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Ohio Law Imposing Sales Tax on Satellite TV But Not on Cable Does Not Violate U.S. Commerce Clause

5-2 Decision Authored by Justice O’Donnell

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2009-0627.  DIRECTV, Inc. v. Levin, Slip Opinion No. 2010-Ohio-6279.
Franklin App. No. 08AP-32, 181 Ohio App.3d 92, 2009-Ohio-636.  Judgment of the court of appeals affirmed.
Lundberg Stratton, O'Connor, O'Donnell, Lanzinger, and Cupp, JJ., concur.
Brown, C.J., and Pfeifer, J., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2010/2010-Ohio-6279.pdf

Video clip View oral argument video of this case.

(Dec. 27, 2010) The Supreme Court of Ohio today rejected a constitutional challenge to an Ohio law that imposes state sales tax on pay TV services that are transmitted directly to a satellite receiver at the consumer’s location, but does not impose sales tax on competing pay TV services that are delivered to consumers via cable.

Stating the holding of the Court, Justice Terrence O’Donnell wrote: “The enactment of a sales tax by the Ohio General Assembly on satellite broadcasting services but not on cable broadcasting services does not violate the Commerce Clause of the United States Constitution, because the tax is based on differences between the nature of those businesses, not the location of their activities, and it does not favor in-state interests at the expense of out-of-state interests.”

The 5-2 decision turned back a challenge to the law by the satellite television companies and upheld a decision by the 10th District Court of Appeals.

As part of a 2003 overhaul of Ohio’s tax statutes, the General Assembly enacted legislation imposing state sales tax on satellite television services, i.e., on retail pay television service that is provided to subscribers by companies that transmit programming directly from earth-orbiting satellites to roof-top or set-top receivers located at their subscribers’ homes or businesses. The legislation did not extend the sales tax to pay television services that transmit programming to subscribers by means of coaxial or fiber-optic cable that is buried underground or strung along telephone wires.

The two largest providers of satellite television service in Ohio and across the country, DIRECTV and EchoStar, filed suit against the state tax commissioner in the Franklin County Court of Common Pleas seeking a declaratory judgment that the portion of the tax legislation imposing sales tax on satellite television service but not on cable television service in Ohio was unconstitutional under the Commerce Clause of the U.S. Constitution. Their complaint asserted that the state’s unequal tax treatment of competing businesses provided a commercial advantage to cable companies that employ thousands of Ohio residents and own billions of dollars worth of commercial property in Ohio, and disadvantage the satellite companies, which are headquartered in other states and have very little physical presence in Ohio.

The trial court granted partial summary judgment in favor of the satellite companies, holding that although there was no deliberate intent to give in-state businesses an advantage over interstate competitors, the practical effect of the unequal tax was to impede the free flow of interstate commerce in violation of the Commerce Clause.  The state and the satellite companies each appealed portions of the trial court’s judgment that were unfavorable to them.

On review, the 10th District Court of Appeals reversed the trial court, holding that imposition of state sales tax on satellite TV services but not on cable TV services was not contrary to the Commerce Clause because both the satellite companies and the cable TV companies serving Ohio are business entities headquartered outside of Ohio that have facilities located both within and outside the state − and therefore both sets of providers are entities engaged in interstate commerce. The court of appeals held further that the Ohio legislature’s decision to impose sales tax on satellite TV service but not on cable service was not unconstitutionally discriminatory because it was based on the different nature of the companies’ business activities, not on the physical location of their facilities. The satellite companies sought and were granted Supreme Court review of the 10th District’s decision.

In today’s decision, Justice O’Donnell concluded: “The Ohio General Assembly imposed a sales tax that makes no distinction between local and interstate commerce, but rather distinguishes based on the mode of distributing television programming.”

In addition to the constitutional issue involving the Commerce Clause, the Court also ruled that the satellite companies were not permitted to raise a challenge to a decision by the lower court granting summary judgment in favor of the tax commissioner on a claim of intentional discrimination, because they failed to raise the issue in their initial brief or memorandum in support of jurisdiction.

Justice O’Donnell’s opinion was joined by Justices Evelyn Lundberg Stratton, Maureen O’Connor, Judith Ann Lanzinger and Robert R. Cupp.

Chief Justice Eric Brown entered a dissenting opinion that was joined by Justice Paul E. Pfeifer.

Chief Justice Brown recognized that it is in Ohio’s economic interest to favor cable companies that provide local employment and investment over satellite companies that do not provide the same local employment and investment.  However, the Commerce Clause forbids states to discriminate against interstate commerce.  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.  Together, these features place the sales tax well within the prohibition of the dormant Commerce Clause.”

E. Joshua Rosenkranz, 202.506.5000, for DIRECTV, Inc. and EchoStar Satellite LLC.

Lawrence D. Pratt, 614.466.5967, for State Tax Commissioner Richard Levin.