ed.2d 326, 330 n. 7 (1977) (citations and internal quotation marks omitted).

It is well established that a law is discriminatory if it "tax[es] a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State." Chemical Waste Mgmt. v. Hunt, 504 U.S. 334, 342, 112 S.Ct. 2009, 2014, 119 L.Ed.2d 121, 132 (1992) (internal quotation and citations omitted). "Discrimination" for purposes of the dormant Commerce Clause is "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." Granholm v. Heald, 544 U.S. 460, 472, 125 S.Ct. 1885, 1895, 161 L.Ed.2d 796, 809 (2005) (quoting Oregon Waste Systems, Inc. v. Dep't of Envtl. Quality of Ore., 511 U.S. 93, 99, 114 S.Ct. 1345, 1350, 128 L.Ed.2d 13, 21 (1994)). Thus, no state may "impose a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local business." Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 362, 3 L.Ed.2d 421, 427 (1959), superseded by statute as stated in, Silent Hoist & Crane Co. v. Director, Div. of Taxation, 100 N.J. 1, 10 n. 1, 494 A.2d 775, 779 n. 1 (1985). There are three ways in which a statute can discriminate against out-of-state interests: (1) it may be facially discriminatory; (2) it may have a discriminatory intent; or (3) it may discriminate in its practical effect. Amerada Hess Corp., 490 U.S. at 75, 109 S.Ct. at 1623, 104 L.Ed.2d at 68.

The statute at issue in this appeal is section 105.164.4(a)(6) of the North Carolina General Statutes which provides:

(a) A privilege tax is imposed on a retailer at the following percentage rates of the retailer's net taxable sales or gross receipts as appropriate.... (6) The rate of five (5%) applies to the gross receipts derived from providing direct-to-home satellite service to the subscribers in this State. A person engaged in the business of providing direct-to-home satellite service is considered a retailer under this Article.

N.C. Gen.Stat. § 105-164.4(a)(6). The statute defines "[d]irect-to-home satellite service" as, "[p]rogramming transmitted or broadcast by satellite directly to the subscribers' premises without the use of ground equipment or distribution equipment, except equipment at the subscribers' premises or the uplink process to the satellite." N.C. Gen.Stat. § 105-164.3(8) (2003).

On appeal, Plaintiffs contend that section 105-164.4(a)(6) discriminates against satellite providers and favors cable companies in two ways — on its face and in its practical effect.

II.

Plaintiffs first argue that section 105-164.4(a)(6) of the North Carolina General Statutes facially discriminates against interstate commerce. We disagree.

A state tax law is facially discriminatory where it (1) explicitly refers to state boundaries or uses other terminology that inherently indicates the tax is based on the in-state or out-of-state location of an activity, see Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 407, 104 S.Ct. 1856, 1867, 80 L.Ed.2d 388, 403 (1984) (holding that a New York income tax provision that expressly provided a tax credit for shipping products from New York rather than other states violated the Commerce Clause); and (2) applies to entities similarly situated for Commerce Clause purposes. Gen. Motors Corp. v. Tracy, 519 U.S. 278, 299, 117 S.Ct. 811, 824, 136 L.Ed.2d 761, 780 (1997). "A facial challenge to a legislative act is ... the most difficult challenge to mount successfully." United States v. Salerno, 481 U.S. 739, 745, 107 S.Ct. 2095, 2100, 95 L.Ed.2d 697, 707 (1987). The challenger must establish that "no set of circumstances exists under which [the tax] would be valid." Id. Moreover, the challenger must demonstrate there is an "explicit discriminatory design to the tax." Amerada Hess Corp., 490 U.S. at 76, 109 S.Ct. at 1623, 104 L.Ed.2d at 69.

Plaintiffs contend that section 105-164.4(a)(6) is facially discriminatory because it conditions the applicability of...