Medlock v. Leathers

• Decision Date: 23 November 1992
• Docket Number: No. 89-89,89-89
• Citation: 842 S.W.2d 428,311 Ark. 175
• Court: Arkansas Supreme Court
• Parties: , 72 Rad. Reg. 2d (P & F) 3 Daniel L. MEDLOCK, et al., Appellants, v. Timothy J. LEATHERS, Commissioner of Revenues, et al.,.... Appellees, City of Fayetteville, Arkansas, Intervenor.

Page 428

842 S.W.2d 428

311 Ark. 175, 72 Rad. Reg. 2d (P & F) 3

Daniel L. MEDLOCK, et al., Appellants, v. Timothy J. LEATHERS, Commissioner of Revenues, et al.,.... Appellees City of Fayetteville, Arkansas, Intervenor.

No. 89-89.

Supreme Court of Arkansas.

Nov. 23, 1992.

Eugene G. Sayer, Little Rock, for appellants.

Larry D. Vaught, Little Rock, for appellees.

KENNETH R. MOURTON, Special Justice.

This case involves the issue whether Arkansas' imposition of a gross receipts tax violates the Equal Protection Clause of the Fourteenth Amendment. We hold that no such violation occurred even though the tax applied to cable television operators and subscribers while remaining silent as to satellite subscribers and operators. The chancellor's order denying and dismissing the equal protection claim is affirmed. A finding of the statute's constitutional validity allows us to dismiss the Supremacy Clause issue.

On March 21, 1987, the Arkansas General Assembly adopted Act 188 of 1987 [Act 188], effective July 1, 1987, amending the previous statute concerning the Arkansas gross receipts tax. Act 188 added cable television to the list of services that had state and local sales taxes imposed on them. It did not, however, apply to other forms of mass media, particularly scrambled satellite television services. The appellants filed a class action on May 28, 1987, requesting that Act 188 be declared an illegal exaction discriminating among mass media.

Appellants are Daniel L. Medlock, a cable subscriber, Community Communications Company, The Arkansas Cable Television Association, Inc. on behalf of themselves and all other similarly situated taxpayers subjected to the television services sales tax. The appellees are James C. Pledger, the Commissioner of Revenues, Timothy J. Leathers and various state, county, and city officials, Pulaski County, the City of Benton, and all similarly situated counties and cities. The City of Fayetteville intervened. Appellants claimed a variety of their constitutional rights had been violated freedom of speech; freedom of the press; equal privileges and immunities; freedom of equal protection of the laws and protection under the Supremacy Clause. These allegations centered primarily on a claim of discrimination against cable television under the First Amendment. This court originally held that the First Amendment required similar taxation of cable and satellite providers. The U.S. Supreme Court found that imposing the fee upon cable alone did not impede cable's free speech ability to act as a check on government nor did it target a small group of speakers or discriminate on content and was therefore constitutionally permissible. Leathers v. Medlock, 499 U.S. 439, 111 S.Ct. 1438, 113 L.Ed.2d 494 (1991). We originally found that cable and satellite businesses were similarly situated because they ended in substantially the same result--video programming. Medlock v. Pledger, 301 Ark. 483, 785 S.W.2d 202 (1990), aff'd in part, rev'd in part, Leathers v. Medlock, 499 U.S. 439, 111 S.Ct. 1438, 113 L.Ed.2d 494 (1991). The case has been remanded to us for consideration of the issue that we did not originally reach: whether the Equal Protection Clause required similar taxation of cable and satellite providers. We allowed the parties to address the Supremacy Clause issue during this remand.

The chancery court ¹ found in favor of appellees and determined Act 188 was not an illegal exaction. After the chancellor's decision, ² Act 188 was amended by Act 769 of 1989, effective July 1, 1989, to include "[s]ervice of cable television, community antenna television, and any and all other distribution of television, video, or radio services...." Ark.Code.Ann. § 26-52-301(3)(D)(i) (Repl.1992).

I.

The Fourteenth Amendment of the U.S. Constitution provides, "No state shall make or enforce any law which shall ... deny to any person within its jurisdiction the equal protection of the laws." U.S. CONST. amend. XIV, § 1. In previous equal protection cases this court has determined that tax legislation often survives the rational basis test. Streight v. Ragland, 280 Ark. 206, 655 S.W.2d 459 (1983). The court stated, "[u]nder the rationality standard of review, we must presume the legislation is constitutional, i.e. that it is rationally related to achieving a legitimate governmental objective." Id. at [311 Ark. 179] 213, 655 S.W.2d at 463. Awareness of local needs and usages of funds helps the legislature form equitable distributions of tax burdens. Such knowledge and familiarity with community conditions have traditionally allowed courts to tolerate legislatively created classifications. See generally Regan v. Taxation with Representation of Washington, 461 U.S. 540, 103 S.Ct. 1997, 76 L.Ed.2d 129 (1983) (stating that legislatures have extremely broad latitude in creating classifications and distinctions in tax statutes); New York Rapid Transit Corp. v. City of New York, 303 U.S. 573, 58 S.Ct. 721, 82 L.Ed. 1024 (1938) (holding that state legislatures may identify or designate a particular class to be the object of a tax so long as the state does not violate the class' rights to equal protection of the laws); Louisville Gas & Elec. Co. v. Coleman, 277 U.S. 32, 48 S.Ct. 423, 72 L.Ed. 770 (1928) (explaining that flexibility is granted to states to classify for taxation purposes); Citizens' Tel. Co. v. Fuller, 229 U.S. 322, 33 S.Ct. 833, 57 L.Ed. 1206, aff'd, 229 U.S. 335, 33 S.Ct. 837, 57 L.Ed. 1215 (1913) (reviewing numerous decisions where state legislatures were allowed to discriminate among different persons in taxation statutes).

"Inherent in the power to tax is the power to discriminate in taxation." Leathers, 499 U.S. at ----, 111 S.Ct. at 1446. Courts should defer to local legislative determinations as to the desirability of imposing discriminatory measures. City of New Orleans v. Dukes, 427 U.S. 297, 96 S.Ct. 2513, 49 L.Ed.2d 511 (1976). A court will not strike down a classification merely because it is underinclusive. The law must be "purely arbitrary" in its classification; thus the only classification not allowed in taxing is invidious discrimination. Id. If a taxation statute discriminates in favor of one class it is not determined to be arbitrary so long as the discrimination is based upon a reasonable distinction, and if there is any hypothesized set of facts to uphold a rational basis. Streight v. Ragland, 280 Ark. 206, 655 S.W.2d 459 (1983). Appellants argue that hypothesizing a rational basis, as in Streight, should be beyond the power of this court. We view hypothesizing a rational basis the same as conceiving a rational basis; a practice that is available to the courts without question. We point to the language of Streight and conclude that any rational basis for a taxation statute may be developed at any time.

In any event, the judiciary is allowed to hypothesize and ... reach a conceivable basis for the exemptions which [it] conclude[s] are rational, reasonably distinctive and not arbitrary. It causes us to defer to legislative purpose because there is a rational basis for the tax....

....

Before it is said that such hypothesizing is far afield, we re-emphasize that our role is not to discover the actual basis for the legislation. Our task is merely to consider if any rational basis exists which demonstrates the possibility of a deliberate nexus with state objectives so that the legislation is not the product of utterly arbitrary and capricious government and void of any hint of deliberate and lawful purpose.

Streight, 280 Ark. at 214-15, 655 S.W.2d at 464.

This court will give great deference to the General Assembly in the legislation of taxation where the clear intent of the statute is to raise revenue and not to discriminate among similarly situated individuals. In a similar equal protection case involving the media, Justice Rehnquist stated, "[w]e have shown the greatest deference to state legislatures in devising their taxing schemes." Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 599, 103 S.Ct. 1365, 1379, 75 L.Ed.2d 295 (1983) (Rehnquist, J., dissenting). Even without such deference Act 188 will survive the rational basis test when we apply the intervenor's argument. Arkansas, primarily a rural state, may classify between satellite and cable because the state needs satellite television transmission in those geographic areas where cable services are not feasible. We acknowledge other conceivable rational bases for the arguments that were addressed at oral argument but we are not compelled to discuss them here. One conceivable rational basis is enough to pass the test.

In searching for any rational basis, we ask whether the created classification has a conceivable reasonable relationship to the governmental action. Madden v. Kentucky, 309 U.S. 83, 60 S.Ct. 406, 84 L.Ed. 590 (1940). Under the rational basis test, a reasonable purpose of the legislation need not be determined at the time of passage of the statute. Because broad discretion to classify has long been recognized in taxation, New York Rapid Transit Corp. v. City of New York, 303 U.S. 573, 58 S.Ct. 721, 82 L.Ed. 1024 (1938), "the Fourteenth Amendment was not intended to compel the State[s] to adopt an iron rule of equal taxation." Bell's Gap R.R. Co. v. Pennsylvania, 134 U.S. 232, 237, 10 S.Ct. 533, 535, 33 L.Ed. 892 (1890).

Because of this presumption of a tax's constitutionality, the party challenging the tax has the burden of showing that no conceivable basis could ever support it. Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61, 31 S.Ct. 337, 55 L.Ed. 369 (1911); Streight v. Ragland, 280 Ark. 206, 655 S.W.2d 459 (1983). We originally determined cable and satellite to be "the purveyors of a particular medium." Medlock v. Pledger, 301 Ark. 483, 487, 785 S.W.2d 202, 204 (1990). That "particular medium," video programming, is the end result of both cable and satellite. Because...