Sales Tax Slice: Satellite Providers’ Discriminatory Tax Argument Loses Again


Tennessee joins the list of states, now including Ohio, North Carolina, and Kentucky, to conclude that preferential sales tax treatment for cable providers over satellite providers is disparate treatment but does not amount to an unconstitutional discrimination. 

Satellite providers appear to be losing this nationwide push because courts have consistently held that the disparate sales tax treatment does not violate the commerce clause.  Other courts have concluded on different grounds, such as when the Ohio Supreme Court determined in 2010 that satellite and cable providers deliver and assemble programming differently, or when a North Carolina court determined in 2006 that “neither satellite companies nor cable companies are properly characterized as an in-state or out-of-state economic interest.”

Last week the Tennessee Court of Appeals upheld a sales tax exemption for cable television providers but not for their satellite competitors.  Distinguishing cable and satellite providers as “not similarly situated” enterprises due to their different regulatory burdens, the court held that Tennessee’s disparate sales tax treatment did not violate the commerce clause.

Tennessee imposes on cable television subscription fees a three-tiered sales tax framework that exempts the first $15 of monthly fees.  In contrast, the state imposes on satellite subscription fees a single-tiered tax that starts at the first dollar—there is no exemption for satellite. Satellite providers DIRECTV and DISH Network challenged the disparate tax treatment on constitutional grounds.  They argued that consumers view satellite and cable providers as substitutable, similar competitors.  That consumer-focused perspective, they contended, made them “substantially similar entities” that compete directly for television subscription business.

The court acknowledged that similarity, particularly in light of the companies’ aggressive mail and television marketing campaigns, but it explained that the consumer-focused similarity did not control.  Instead, the court distinguished the providers on regulatory grounds, explaining that the federal government regulates cable heavily but satellite minimally.  The court identified significant public interest, technical, and operational regulations that Congress and the FCC impose on cable only, such as “must-carry” provisions; obscene content provisions; signal quality and administrative standards; and ownership, acquisition, rate, and other federal regulatory burdens.  And because satellite providers do not share those burdens, said the court, “even a cursory review of telecommunication regulation reveals that Congress has chosen to more heavily regulate cable providers.” 

Due to the regulatory disparity, the court concluded that cable and satellite providers are not substantially similar entities for purposes of the commerce clause, and therefore that the Constitution permits Tennessee to favor cable providers with the $15 exemption.

In light of satellite providers’ continuing losing streak in the state courts, it appears that they will continue struggling to win with their constitutional argument for more competitive sales tax treatment.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are cable and satellite television providers similarly situated business enterprises?

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by Ryan Voorhees