Directv, Inc. v. Tolson
| Decision Date | 20 February 2007 |
| Docket Number | No. 5:05-CV-784-FL.,5:05-CV-784-FL. |
| Citation | 498 F.Supp.2d 784 |
| Court | U.S. District Court — Eastern District of North Carolina |
| Parties | DIRECTV, INC v. E. Norris TOLSON. |
Christopher G. Smith, J. Mitchell Armbruster, James D. Blount, Jr., Smith Anderson Blount Dorsett, Mitchell & Jernigan, Raleigh, NC, for DirecTV, INC.
Michael D. Youth, Attorney General's Office, Raleigh, NC, for E. Norris Tolson.
This matter comes before the court on defendant's motion to dismiss the amended complaint (DE # 55) pursuant to principles of comity and Fed.R.Civ.P. 12(b)(1) and 12(b)(6), filed August 30, 2006. Plaintiffs having responded, the issues raised are ripe for decision. For the reasons set forth below, the motion is granted.
Plaintiffs brought suit against defendant on November 22, 2005, challenging the state of North Carolina's taxation of providers of multi-channel video programming. Plaintiffs, providers of satellite television, claimed state tax laws then in effect violated the dormant Commerce Clause of Article I of the Constitution, by affording a five percent (5%) tax credit to providers of cable television. Defendant moved to dismiss on December 30, 2005, arguing the action was barred on several grounds and the complaint failed to state a claim upon which relief could be granted.
Thereafter, on January 20, 2006, the North Carolina Cable Telecommunications Association (hereinafter "NCCTA"), a trade association that lobbies on behalf of cable television providers, moved to intervene as of right or, alternatively, with the permission of the court. After hearing the motion, the court denied it on June 21, 2006.1 For reasons set forth in the court's order, including that the state's defense of the tax credit would adequately protect the interests of the members of NCCTA, the court declined to permit intervention.
Before the court could rule on the motion to dismiss, in July 2006, the North Carolina General Assembly passed, and the governor signed, legislation that significantly modified the laws at issue (hereinafter, "the 2006 amendments"). On August 1, 2006, plaintiffs filed the amended complaint now before the court. Plaintiffs seek a declaratory judgment that sections 8 through 15 of the 2006 amendments discriminate against interstate commerce, in violation of the dormant Commerce Clause and 42 U.S.C. § 1983, and directly conflict with and frustrate federal law, in violation of the Supremacy Clause. Plaintiffs also seek a permanent injunction barring enforcement by the state of section 8 of the 2006 amendments, and an award of attorney fees and costs.2
On August 30, 2006, defendant filed another motion to dismiss, which is now before the court.3 The instant motion argues this action is barred by principles of comity, plaintiffs lack standing to challenge the 2006 amendments and therefore the court does not have subject matter jurisdiction over this dispute, and that plaintiffs have failed to state any claim under the Commerce Clause and Supremacy Clause upon which relief can be granted.
This case is before the court on motion pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6), as well as for review pursuant to principles of comity. Both Rule 12(b)(1) and Rule 12(b)(6) require the court to accept plaintiffs' factual allegations in the amended complaint as true. However, neither rule requires the court to accept plaintiffs' legal conclusions. Defendant has not yet filed an answer to the amended complaint, but the instant motion contains a statement of facts. To the extent defendant's factual allegations conflict with those of plaintiffs, the court on motion to dismiss must accept plaintiffs' factual allegations; however, except as to the discussion of the net effects of the various taxation schemes in Section C below, and the brief history of similar litigation in Section D below, the following facts are undisputed.
Plaintiffs provide multi-channel video programming by means of "direct broadcast satellite" (DBS) service to subscribers in North Carolina and throughout the nation. Multi-channel video programming, in layman's terms, is television programming. Satellite operators transmit local stations and what are commonly known as "cable" channels, such as ESPN, MTV, and HBO. (Am.Compl. ¶ 19.) Plaintiffs are the two main providers of DBS service in North Carolina and nationally (Am.Compl. ¶ 6-7), and are two of only three companies that own and operate DBS satellites (Am. Compl. ¶ 12). DIRECTV, Inc. is a corporation organized and headquartered in California. (Am.Compl. ¶ 6.) EchoStar Satellite, L.L.C. is organized and headquartered in Colorado. (Am.Compl. ¶ 7.) Plaintiffs and similar companies are referenced by the generic term "satellite operators" throughout this order.
Programming provided by satellite operators reaches subscribers by transmission from satellites in fixed orbit twenty-two thousand three hundred (22,300) miles above earth, to small satellite dishes mounted on or near subscribers' houses. (Am.Compl. ¶ 2.) Satellite operators do not need to use public rights-of-way, and therefore have historically been exempt from franchise fees or similar levies made by local governments. (Am.Compl. ¶ 14.)
The primary competition of satellite operators in the market for multi-channel video programming are companies that provide such programming via networks of coaxial or fiber optic cable, typically laid in trenches under or alongside roads or hung on utility poles. (Am.Compl. ¶ 15.) These cable networks physically connect to subscribers' houses. Like satellite operators. cable operators' programming includes local and "cable" stations. Unlike satellite operators, however, because cable companies rely on physical land-based networks, they require public rights-of-way and have historically been subject to franchise fees levied by local governments in exchange for access to subscribers, (Am.Compl. ¶ 16-17.) These companies are referenced by the generic term "cable operators" throughout this order.
Prior to January 1, 2002, neither satellite nor cable operators were subject to any state tax in North Carolina on their gross receipts. Cities and counties had the statutory authority to grant franchises to cable operators, see N.C. Gen.Stat. §§ 160A-319 and 153A-137 (Lexis 2001), and typically levied a franchise tax or fee of five percent (5%) of cable operators' gross receipts from customer subscription fees in the franchise area, in exchange for franchise rights, see N.C. Gen.Stat. §§ 160A-214 and 153A-154 (Lexis 2001).
On January 1, 2002, legislation passed by the General Assembly the previous year took effect, imposing a five percent (5%) tax on satellite operators' gross receipts from customer subscriptions in the state. See N.C. Gen.Stat. § 105-164.4(a)(6) (Lexis 2002). Therefore, both satellite and cable operators paid five percent (5%) of gross receipts to the state and/or its political subdivisions. The legislation, titled "Equalize Taxation of Satellite TV and Cable TV," did not alter the existing franchising regime affecting cable operators. 2001 N.C. Sess. Laws 424, § 34.17. Plaintiffs unsuccessfully challenged this taxation scheme in the state court action, described in Section D below. The practice in North Carolina is to refer to taxes levied on gross receipts as "sales" taxes, and this order adopts that term.
The law changed again in 2005. Pursuant to the new legislation, the sales tax on satellite operators increased from five percent (5%) to seven percent (7%). See N.C. Gen.Stat. §§ 105-164.3(4a) and 105-164.4(a)(6) (Lexis 2006). For the first time, cable operators were made subject to the sales tax. Id. However, they received a credit against the sales tax, in the amount of the franchise taxes paid to local governments. See N.C. Gen.Stat. § 105-164.21B (Lexis 2006). The net effect of this scheme was that satellite operators paid a tax of seven percent (7%) of gross receipts to the state, while cable operators paid the traditional franchise tax of five percent (5%) of gross receipts to local governments, and an adjusted tax of two percent (2%) of gross receipts to the state. In other words, the total tax paid to North Carolina and/or its political subdivisions was the same, seven percent (7%) of gross receipts, for satellite and cable operators. Plaintiffs challenged this scheme in the original complaint filed in this lawsuit.
In July 2006, the General Assembly again altered the taxation of satellite and cable operators, passing a bill entitled "An Act to Promote Consumer Choice in Video Service Providers and to Establish Uniform Taxes for Video Programming Services." 2006 N.C. Sess. Laws 151. The legislation's purpose is Id., § 17. The amendments, effective January 1, 2007, significantly alter the franchising and taxation of cable operators, in three key ways. The amended complaint challenges the 2006 amendments.
The first change made by the 2006 amendments is the revocation of local governments' authority to enter franchise agreements with, and impose franchise taxes or fees on, cable operators. See id., §§ 10-45. The North Carolina Secretary of State instead becomes "the exclusive franchising authority in this State for cable service provided over a cable system." Id., § 1. Cable operators must still receive a franchise in order "to construct and operate a cable system over public rights-of-way within the area to be served." Id.
The second change is the elimination of the tax credit received by cable...
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