DIRECTV, INC., ET AL.
RICHARD H. ROBERTS, COMMISSIONER OF REVENUE, STATE OF TENNESSEE
Session May 22, 2014.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed; Case Remanded. Appeal from the Chancery Court for Davidson County. No. 032408IV. Russell M. Perkins, Chancellor.
Robert E. Cooper, Jr., Attorney General and Reporter; Joseph F. Whalen, Associate Solicitor General; and Mary Ellen Knack, Senior Counsel, for the appellant, Richard H. Roberts, Commissioner of Revenue.
Stephen J. Jasper, Nashville, Tennessee; E. Joshua Rosenkranz and Jeremy N. Kudon, New York, New York; and Eric A. Shumsky, Washington, D.C., for the appellees, DIRECTV, Inc. and DISH Network L.L.C.
Carolyn W. Schott and André e Sophia Blumstein, Nashville, Tennessee, and John A. Hinman, San Francisco, California, for the Amicus Curiae, National Association of Wine Retailers.
Joseph F. Welborn, III, Nashville, Tennessee, for the Amicus Curiae, Satellite Broadcasting & Communications Association.
Brett R. Carter, Nashville, Tennessee, and Eric S. Tresh and Zachary T. Atkins, Atlanta, Georgia, for the Amicus Curiae, Tennessee Cable Telecommunications Association, Inc.
W. NEAL MCBRAYER, J., delivered the opinion of the Court, in which FRANK G. CLEMENT, JR., P.J., M.S., and ANDY D. BENNETT, J., joined.
W. NEAL McBRAYER, JUDGE.
Plaintiffs contend that the sales tax law unconstitutionally discriminates against satellite television providers. The law taxes the entire subscription fee billed to satellite customers while the first $15 of the subscription fee billed to cable customers is exempt. On cross-motions for summary judgment, the trial court found the sales tax law violated the Commerce Clause of the United States Constitution. The Commissioner of Revenue appeals. Because we find that satellite providers and cable providers are not similarly situated for purposes of the Commerce Clause, we reverse.
I. Facts and Procedural History
Plaintiffs DIRECTV, Inc. (" DIRECTV" ) and EchoStar Satellite Corporation, now known as DISH Network L.L.C. (" DISH" ), provide direct-to-home satellite television service. Satellite providers DIRECTV and DISH compete for subscribers with cable providers. The competitors are similar in several respects. Satellite providers, like cable providers, secure television programming by negotiating with programmers to obtain the rights to distribute programming content. Both use retailers, websites, and call centers to sell their programming packages to customers. Both provide their subscribers with equipment that receives and converts programming signals into content that can be viewed at the subscriber's home and rely upon technicians to install and service the home equipment. Both satellite providers and cable providers offer an array of programming packages for which they bill their subscribers monthly.
The major satellite providers and major cable providers are interstate enterprises. DIRECTV is a California corporation headquartered in El Segundo, California, and DISH is a Nevada corporation headquartered in Englewood, Colorado. Major cable providers include Delaware corporation Time Warner Cable, which is headquartered in New York, New York; Pennsylvania corporation Comcast, which is headquartered in Philadelphia, Pennsylvania;  and Delaware corporation Charter Communications, which is headquartered
in Stamford, Connecticut.
A. Program Assembly and Delivery by Satellite and Cable Providers
Although satellite and cable providers have similarities, the manner in which they assemble and deliver programming to customers is very different. The different approaches to assembly and delivery of programming result in differing infrastructure requirements. Satellite providers collect and assemble program signals at uplink facilities located outside of the State. Each of the facilities has its own farm of satellite dishes, studio equipment, and staff of trained employees. From the uplink facilities, the satellite providers digitize, process, and compress the program signals; convert them into radio frequencies; and transmit them to their satellites. The two largest uplink facilities used by DIRECTV are located in Colorado and California. DISH's two largest uplink facilities are located in Wyoming and Arizona.
Satellites in geostationary orbits above the Earth receive the signals from the uplink facilities. From the satellites, the programming signals are beamed back down to Earth directly to customers. The customers receive the signals by means of a receiving dish mounted on or near their homes.
In contrast to satellite providers, cable providers collect and assemble program signals at distribution points called " headends." Over eighty headends are located in Tennessee. The typical headend is a building surrounded by several large satellite dishes. The satellite dishes collect programming signals and then direct them to receivers located within the headend building. Employees then modulate the signals and insert local programming and advertising.
From the headends, signals travel through underground " trunk" lines and then are distributed through " hubs" and/or " nodes" into " feeder" or distribution lines. Hubs and nodes are physical buildings or cabinet devices that are installed in each neighborhood. The program signals reach customers from " drop lines," which are connected to small boxes along the distribution lines or " taps." The signal can be viewed on any television connected to a cable set-top box.
The different approaches to program assembly and distribution, besides demanding different levels of in-state infrastructure, produce differing in-state economic impacts. Cable providers have invested over $1 billion to build, service, and maintain their in-state distribution system of headend buildings and miles of cable. They also employ over 4,000 Tennessee residents, many in connection with the assembly and distribution of programming.
DIRECTV and DISH, on the other hand, either directly or through affiliates, lease space in Tennessee to provide office support for installation technicians and storage of installation-related equipment. They also lease space in Tennessee for the collection of local television signals for rebroadcast to their subscribers. DIRECTV has an ownership interest in an office building in Tullahoma, Tennessee. As of 2010, DIRECTV had 493 Tennessee employees. At the same point in time, DISH had no Tennessee employees, but an affiliated company employed 239 Tennesseans to perform installation services.
B. Taxation of Satellite and Cable Subscription Fees
Historically, Tennessee has taxed cable and satellite services differently. In 1984,
the Legislature enacted Public Chapter 13, which imposed an amusement tax on cable television subscription charges in excess of " those charges made for the basic or lowest rate charged by the supplier of such services." 1984 Tenn. Pub. Acts 75-76 (ch. 13 § 1). After initially determining such services were not subject to sales or use tax, starting in 1994, the Department of Revenue began taxing satellite as a telecommunications service. See HBO Direct, Inc. v. Johnson, No. 01A01-9804-CH-00221, 1999 WL 452317, at *3 (Tenn. Ct.App. July 1, 1999). By 1998, the amusement tax rate and the tax rate for telecommunications services were the same, but customers of satellite providers did not enjoy an exemption for basic service.
In 1999, Tennessee removed cable services from the amusement category and began treating subscription fees charged by cable and satellite providers as a taxable privilege, subject to sales tax. 1999 Tenn. Pub. Acts 1030-32 (ch. 423). The Legislature created a three-tiered taxing structure for cable television services and a single-tiered taxing structure for satellite services. Id. For cable services, rather than exempting " the basic or lowest rate charged" by the cable provider, the State exempted charges or fees less than $15.00. Id. The State taxed cable services of $15.00 or more, but not exceeding $27.50, at the rate of 8.25%. Id. Cable charges or fees in excess of $27.50 were subject to the state tax rate of 6% plus a local option tax of up to 2.75%. Id. For satellite services, the State taxed subscription fees at the rate of 8.25% with no exemption. Id.
The three-tiered taxing structure for cable television services and the single-tiered taxing structure for satellite services have remained in effect until the present, except the state tax rate for cable charges or fees in excess of $27.50 is now 7% plus a local option tax. Tenn. Code Ann. § § 67-6-103(f), -202(a), -226, -227, -714 (2013). Cable customers continue to receive an exemption from the sales tax on the first $15.00 of monthly charges, while satellite customers do not. Id. § § 67-6-103(f), -226, -227.
C. Proceedings Below
In August 2003, DIRECTV and DISH filed a complaint against the Commissioner of Revenue seeking a refund of sales and use taxes paid since January 1, 2002. DIRECTV and DISH alleged that the sales tax on satellite television services violated the Commerce Clause and the Equal Protection Clause of the United States Constitution, as well as the equal protection guarantee of the Tennessee Constitution.
The parties filed cross-motions for summary judgment. Following a hearing, the trial court entered an order granting DIRECTV's and DISH's motion for summary judgment and denying the Commissioner's motion. The trial court concluded that the exemption on the first $15.00 of monthly charges granted to cable--but not satellite--customers, violated the dormant or negative Commerce Clause of the United States Constitution. According to the court, the undisputed ...