Directv, Inc. v. Treesh

• Citation: 469 F.Supp.2d 425
• Decision Date: 30 March 2006
• Docket Number: Civil Action No. 3:05-24.
• Parties: DIRECTV, INC., et al., Plaintiffs, v. Mark TREESH, in his official capacity as Commissioner of the Department of Revenue, Defendant.
• Court: U.S. District Court — Eastern District of Kentucky

469 F.Supp.2d 425

DIRECTV, INC., et al., Plaintiffs, v. Mark TREESH, in his official capacity as Commissioner of the Department of Revenue, Defendant.

Civil Action No. 3:05-24.

United States District Court, E.D. Kentucky, Frankfort.

March 30, 2006.

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Betty Jo Christian, John D. Clopper, Mark F. Horning, Steptoe & Johnson, LLP, Washington, DC, Bradley E. Cunningham, Kenneth S. Handmaker, Middleton & Reutlinger, Louisville, KY, for Plaintiffs.

Douglas M. Dowell, Laura M. Ferguson, Stewart Douglas Hendrix, Office of Legal

Services for Revenue, Frankfort, KY, for Defendant.

Burt A. Braverman, Cole, Raywid & Braverman, L.L.P., Washington, DC, Jackson W. White, Lexington, KY, for Kentucky Cable Telecommunications Association.

OPINION AND ORDER

CALDWELL, District Judge.

This matter is before the Court on the Motion to Dismiss (Rec. No. 10) filed by the Defendant, Mark Treesh (the "Commissioner"), who has been sued in his official capacity as Commissioner of the Kentucky Department of Revenue. The Plaintiffs, DIRECTV, Inc. and Echostar Satellite, LLC (the "Satellite Companies"), argue that recently enacted Kentucky corporate tax provisions unconstitutionally discriminate against interstate commerce by benefitting cable television operators (the "Cable Companies") and burdening the Satellite Companies. For the following reasons, the Court will GRANT the Motion to Dismiss.

I FACTS.

A. The Satellite Companies.

The Plaintiff, DIRECTV is organized and headquartered in California. (Rec. No. 1, Complaint ¶ 6). The Plaintiff, EchoStar Satellite, LLCM is organized and headquartered in Colorado. (Rec. No. 1, Complaint ¶ 7). Neither plaintiff has any offices located in Kentucky. (Rec. No. 1, Complaint ¶ 17).

The Satellite Companies provide multichannel video programming to subscribers by means of satellites stationed above the Earth. (Rec. No. 1, Complaint ¶ 13). The federal government grants the Satellite Companies the right to transmit in certain electromagnetic frequencies from satellites located at certain orbital positions. (Rec. No. 1, Complaint ¶ 14). Subscribers in Kentucky then receive the signal from these satellites by means of a small satellite dish mounted on or near their house. (Rec. No. 1, Complaint ¶ 15).

In their. Complaint, the Satellite Companies state that, because they do not use any public rights-of-way, they are not required to obtain franchise rights from local governments to operate in Kentucky. (Rec. No. 1, Complaint ¶ 16). In their brief as amicus curiae, the Kentucky Cable. Telecommunications Association (the "KCTA") asserts that the Satellite Companies transmit the programming of local broadcast stations and that, in order to do this, they must have "local receive facilities" on the ground in Kentucky to receive the signals of local broadcast stations. (Rec. No. 28 Brief for KCTA as Amicus Curiae at 18 n. 7).

The Satellite. Companies state that DRECTV has two sales employees in Kentucky and EchoStar has six sales employees in Kentucky. (Rec. No. 1, Complaint ¶ 17). The KCTA asserts that, in addition to regular employees, the Satellite Companies employ a "legion" of local contractors in Kentucky to sell their services and receive dishes. (Rec. No. 28 Brief for KCTA as Amicus Curiae at 18 n. 7).

B. The Cable Companies.

The Cable Companies provide multichannel video programming by means of cable networks located in Kentucky. (Rec. No. 1, Complaint ¶ 2). The Cable Companies receive programming at cable headends located in Kentucky and then transmit the programming to Kentucky subscribers by way of cables laid in trenches in or along roads or hung on utility poles in the state and connected to the subscribers' television sets and set top boxes. (Rec. No. 1, Complaint ¶ 18).

In their Complaint, the Satellite Companies assert that the Cable Companies must obtain local government permission to use roads and other rights-of-way in order to lay or string cable connecting their local distribution facilities to the subscribers' homes. (Rec. No. 1, Complaint ¶ 19). According to the Satellite' Companies, local governments grant this permission by franchise agreements and permits granted to the Cable Companies. (Rec. No. 1, Complaint ¶ 19). The. Satellite Companies assert that, in return for permission to use public rights-of-way, the Cable Companies pay a franchise fee to the applicable local government that is typically five percent of gross revenue within the franchise area. (Rec. No. 1, Complaint ¶ 20).

The KCTA asserts that the Cable Companies transmit national satellite-delivered programming, broadcast television signals and regional cable television network programming. In doing so, they rely on satellite transmissions, microwave relay stations and interstate fiber optic communications lines that beam their transmissions across state boundaries. (Rec. No. 28 Brief for KCTA as Amicus Curiae at 15-17). See also, Int'l Cablevision, Inc. v. Sykes, 75 F.3d 123, 126 (2nd Cir.1996) ("Cablevision sells cable television programming which it delivers to its customers from the system headend via coaxial ground cable. The headend has parabolic or other appropriately shaped antennas for receiving satellite-delivered program signals, high-gain directional antennas for receiving distant TV broadcast signals, directional antennas for receiving local signals, machines for playback of taped programming and commercial insertion, and studios for local origination and community access programming.") (quotations and citation omitted).

The KCTA also asserts that the three largest cable companies in Kentucky are headquartered in states other than Kentucky. According to the KCTA, these companies are Insight Communications which is headquartered in New York, Adelphia Communications which is `headquartered in Greenwood Village, Colorado and Charter Communications which is headquartered in St. Louis. (Rec. No. 28 Brief for KCTA as Amicus Curiae at 16 n. 6).

The Satellite Companies assert that the Cable Companies' employ numerous Kentucky residents and have numerous offices and facilities in Kentucky. (Rec. No. 1, Complaint ¶ 21). The Satellite Companies assert that they are competitors of the Cable Companies in the market for multichannel video programming distribution. (Rec. No. 1, Complaint ¶ 22). According to the Satellite Companies, both the Cable Companies and the Satellite Companies sell various packages of television channels including local television stations and cable programming. (Rec. No. 1, Complaint ¶ 22).

C. Situation Prior to the 2005 Amendments.

The legislation that is the subject of the Satellite Companies' Complaint was enacted by the Kentucky General Assembly in March, 2005. 2005 KY H.B. 272, Kentucky. H.B. No. 272, 2005 Regular Session (Ky.2005)(the "2005 Amendments")(relevant provision codified at various sections of. Chapter 136 of the Kentucky Revised Statutes).

Prior to the 2005 Amendments, neither the Cable Companies nor the Satellite Companies were required to pay Kentucky state sales tax. In addition, pursuant to § 602(a) of the federal Telecommunications Act of 1996, the Satellite Companies were and are exempt from local taxes and fees. Pub.L. No. 104-104, Title VI, § 602(a), 110 Stat. 144(a)(1996) (reprinted at 47 U.S.C. § 152, historical and statutory notes). Nevertheless, the Telecommunications Act explicitly permits states to impose a tax on the Satellite Companies and to distribute the proceeds from the tax to local governments. Pub.L. No. 104-104, Title VI, § 602(c), 110 Stat. 144(a)(1996) (reprinted at 47 U.S.C. § 152, historical and statutory notes). Meanwhile, as discussed above, the Cable Companies paid franchise fees to local governments in return for franchise agreements permitting them to use road and other rights-of-way to lay or string cable. (Rec. No. 1, Complaint ¶ 19).

D. The 2005 Amendments.

With the 2005 Amendments, the legislature sought to provide "a fair, efficient and uniform method for taxing communications services sold in this Commonwealth" and to simplify "an existing system that includes a myriad of levies, fees and rates imposed at all levels of government." 2005 KY H.B. 272 § 88(1), (3) (codified at KRS § 136.600(1), (3)). The relevant provisions of the 2005 Amendments became effective on January 1, 2006. 2005 KY H.B. 272 § 168.

1) Section 90 — New Excise Tax on Purchasers.

Section 90 of the 2005 Amendments imposes an excise tax on the retail purchase of multichannel video programming service provided to a person whose place of primary use is in the state. 2005 KY H.B. 272 § 90(1) (codified at KRS § 136.604(1)). The amendments define "multichannel video programming service" as "cable service and satellite broadcast and wireless cable service." 2005 KY H.B. 272 § 89(8)(codified at KRS § 136.602(8)). The excise tax is three percent of the sales price charged for the service. 2005 KY H.B. 272 § 90(2)(codified at KRS § 136.604(2)). The amendments require the provider to collect the excise tax from the purchaser. 2005 KY H.B. 272 § 91(1)(codified at KRS § 136.606(1)).

2) Section 96 — New Gross Revenue Tax on Providers.

Section 96 of the 2005 Amendments imposes a 2.4 percent tax on a multichannel video programming service provider's gross revenues. 2005 KY H.B. 272 § 96(1),(2)(a)(codified at KRS § 136.616(1), (2)(a)). Unlike the excise tax, the provider is prohibited from collecting the 2.4 percent gross revenue tax directly from the purchaser or to separately state the tax on the bill to the purchaser. 2005 KY H.B. 272 § 96(3)(codified at KRS § 136.616(3)).

3) Section, 112 — Creation of Designated Fund.

Section 112 of the 2005 Amendments establishes a gross revenues and excise tax fund. 2005 KY H.B. 272 § 112(1)(codified at KRS § 136.648(1)). All revenue from the gross revenues and excise tax imposed under Sections 90 and 96 are to be deposited into the fund. 2005 KY H.B. 272 § 112(3)(codified...