DirecTV, Inc. v. StateDirecTV, Inc. v. State
- Reporters:
- , ,
- Before:
- Wynn
A tax statute does not violate the Commerce Clause of the United States Constitution when the differential tax treatment of “two categories of companies results solely from differences between the nature of their businesses, [and] not from the location of their activities.” 1 In this case, Plaintiffs contend that section 105-164.4(a)(6) of the North Carolina General Statutes, which imposes a sales tax on “[d]irect-to-home satellite service,” but not on cable television service, 2 discriminates against satellite providers and favors cable companies on its face and in its practical effect. Because the differential tax results solely from differences between the nature of the provision of satellite and cable services, and not from the geographical location of the businesses, we affirm the trial court’s grant of summary judgment to the State of North Carolina.
The facts pertinent to this appeal indicate that Plaintiffs DIRECTV, Inc. and EchoStar Satellite, L.L.C., provide direct broadcast satellite service to subscribers in North Carolina, as well as to subscribers throughout the nation. To distribute satellite services to their customers, satellite operators beam television programming to receiver “dishes” affixed directly to subscribers’ homes from satellites stationed at fixed altitudes above the earth’s equator. In contrast, cable companies provide television programming to their customers using local distribution facilities. Specifically, cable companies distribute their programming using coaxial or fiber optic cables that are laid across the state in a ground-based network. Notwithstanding these differences in the provision of television programming to their customers, satellite and cable companies utilize satellites at
Before 2001, North Carolina’s sales tax did not apply to the retail sale of either satellite or cable service. In 2001, the General Assembly enacted a new law entitled “Equalize Taxation of Satellite TV and Cable TV.” 2001 N.C. Sess. Laws. 424, § 34.17. This new law, codified in section 105-164.4(a)(6) of the North Carolina General Statutes, amended the tax code to impose a state sales tax on providers of “direct-to-home satellite service” equal to five percent of the companies’ gross receipts. Thus, section 105-164.4(a)(6) imposed a five percent sales tax on satellite companies, but did not impose a sales tax on cable companies. Since 1 January 2002, the effective date of section 105-164.4(a)(6), Plaintiffs have paid the five percent sales tax, which they recouped from their subscribers in a line item on subscribers’ monthly bills.
On 30 September 2003, Plaintiffs filed suit in Superior Court, Wake County, seeking a refund of nearly $30,000,000.00 in sales taxes paid pursuant to section 105-164.4(a)(6). In their complaint, Plaintiffs challenged the constitutionality of section 105-164.4(a)(6) on grounds that it (1) violates the Commerce Clause of the United States Constitution; (2) denies Plaintiffs equal protection of the laws in violation of the Equal Protection Clause of the United States Constitution; and (3) violates the rule of uniform taxation of Article V, Section 2, of the North Carolina Constitution.
On 18 January 2005, Plaintiffs moved for summary judgment on the Commerce Clause claim of their complaint, and the State simultaneously cross-moved for summary judgment on Plaintiffs’ Commerce Clause and equal protection claims. On 26 May 2005, the trial court denied Plaintiffs’ motion for summary judgment and granted the State’s cross-motion for summary judgment in its entirety, thereby dismissing Plaintiffs’ complaint. Plaintiffs appeal to this Court contending that section 105-164.4(a)(6) of the North Carolina General Statutes facially discriminates against interstate commerce; and the satellite service tax violates the Commerce Clause in its practical effect.
I.
The United States Constitution expressly grants to Congress the power to “regulate [c]ommerce with foreign [njations, and among the several [s]tates[.]”
It is well established that a law is discriminatory if it “tax[es] a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.”
Chemical Waste Mgmt. v. Hunt,
504 U.S. 334, 342, 119 L. Ed. 2d 121, 132 (1992) (internal quotation and citations omitted). “Discrimination” for purposes of the dormant Commerce Clause is “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.”
Granholm v. Heald,
544 U.S. 460, 472, 161 L. Ed. 2d 796, 809 (2005) (quoting
Oregon Waste Systems, Inc. v. Dep’t of Envtl. Quality of Ore.,
511 U.S. 93, 99, 128 L. Ed. 2d 13, 21 (1994)). Thus, no state may “impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business.”
Northwestern States Portland Cement Co. v. Minnesota,
358 U.S. 450, 458, 3 L. Ed. 2d 421, 427
The statute at issue in this appeal is section 105.164.4(a)(6) of the North Carolina General Statutes which provides:
(a) A privilege tax is imposed on a retailer at the following percentage rates of the retailer’s net taxable sales or gross receipts as appropriate. . . . (6) The rate of five (5%) applies to the gross receipts derived from providing direct-to-home satellite service to the subscribers in this State. A person engaged in the business of providing direct-to-home satellite service is considered a retailer under this Article.
On appeal, Plaintiffs contend that
II.
Plaintiffs first argue that
A state tax law is facially discriminatory where it (1) explicitly refers to state boundaries or uses other terminology that inherently indicates the tax is based on the in-state or out-of-state location of an activity, see Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 407, 80 L. Ed. 2d 388, 403 (1984) (holding that a New York income tax provision that expressly provided a tax credit for shipping products from New York rather than other states violated the Commerce Clause); and (2) applies to entities similarly situated for Commerce Clause purposes. Gen. Motors Corp. v. Tracy, 519 U.S. 278, 299, 136 L. Ed. 2d 761, 780 (1997). “A facial challenge to a legislative act is . . . the most difficult challenge to mount successfully.” United States v. Salerno, 481 U.S. 739, 745, 95 L. Ed. 2d 697, 707 (1987). The challenger must establish that “no set of circumstances exists under which [the tax] would be valid.” Id. Moreover, the challenger must demonstrate there is an “explicit discriminatory design to the tax.” Amerada Hess Corp., 490 U.S. at 76, 104 L. Ed. 2d at 69.
Plaintiffs contend that
Plaintiffs argue that
The facts in
Bacchus
are easily distinguished from the facts in this case. Here,
As
III.
Plaintiffs next contend that even if
“[A] state tax that favors in-state business over out-of-state business for no other reason than the location of its business is prohibited by the Commerce Clause.” American Trucking Ass’ns v. Scheiner, 483 U.S. 266, 286, 97 L. Ed. 2d 226, 244 (1987) (citation omitted); see also Best & Co., Inc. v. Maxwell, 311 U.S. 454, 456-57, 85 L. Ed. 275, 278 (1940) (holding that a North Carolina statute that taxed out-of-state retailers for hotel room use was discriminatory in practical effect because it discriminated in favor of intrastate businesses). Only actual, rather than hypothetical, discrimination violates the Commerce Clause. Associated Indus. of Missouri v. Lohman, 511 U.S. 641, 654, 128 L. Ed. 2d 639, 651 (1994); see also Gregg Dyeing Co. v. Query, 286 U.S. 472, 481, 76 L. Ed. 1232, 1239 (1932) (“Discrimination . . . is a practical conception. We must deal in this matter . . . with substantial distinctions and real injuries.”). Plaintiffs bear the initial burden of showing that a statute has a discriminatory effect on interstate commerce. Hughes v. Oklahoma, 441 U.S. 322, 336, 60 L. Ed. 2d 250, 262 (1979). If Plaintiffs meet that burden, the State bears the burden of establishing that the challenged tax “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 278, 100 L. Ed. 2d 302, 311 (1988) (citations omitted).
In determining whether
operate both in New Jersey and outside New Jersey. Similarly, nonproducing retailers may operate both in New Jersey and outside the State. Whatever different effect the [deduction denial] may have on these two categories of companies results solely from differences between the nature of their businesses, [and] not from the location of their activities.
Id.
In Exxon Corp., the United States Supreme Court reviewed a Maryland statute that prohibited oil producers or refiners from operating a retail service station within the state. Exxon Corp., 437 U.S. 117, 57 L. Ed. 2d 91. Under the statute, all major oil companies, including Exxon, had to divest themselves of their retail service stations in the state. Id. at 125-26, 57 L. Ed. 2d at 100. Exxon argued that the statute protected in-state independent dealers in the gas retail market from out-of-state competition. The Court, noting that there were several major interstate marketers of petroleum that owned retail gas stations in Maryland that did not produce or refine gasoline, held that the relevant statute created no barriers, explaining,
[the statute] does not prohibit the flow of interstate goods, place added costs upon them, or distinguish between in-state and out-of-state companies in the retail market. . . . The fact that the burden of a state regulation falls on some interstate companies does not, by itself, establish a claim of discrimination against interstate commerce.
Id. at 126, 57 L. Ed. 2d at 100. Thus, in Exxon Corp., the Court determined that the dormant Commerce Clause prohibits discrimination against the interstate market for retail gasoline, but that it does not specifically protect retailers in the interstate market who are oil producers. See also Brown & Williamson Tobacco Corp. v. Pataki, 320 F.3d 200 (2d Cir. 2003) (relying on Exxon, the court held that the dormant Commerce Clause prohibits discrimination against the interstate market for retail cigarettes, but not discrimination against retailers in that market who sell cigarettes in a particular manner).
In the case sub judice, the relevant market is the interstate market for multichannel video programming. The relevant retailers are multichannel video programming service providers, including those companies that deliver programming by satellite and those that deliver programming by cable. Based on the United States Supreme Court’s reasoning in Amerada Hess and Exxon Corp., we conclude that the dormant Commerce Clause prohibits discrimination against the interstate marketing for multichannel video programming, but that it does not necessarily prohibit discrimination against programmers in that market who deliver programming by satellite as opposed to cable.
Plaintiffs argue that their delivery of television programming is inherently out-of-state and, therefore, they are unfairly subjected to the tax imposed upon them in
Plaintiffs’ reliance on Granholm, 544 U.S. 460, 161 L. Ed. 2d 796, is misplaced. In Granholm, the Court struck down a New York statute as violating the Commerce Clause where the statute forbade out-of-state wineries from making direct sales unless they first established a distribution operation in New York. Id. at 493, 161 L. Ed. 2d at 822. The United States Supreme Court concluded that this statute discriminated against interstate commerce because the mandate to build a distribution system in New York was an “additional step[] that drive[s] up the cost of [out-of-state] wine[,]” that in-state producers did not have to incur. Id. at 474-75, 161 L. Ed. 2d at 810.
In the case
sub judice,
even if Plaintiffs were to establish an instate distribution system for the delivery of satellite programming,
they would still be subjected to the tax imposed under
Plaintiffs further argue that
The statute does not require Plaintiffs to recoup the sales tax from its subscribers. Plaintiffs have elected to pay this tax by passing the costs to its subscribers. Moreover, although cable subscribers do not pay $30.00 per year in the sales tax imposed under
Finally, the record is void of any evidence that this tax has created an undue burden on interstate commerce. Even after the imposition of the sales tax in 2002, Plaintiffs’ number of subscribers and gross revenues have increased from 2001 to 2003 in North Carolina. Moreover, Plaintiffs’ share of the North Carolina multichannel video programming market has continually increased and has remained higher than their share of the national multichannel video programming market. Therefore, Plaintiffs’ success in this market with the imposition of the sales tax under
Affirmed.
Judges GEER and STEPHENS concur.
Notes
. Amerada Hess Corp. v. Director, Div. of Taxation, New Jersey Dep’t of the Treasury, 490 U.S. 66, 78, 104 L. Ed. 2d 58, 70 (1989) (citation omitted).
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