Ohio Satellite Tax Reaches State Supreme Court

Published November 1, 2009

The Ohio Supreme Court will decide whether the state can continue to impose a sales tax on satellite TV while its biggest competitor, cable, remains tax-free.

The high court agreed this summer to hear the case, and it could end up being a landmark decision. Ohio imposed the sales tax on satellite TV service in 2003, becoming one of six states imposing such a tax. California legislators are contemplating being the seventh to charge the levy.

Tax’s Justification Questioned

A lower court in February ruled against satellite companies such as DirecTV and EchoStar, who had argued imposing a sales tax on satellite but not cable was discriminatory and not justified.

Steven Titch, a telecom and IT policy analyst at the Los Angeles-based Reason Foundation, notes satellite TV, unlike cable, doesn’t use state services. “They are different platforms,” said Titch. “Cable uses the right of way. What they do imposes costs on the municipality.

“Satellites don’t require a right of way [so they don’t impose these costs on the public]. This is just another tax on a service,” Titch added.

Legal Landscape

The satellite industry claims a sales tax on its services violates the Commerce Clause of the U.S. Constitution. Ohio is not permitted to subject satellite TV service to the state’s 5.5 percent sales tax—while exempting cable—the industry says, because satellite TV is sold across state lines while ground-based cable is sold within each state. The Constitution’s Commerce Clause assigns regulation of interstate commerce to Congress.

Ohio state attorneys counter by noting the U.S. Supreme Court has consistently ruled the Commerce Clause does not protect one interstate business from another, regardless of the technology involved. The state also claims not taxing satellite is the real act of discrimination because cable operators are charged franchise fees the satellite industry avoids.

State Tax Grab

Jeff Kagan, a telephony and wireless industry analyst based in Atlanta, says this is simply a case of states surveying the technological landscape and searching for “every new area they can tax.”

“Technology is changing. Customers are changing the things they do, and that means the government starts to look at the marketplace like a buffet table,” Kagan said. “Where do they start?

“On one hand, states feel they have to do this because taxes are reduced from the older technology, but on the other hand there are taxes on everything,” Kagan said. “Compromise and balance are the key.”

Growth vs. Revenue

“Much of the new technology over the last decade has not been taxed yet,” Kagan added. “The thought was to let it grow. The worry was taxation would hamper growth. We always expected taxes to eventually play a role.

“The hardest part of the dance is to tax without slowing growth. To level the playing field we have to decide whether we want to increase or decrease taxes on all players,” Kagan said.

Titch said it’s not necessary to “level the playing field” in this instance because cable and satellite are essentially playing in two different fields. He calls this an example of a state government wanting to collect revenue from yet another “discretionary” target.

“If a service is discretionary, they’re going to stick a tax on it,” Titch added. “They already do it for telephone, cigarettes, and alcohol.

“This tax is not fair to the satellite service providers,” Titch concluded. “These are the guys providing universal services. Everybody is for putting out as many of these multimedia services as possible. But if they tax it, they will have less of it.”

Phil Britt ([email protected]) writes from South Holland, Illinois.