In a 5-2 decision, the Ohio State Supreme Court Monday upheld the state sales tax on satellite pay TV service.
DirecTV and EchoStar had challenged the tax as unconstitutional because it was not imposed on cable operators, but the court said it did not violate the Commerce Clause because the tax is based on differences between the businesses, not on their location or activities.
"The General Assembly used the phrase "ground receiving or distribution equipment" in R.C. 5739.01(XX) to track the definition of 'direct-to- home satellite service' set forth in the...U.S. Code, which authorize states to tax satellite-television service," wrote Justice Terrence O'Donnell for the majority. "The General Assembly defined satellite broadcasting service to correspond with this federal authorization and to identify the taxable transaction by the method of distributing pay-television services, not to protect companies that have invested in a ground distribution system or to encourage investment in such a system," they said.
The satellite operators had also challenged the decision on the grounds of intentional discrimination, but lost on procedural grounds because of a failure to raise the issue in initial briefs. They had wanted to show that cable
industry lobbying on the tax showed an intent to discriminate. But the court also said it would not have supported that argument even if the evidence had been admissible.
The decision upholds a Tenth District Court of Appeals ruling overturning a trail judge's partial summary judgment. The trial judge found that though there was not deliberate intent to favor in-state businesses, that was the practical effect. The Tenth circuit reversed, finding that both cable and satellite operators are businesses not based in Ohio that conduct business inside and outside the state, so both were engaged in interstate commerce, and that the Ohio legislature's decision in 2003 to impose a sales tax on satellite was because of the difference in their business activities.
One of the two dissenting justices was the courts' chief justice, Eric Brown. In his dissent, he wrote: "[T]he sales tax is unconstitutional. It treats sellers of the same service differently. That's discrimination. It favors the sellers who invest locally and burdens the sellers who do not. That's favoritism of in-state over out-of-state economic interests."
"Today's Ohio Supreme Court decision to uphold a discriminatory 5.5% tax on satellite TV homes hurts all consumers, whether they subscribe to satellite or cable TV" said DirecTV and Dish in a joint statement. "DirecTV and Dish Network disagree with the court's decision and are examining what steps to take next to ensure that satellite consumers in Ohio are treated fairly."
They suggested that not only satellite operators but pay TV consumers would be the losers.
"This decision will directly affect the wallets of Ohio consumers who will now have no way to combat ever-increasing cable prices," they said. "It will also exacerbate Ohio's budget situation, depriving the state of badly needed revenue at a time of almost unprecedented fiscal crisis for Ohio. If the tax were applied on both competitors equally, hundreds of millions of additional dollars would flow into the state's coffers."
The satellite operators two weeks ago filed suit in Utah against its satellite tax.
The cable industry has been successful in getting a number of states to change their laws to take into account local fees they pay that are not paid by satellite operators, laws Dish and DirecTV argue are discriminatory. Other states with such taxes include Florida, Kentucky, North Carolina, Tennessee, Massachusetts, with pending court challenges in Florida, Tennessee and Massachusetts.