California Satellite Tv

The suggestion that California might impose new taxes on satellite television providers led to a spirited debate before the California Commission on Tax Policy in the New Economy, meeting in El Segundo on May 22, 2003. The chief financial officers (CFOs) of the two competing satellite television providers, Direct TV and EchoStar Communications, joined forces to argue that a statewide tax on direct broadcast (satellite) services would be unfair to their industry. A representative of cable TV providers countered that such a tax would help cable companies compete on price with the satellite services. Federal law (P.L. 104-104) prohibits local taxes and fees on direct-to-home satellite service but allows states to tax the service and to distribute the revenue to localities, if the state chooses.

The issue arose from a proposal in a draft version of the Commission's preliminary report that a statewide 8% tax on satellite TV services "approximates the tax and fee burden on cable television operators and subscribers." The Commission postponed adoption of the draft report, and several members commented that the final version, due in June, should list the pros and cons of various proposals, but not make specific recommendations.

Satellite Providers Argue Unfairness of New Taxes

EchoStar's CFO Mike McDonnell argued that the franchise fees and utility taxes paid by cable operators do not apply to satellite providers simply because the methods of delivering TV signals are fundamentally different. Cable TV requires cables and wires in local communities, justifying franchise fees and utility user taxes, but satellite companies have to pay the Federal Communications Commission for orbital slots above the earth. McDonnell also questioned the objectivity of Commission Chair William Rosendahl, an executive with cable TV operator Adelphia Communications. Several Commissioners defended Rosendahl as fair and impartial.

Mike Palkovic, CFO of Direct TV, suggested that a tax on satellite providers alone would violate the Commerce Clause of the U.S. Constitution. He pointed out that satellite represents less than 25% of the market and asserted that cable operators get a direct benefit from franchise fees because they are then protected from other cable TV competition in most communities. Palkovic added that a fair and sound tax policy should address the entire subscriber TV market.

Cable Operators seek a Level Playing Field

A cable TV subscriber pays 53cents in taxes and fees, versus 4.7cents for a DBS (direct broadcast satellite) subscriber, according to Jeffrey Sinsheimer, representing the California Cable and Telecommunications Association. He pointed out that the satellite TV companies heavily advertise their price advantage over cable, and argued that a tax on satellite TV providers would promote competition. Mr. Palkovic of Direct TV responded that cable TV already has 80% of the market.

Commissioner Marilyn Brewer told both parties that they should work out their differences because if it is left to the government, they would not like the result.

Preliminary Report Scheduled for June

Following considerable debate on the content of the preliminary report, Commissioners agreed to meet by teleconference on June 12, 2003, to approve a final version. The report will constitute a workplan for the rest of the year. It should frame the issues for adversarial debate, but should not include recommendations. Issues to be considered will include the following:

* Participation in the Streamlined Sales Tax Project (SSTP): Should California become a voting member?

* Statewide communications simplification tax: Should all state and local taxes and fees on communication service providers (telephone, cellular, cable, and satellite) and their customers be combined into a single statewide tax that would be provided to local jurisdictions on a revenue-neutral basis?

* DBS (satellite) tax: Should an 8% tax be imposed on direct broadcast satellite service providers?

* Split roll: Should there be periodic reassessment of nonresidential property to market value?

* State tax courts: Should a tax court be established to resolve all tax disputes?

* Flat-rate taxes: Should all current taxes in California be eliminated except "sin" taxes, and two new 6% taxes on personal income and business value added be established?

* Protection of local revenues: Should the California Constitution be amended to provide a minimum allocation of property taxes to local government and allow local governments to raise money for infrastructure, public safety, and other local public purposes?

* Electoral approval of tax measures: Should the required majority vote be reduced from 66 2/3% to 55%?

* Local/state tax swap: Should control over property tax revenues be returned to local governments in exchange for state-controlled revenues now allocated to local governments?

* Broadening of sales tax base: Should certain services not now taxed be included?

* Structural tax reform: Should various proposals be considered?

* Internet transaction tax: Should tax be collected on out-of-state sales?

The Commission plans to meet on July 18, 2003, to consider the "guiding principles of good tax policy" as they apply to the four major taxes (corporate and personal income, sales and use, and property) at a location to be announced. Additional information may be found on the Commission's website at http:// www.caneweconomy.ca.gov. (California Commission on Tax Policy in the New Economy Meeting, El Segundo, California, May 22, 2003.)

Copyright CCH Incorporated: Federal and State Tax Jun 3, 2003
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