Directv, Inc. v. Tolson

• Decision Date: 10 January 2008
• Docket Number: No. 07-1250.,07-1250.
• Citation: 513 F.3d 119
• Parties: DIRECTV, INCORPORATED; Echostar Satellite, L.L.C., Plaintiffs-Appellants, v. E. Norris TOLSON, in his official capacity as Secretary of Revenue, Defendant-Appellee. North Carolina Cable Telecommunications Association, Amicus Supporting, Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

513 F.3d 119

DIRECTV, INCORPORATED; Echostar Satellite, L.L.C., Plaintiffs-Appellants, v. E. Norris TOLSON, in his official capacity as Secretary of Revenue, Defendant-Appellee.

North Carolina Cable Telecommunications Association, Amicus Supporting, Appellee.

No. 07-1250.

United States Court of Appeals, Fourth Circuit.

Argued: December 5, 2007.

Decided: January 10, 2008.

ARGUED: Pantelis Michalopoulos, Steptoe & Johnson, L.L.P., Washington, D.C., for Appellants. Michael David Youth, North Carolina Department of Justice, Raleigh, North Carolina, for Appellee. ON BRIEF: Mark F. Horning, Janice D. Gorin, Steptoe & Johnson, L.L.P., Washington, D.C.; Christopher G. Smith, J. Mitchell Armbruster, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., Raleigh, .North Carolina, for Appellants. Christopher G. Browning, Jr., Solicitor General, North Carolina Department of Justice, Raleigh, North Carolina, for Appellee. Mark J. Prak, Marcus W. Trathen, Charles F. Marshall, Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., Raleigh, North Carolina, for Amicus Supporting Appellee.

Before NIEMEYER and SHEDD, Circuit Judges, and LEONIE M. BRINKEMA, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge SHEDD wrote the opinion, in which Judge NIEMEYER and Judge BRINKEMA joined,

OPINION

SHEDD, Circuit Judge:

Plaintiffs DIRECTV, Inc. and Echostar Satellite, LLC, providers of satellite television programming, brought this suit claiming that North Carolina's system of taxing multi-channel television programming violates the Dormant Commerce Clause of Article I of the United States Constitution. The district court granted Defendant E. Norris Tolson's motion to dismiss, concluding that Plaintiffs' suit is barred by the Tax Injunction Act and principles of comity, that Plaintiffs lack standing, and that Plaintiffs failed to state a claim on which relief can be granted. We hold that Plaintiffs' suit is barred by principles of comity and therefore affirm.

I

A.

Consumers have two main choices for the purchase of subscription multi-channel television programming: traditional "cable" providers and direct broadcast satellite ("DBS") providers. Both types of service provide substantially the same programming, but each uses a different means to deliver that programming to subscribers.

Cable providers deliver their programming through networks of coaxial or fiber optic cables laid in trenches, alongside roads, or hung on utility poles. These networks are physically connected to subscribers' homes. Thus, cable providers rely on the use of public rights-of-way for the delivery of their programming. Historically, cable providers in North Carolina have been required to obtain franchises from city and county governments entitling them to operate within designated franchise areas. In exchange for these franchises, local governments, with the authorization of the North Carolina General Assembly, have typically levied franchise taxes on cable providers.

By contrast, DBS providers transmit their programming from satellites orbiting the earth from space directly to satellite dishes mounted on or near subscribers' homes. Accordingly, DBS providers do not rely on public rights-of-way for the delivery of their programming, and federal law prohibits local governments from charging franchise taxes or fees to DBS providers. Telecommunications Act of 1996, Pub.L. No. 104-104, Title VI, § 602(a), 110 Stat. 144 (1996) (reprinted at 47 U.S.C. § 152, historical and statutory notes).

B.

North Carolina has amended its taxation of multi-channel television programming several times in recent years. Prior to 2002, neither satellite nor cable TV providers were subject to sales tax on their gross receipts. At the same time, cities and counties had statutory authority to grant franchises to cable operators, see N.C. Gen.Stat. §§ 160A-319 and 153A-137 (West 2001), and to levy a "franchise tax"—typically 5% of cable operators' gross receipts in the franchise area—in exchange for those franchise rights. See N.C. Gen.Stat. §§ 160A-214 and 153A-154 (West. 2001).

Beginning in 2002, North Carolina imposed a 5% sales tax on the gross receipts of DBS providers. See N.C. Gen.Stat. § 105-164.4(a)(6) (West 2005). Cable operators continued to pay franchise taxes to localities as they had done before. The net effect of the tax, therefore, was that both cable and DBS providers paid 5% of their gross receipts to the State and/or its political subdivisions. Plaintiffs unsuccessfully challenged this scheme on Commerce Clause grounds in North Carolina state court. See DIRECTV, Inc. v. State, 178 N.C.App. 659, 632 S.E.2d 543 (2006).

Beginning in 2005, North Carolina imposed a sales tax of 7% on the gross receipts of both cable and DBS providers. See N.C. Gen.Stat. §§ 105-164.3(4a) and 105-164.4(a)(6) (West 2006). Cable providers continued to pay franchise taxes to local governments, but were permitted to take a credit against the state sales tax in the amount they paid in local franchise taxes. See N.C. Gen.Stat. § 105-164.21B (West 2005). The net effect of this scheme was that both satellite and cable providers paid 7% of their gross receipts to the State and/or its political subdivisions.

In 2006, further amendments to North Carolina's taxation of multi-channel television providers created the tax scheme at issue in this lawsuit. See An Act to Promote Consumer Choice in Video Service Providers and to Establish Uniform Taxes for Video Programming Services, 2006 N.C. Sess. Laws 2006-151 (the "2006 Amendments"). The 2006 Amendments revoked the authority of local governments to charge franchise taxes to cable providers and vested franchising authority with the North Carolina Secretary of State. See id. §§ 1, 10-13. At the same time, the 2006 Amendments eliminated the tax credit available to cable providers, subjecting them to the full 7% state sales tax on gross receipts. See id. § 9. The 2006 Amendments also provide that a portion of the proceeds of the state sales tax on cable and DBS providers be distributed to local governments. For those local governments that previously imposed franchise taxes on cable providers, the amount of this distribution is based on the revenue formerly generated by those taxes. See id. § 8, (adding N.C. Gen.Stat. § 105-164.44I). Counties or cities that did not charge franchise taxes also receive a portion of the state tax revenue under the 2006 Amendments, in amounts based on their populations. See id. Accordingly, just as they did in 2005, both cable and DBS providers now pay taxes equal to 7% of their gross receipts. Those taxes, however, are paid only to the State, which in turn distributes a portion of the proceeds to local governments according to state law.

II

A.

We turn briefly to a discussion of the constitutional principles underlying Plaintiffs' claims. The Commerce Clause provides that Congress "shall have the power ... [t]o regulate Commerce ... among the several states." U.S. Const. art, I, § 8, cl. 3. This grant of affirmative Congressional authority carries with it an implied or "dormant" restriction of the power of states to regulate interstate commerce, prohibiting them from enacting laws that impose "substantial burdens" on commerce between the states. Dennis v. Higgins, 498 U.S. 439, 447, 111 S.Ct. 865, 112 L.Ed.2d 969 (1991) (internal quotation and citation omitted). The clearest example of a state law that violates the Dormant Commerce. Clause is one that facially discriminates against interstate commerce, such as a protective tariff or customs duty. West. Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 193, 114 S.Ct. 2205, 129 L.Ed.2d 157 (1994); see also Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 579, 106 S.Ct. 2080, 90 L.Ed.2d 552 (1986). Even a facially neutral state law, however, violates the Dormant Commerce Clause "when its effect is to favor in-state economic interests over out-of-state interests." Brown-Forman, 476 U.S. at 579, 106 S.Ct. 2080. Likewise, a state runs afoul of the Dormant Commerce Clause even when it joins an otherwise constitutional tax with an otherwise constitutional subsidy in a way that benefits in-state economic interests and burdens out-of-state interests. Thus, in West Lynn, the Supreme Court struck down a Massachusetts milk pricing order that combined a non-discriminatory tax on milk sales with an otherwise permissible subsidy of Massachusetts dairy farmers because, taken together, the two provisions had a discriminatory effect. 512 U.S. at 199-202, 114 S.Ct. 2205. The Court emphasized that state economic regulation must be considered as a whole, and found particularly troubling the fact that the proceeds from the tax were used to create a "subsidy to one of the groups hurt by the tax" — i.e., the in-state dairy farmers. Id. at 200, 114 S.Ct. 2205.

B.

Plaintiffs are the two main providers of DBS service in North Carolina and nationally and are two of only three companies that own and operate DBS satellites. They brought this suit in 2005 under 42 U.S.C, § 1983, alleging that North Carolina's tax credit for cable providers violated the Dormant Commerce Clause because the credit was granted to companies based on their in-state distribution of television programming. After the 2006 Amendments became effective, Plaintiffs amended their complaint to challenge North Carolina's present tax scheme. Plaintiffs seek a declaratory judgment that sections 8 through 15 of the 2006 Amendments violate the Dormant Commerce Clause, a permanent injunction barring the State from enforcing section 8 of the 2006 Amendments, and attorneys' fees and costs.

Plaintiffs argue that North Carolina's present taxation scheme is no different from that struck down by the Supreme Court in West Lynn, because it combines an evenhanded tax on sales of subscription multi-channel television programming with a...