DirecTV v. Utah State Tax Comm'n

• Decision Date: 14 December 2015
• Docket Number: No. 20130742.,20130742.
• Citation: 364 P.3d 1036
• Parties: DIRECTV and Dish Network, Appellants, v. UTAH STATE TAX COMMISSION, Appellee.
• Court: Utah Supreme Court

364 P.3d 1036

DIRECTV and Dish Network, Appellants,

v.UTAH STATE TAX COMMISSION, Appellee.

No. 20130742.

Supreme Court of Utah.

Dec. 14, 2015.

Michael L. Larsen, Cory D. Sinclair, Salt Lake City, E. Joshua Rosenkranz, Jeremy N. Kudon, Nicholas G. Green, New York City, Eric A. Shumsky, Washington D.C., for appellants.

Sean D. Reyes, Att'y Gen., Bridget K. Romano, Solicitor Gen., Michelle A. Alig, Laron J. Lind, Asst. Att'ys Gen., Salt Lake City, for appellee.

Associate Chief Justice LEE authored the opinion of the Court, in which Chief Justice DURRANT, Justice DURHAM, and Justice HIMONAS joined.

Associate Chief Justice LEE, opinion of the Court:

¶ 1 In this case we consider a constitutional challenge to Utah's pay-TV sales tax scheme. The scheme provides a sales tax credit for "an amount equal to 50%" of the franchise fees paid by pay-TV providers to local municipalities for use of their public rights-of-way. Not all pay-TV providers pay franchise fees, however. Cable providers employ a business model that triggers franchise fees (and, by extension, the tax credit); satellite providers use a different model that triggers no such fees (or credit). The satellite providers filed suit, asserting that Utah's tax scheme unconstitutionally favors local economic interests at the expense of interstate commerce. In this challenge, the satellite providers assert claims under the dormant Commerce Clause of the U.S. Constitution and the Uniform Operation of Laws Clause of the Utah Constitution.

¶ 2 The district court dismissed these claims on a motion for judgment on the pleadings. We affirm. We hold that Utah's pay-TV tax credit survives dormant commerce scrutiny because it does not discriminate in favor of a business or activity with a distinct geographic connection to Utah. We also hold that the tax credit survives rational basis scrutiny under the Uniform Operation of Laws Clause.

I. BACKGROUND

¶ 3 Pay–TV programming is delivered in one of two main ways—by cable or satellite.¹ Cable providers employ a network of wires run underground or on utility poles. The programming content is assembled at "headend" facilities, of which there are several in Utah, from which it is sent through a network of underground or overhead cables. Subscribers access the transmitted programming through a cable "drop" line that runs to their homes.

¶ 4 The infrastructure necessary to deliver cable programming to Utah subscribers requires substantial investment in the local economy. Cable providers invest millions of dollars in Utah and employ over one-thousand Utahns. They build and staff headend facilities, pay property taxes, and install vast networks of cables. And to install cable networks, cable providers invest significant capital in the labor required for installation and in "franchise fees" for using public rights-of-way. Municipalities derive significant revenue from these fees—about $17 million annually in Utah—which helps fund local governments.

¶ 5 Satellite providers avoid many of these infrastructure costs by delivering TV programming directly to subscribers. Under the satellite TV business model, satellite providers shoulder a different set of expenses—those associated with building, launching, and maintaining orbital satellites. There is a tradeoff for the astronomical costs associated with satellites: The investment in satellites allows the satellite providers to avoid the infrastructure costs that burden their cable competitors. Once the orbital satellite is in operation, the providers assemble programming content at various "uplink" centers across the country (of which there are none in Utah). And once the programming package is assembled, it is transmitted to the satellites, which then transmit it directly to subscribers' homes. Subscribers access the programming through a small satellite dish installed on the exterior of their home, which receives and processes the content. Thus, satellite providers do not lay a single foot of local cable. They accordingly avoid the costs associated with building and operating headends and installing and maintaining cables. Their only local connection is to pay independent contractors to install and maintain satellites on people's homes.

¶ 6 Satellite providers also avoid the payment of local franchise fees. To the extent franchise fees are seen as a payment for the right of way for running cable, the exemption from franchise fees is a natural outgrowth of the business model. But the exemption from local franchise fees is also assured by federal law. Under the Telecommunications Act of 1996, satellite providers are exempted from "the collection or remittance, or both, of any tax or fee imposed by any local taxing jurisdiction," such as a city or county, but not the state. Telecommunications Act of 1996, Pub. L. No. 104–104 § 602(a), 110 Stat. 56.

¶ 7 Both satellite and cable subscribers are subject to an excise sales tax in Utah. In 2004 the legislature enacted a 6.25 percent excise sales tax for all pay-TV service. UTAH CODE § 59–26–103. Then, in 2008, the legislature adopted a tax credit for up to 50 percent of the franchise fees paid by pay-TV providers to "counties and municipalities within the state." Id. § 59–26–104.5(2)(b). In so doing, the legislature also required service providers to pass the value of this tax credit through to its customers, resulting in lower subscription costs. Id. § 59–26–104.5(4)(a). Because satellite providers pay no local franchise fees, they are ineligible for this tax credit. Thus, while both cable and satellite subscribers pay the same excise sales tax, cable providers alone pay franchise fees and thus qualify for the tax credit. So only cable subscribers get the benefit of the tax credit's "pass through" requirement.

¶ 8 Two satellite providers, DIRECTV and DISH Network, challenged this tax credit. Their complaint alleged that the credit runs afoul of the Commerce Clause and Equal Protection Clause of the U.S. Constitution and the Uniform Operation of Laws Clause of the Utah Constitution. Specifically, the satellite providers alleged that the tax credit violates the dormant Commerce Clause by facially granting a preference based on geographic ties to the site, imposing a discriminatory effect on interstate commerce, and being motivated by an intent to discriminate against satellite providers who do not have an extensive local footprint. And they averred that the tax credit violates the Equal Protection Clause of the U.S. Constitution and the Uniform Operation of Laws Clause of the Utah Constitution because it advances no valid state interest.

¶ 9 The parties conducted initial discovery for several months. Then, one month before the discovery cut-off, the State Tax Commission moved for judgment on the pleadings.

¶ 10 The district court granted that motion. First, it held that the franchise fee tax credit did not run afoul of the dormant Commerce Clause because it was not facially discriminatory, discriminatory in effect, or discriminatory in purpose. In the district court's view, there was no discrimination of any consequence because the differential treatment of satellite providers was on the basis of a "technological mode of operation" and not the location of a business activity. Further, the district court concluded that the credit did not violate either the Equal Protection Clause or the Uniform Operation of Laws Clause because cable and satellite providers are not similarly situated and the different tax treatment is justified by legitimate state interests in "tax parity" and in "[b]ringing business to the state."

¶ 11 The satellite providers filed this appeal. In reviewing a decision on a motion for judgment on the pleadings, we yield no deference to the district court's analysis. We consider the legal viability of the satellite providers' claims de novo. See State v. Ririe, 2015 UT 37, ¶ 5, 345 P.3d 1261. We also accept the factual allegations of the complaint as true.

¶ 12 Two sets of questions are presented. First, we consider the satellite providers' dormant Commerce Clause claims. We affirm the dismissal of these claims on the ground that the franchise fee tax credit does not discriminate in a manner triggering strict scrutiny under the dormant Commerce Clause. Second, we also affirm the dismissal of the Uniform Operation of Laws Clause claims.² Here we find rational grounds for the differential treatment of satellite and cable providers, and thus hold that the satellite providers have failed to state a viable claim.

II. THE DORMANT COMMERCE CLAUSE

¶ 13 The Commerce Clause grants Congress the authority to regulate interstate commerce. U.S. CONST. art. I, § 8, cl. 3. By negative implication, this provision also limits the states' authority in this realm. Comptroller of Treasury of Md. v. Wynne, ––– U.S. ––––, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015) ; see also Union Pac. R.R. Co. v. Auditing Div. of the Utah State Tax Comm'n, 842 P.2d 876, 883 (Utah 1992) (noting that a state "cannot impose a tax which discriminates against interstate commerce"). So even if Congress has not spoken on an issue of interstate commerce, states are prevented from encroaching on Congress's authority—hence the term "dormant" or "negative" Commerce Clause.

¶ 14 The U.S. Supreme Court has articulated two levels of dormant Commerce Clause scrutiny. First is a "strict" level of scrutiny triggered by laws that directly discriminate against interstate commerce—by "facial" discrimination or discrimination that is apparent in its effect and discriminatory purpose. Or. Waste Sys. Inc. v. Dep't of Envtl. Quality, 511 U.S. 93, 99, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994) ; see also Hughes v. Oklahoma, 441 U.S. 322, 337, 99 S.Ct. 1727, 60 L.Ed.2d 250 (1979) (establishing that "facial discrimination invokes the strictest scrutiny of any purported legitimate local purpose and of the absence of nondiscriminatory alternatives"). Discrimination of this sort is "virtually per se invalid." Or. Waste...