Missouri, where the entire movement to charge streaming companies cable industry-like “franchise fees” started, has shut the door on the gambit with new legislation. 

Republican Gov. Mike Parson on Tuesday signed into a law a bill that would restrict Missouri municipalities from charging companies ranging from Netflix to DirecTV — anyone who streams video — the kind of right-of-way charges cable companies are typically dinged for by digging trenches and attaching wires to power lines. 

Missouri became the 14th state to make that restriction, following Arizona, Arkansas, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Nevada, Ohio, Oklahoma, South Carolina and Tennessee. 

In order to establish their physical infrastructure, cable companies have to pay franchise fees to municipalities. And, in 2018, Creve Coeur, Missouri sued Netflix and Hulu, demanding the companies pay similar tribute. 

Also read: Netflix, Hulu, Disney Sued Again Over Cable Franchise Fees

However, as noted by Americans for Tax Reform (ATR), a conservative group founded by Grover Norquist: “Streamers use the internet to reach homes. This means they either use wireless, satellites, or existing cable connections to deliver content to homes and do not alter municipal infrastructure to reach customers.”

Last we checked, many of these same streamers use internet delivered via cable infrastructure. But DirecTV, which operators DirecTV Stream, lauded Missouri's decision. 

“This overwhelming and bipartisan vote by the Missouri legislature, and Governor Parson’s signing it into law, should put to rest any further notion that franchise fees apply to consumers who choose to stream their content," said Hamlin Wade, associate VP of external affairs at DirecTV, who worked on the legislation across each state, in a statement. 

As ATR noted, there are still plenty of local governments that are taxing video services via means other than franchise fees. 

Chicago, for example, imposed a 9% ding on streaming services, calling it an “amusement tax.” And of the 45 states with a general sales tax, 33 include video streaming services in their sales tax base, ATR said. 

These charges are passed on to consumers. In February, Netflix began charging users an additional 5.07% over their usual tier rate to offset state “communications taxes.” 

A Republican state legislator in Missouri has sponsored a bill intended to stop cities and other local jurisdictions from imposing taxes and fees on Netflix and other streaming companies. 

“A ‘Netflix tax’ would raise costs for Missouri families, limit consumer choice, and hinder economic growth,” wrote Rep. Ben Keathley in a Missouri Times op-ed piece, explaining House Bill 2057.

“Franchise fees are a way for cities to recoup costs from traditional video providers, like cable and phone companies, from digging up streets, laying or hanging wires and accessing rights of way,” Keathley added. “It makes no sense to impose franchise fees on streaming. These services are accessed over the internet. Therefore, there is no impact on cities’ infrastructure.”

Claiming he’s familiar with the “bottomless appetite” of local governments for “more revenue,” Keathly also said that his bill has drawn support from a number of “taxpayer advocates,” including Americans for Tax Reform president Grover Norquist.

Silicon Valley streaming companies are getting help from Heartland-situated small-government-focused conservative politicians as they fight state and local taxes on numerous fronts … and in some cases, just give in.

Earlier this week, Netflix sent an email to its subscribers in Florida, informing them they'd have to pay an additional “state communications tax” surcharge, which adds up to 5.07% of their monthly service charge. 

According to online sales tax resource Accurate Tax,  Florida, North Carolina, Pennsylvania and Washington currently tax streaming services under existing state sales-tax laws. And Netflix generally hasn’t pushed back against this method in the same way it has with state and local governments that try to lump streaming in with telecom services. 

But that may be starting to change. 

In late January, Netflix told a state court in Colorado that its services should not be subject to sales taxes. Colorado has been collecting sales taxes on streaming since 2021. Netflix is arguing that the taxes violate federal laws protecting electronic commerce. 

Two dozen Texas cities have sued streaming giants Netflix, Hulu and Disney Direct-to-Consumer for not paying what the municipalities said are the millions in franchise fees that the streaming services owe them. A favorable decision could lead to millions more from other cities seeking more funds for municipal services.

According to one of the cities in the suit, which was filed in Dallas County, the others taking the streamers to court are  Abilene, Allen, Amarillo, Arlington, Austin, Beaumont, Carrollton, Dallas, Denton, Frisco, Fort Worth, Garland, Grand Prairie, Houston, Irving, Lewisville, McKinney, Mesquite, Nacogdoches, Pearland, Plano, Rowlett, Sugar Land, Tyler and Waco.

The cities are alleging that the streamers should be paying annual franchise fees back to 2007, as they said is required by the Public Utility Regulatory Act (PURA). Those are the fees that cable/broadband operators provide that go toward city services.

“With this lawsuit, we hope to ensure streaming video companies’ compliance with their PURA obligations moving forward and also recoup unpaid franchise fees from the Disney, Hulu and Netflix streaming services as follow-on relief,” Rowlett Mayor Blake Margolis said in a statement, pointing out that the fees are a key source of city revenue.

Streaming services may indeed have big pockets, but they argue they are definitely not covered by PURA, which requires video service providers to pay a 5% franchise fee “if a video service’s programming is delivered via wireline facilities located at least in part in the public right of way.”

While a cable/broadband operator does indeed deliver facilities-based programming, streaming services have no facilities, but ride that operator’s facility —and its use of the public right of way — to the home. So, it is the cable/broadband provider that is the one providing the service to customers.

That argument notwithstanding, for its part Rowlett wants reimbursement and interest on fees dating back to 2007 for Disney, 2011 for Hulu and 2019 for Netflix.

“Disney, Hulu and Netflix have long withheld statutorily required payments to cities throughout Texas, depriving them of fees that help fund essential city services,” said suit co-counsel Steven Wolens, principal with law firm McKool Smith. “This case was filed on behalf of our municipal clients to ensure future compliance with PURA and recoup significant fees owed by some of the nation’s largest streaming services.” ■

The streaming business won another court victory in its effort to push back on local municipalities seeking to collect cable franchise fees, with a Los Angeles Superior Court judge ruling against Lancaster, California, and in favor of Netflix and Hulu. 

The Northern Los Angeles high desert town was trying to get the two streaming companies to pay taxes under California‘s Digital Infrastructure and Video Competition Act, which requires “video service providers’ to pay local municipalities 5% of their revenue. 

It‘s California’s version of cable franchise fees — the freight MSOs have paid for decades for the right to burrow cables underground and string them onto poles. 

But “because Netflix‘s and Hulu‘s services are ‘on demand,’ they are not live, linear, channelized, schedulized or programmed,” wrote Los Angeles Superior Court Judge Yvette Palazuelos. Thus, she declared, Netflix and Hulu don't fit the parameters of the 2006 Digital Infrastructure and Video Competition Act. 

Judge Palazuelos‘s ruling was obtained by The Hollywood Reporter, which has closely tracked the efforts of dozens of smaller municipalities across the U.S. to get streaming companies to pay cable franchise fees. 

Earlier this month, a federal judge in Nevada also ruled in favor of Netflix and Hulu in a similar action filed by the City of Reno, declaring that Netflix and Hulu are more than mere "video service providers." 

Ruled Judge Miranda Du: “The individual films and individual television programs Defendants provide are each a piece of their video content library and thus a ‘part of’ a service, and not the ‘entire’ service.’ Plaintiff’s argument suggests the Court read ‘any’ as ‘all’ video content, but that simply is not the statutory language, and the Court declines to read it as so. As such, Plaintiff’s argument that Defendants’ video content is the ‘entire’ and not ‘part of’ the services provided, and therefore not excluded, does not persuade the Court to agree that Defendants are video service providers.”

A federal appeals court has upheld the FCC's conclusion that non-cash exactions from cable operators by franchising authorities are subject to the 5% cap (of gross revenues) on franchise fees.

The FCC voted along party lines back in August 2019 to hold that cable franchising authorities (LFAs) cannot regulate a cable operator's broadband service and that in-kind services or equipment they require those cable operators to provide must count toward the FCC's 5% (of cable revenues) cap on franchise fees charged by the LFAs. It also preempted state or local franchise regs that conflicted with those conclusions and extended its rules to state as well as local franchises. 

Franchising authorities had challenged a 2019 FCC order, with NCTA-The Internet & Television Association, which pushed for the FCC order, weighing in on the side of the FCC.

Read Also: FCC, DOJ, Defend Franchise Fee Decisions

"We reject Petitioners’ challenge to the FCC’s determination that noncash cable-related exactions are franchise fees," said the court in denying franchise authorities' challenge to the FCC's most recent decision about how cable franchises can be regulated.

As an example of one of those non-cash exactions that needed to count toward the fee, the court noted, was "a demand by St. Louis that a cable operator contribute 20 percent of its stock to the city."

The 2019 order concluded that most cable-related non-cash elements of a franchise agreement are franchise fees subject to the cap. The court said the FCC sufficiently explained why it came to that conclusion, as well as why it concluded that franchise authorities can't regulate the non-cable services of cable operations who are not common carriers.

"We agree with the FCC that, under the statutory text and structure, noncash (or 'in-kind') cable-related obligations mandated by the Act are not franchise fees, but noncash cable-related exactions (including I-Net exactions) that the Act merely permits a franchising authority to impose are franchise fees under § 542(g) and thus count toward the five-percent cap."

Read Also: Dems Seek to Re-Regulate Franchise Fees

The court summarily rejected the argument that the FCC decision was arbitrary and capricious. FCC commissioner Brendan Carr, who was among the Republican majority that approved the 2019 order under then chairman Ajit Pai, praised the decision.

“Today’s Sixth Circuit decision is a good win for every American that wants better, faster, and cheaper Internet service,” said Carr. “For too long, franchising authorities needlessly drove up the cost of building and maintaining the infrastructure needed to eliminate the digital divide. As part of a series of steps to accelerate infrastructure builds and increase competition, the Commission in 2019 cracked down on the outlier conduct that had been slowing down these construction projects and raising the costs of Internet service.

"I am grateful that today’s appellate court decision upholds the key reforms that the 2019 FCC majority put in place. Now is the time to double down on those successful infrastructure reforms, which allowed providers to increase speeds, lower consumers’ monthly bills for broadband, and extend their networks to more Americans."

Carr was Pai's point person on a number of infrastructure buildout issues.

The FCC and Department of Justice have told a federal appeals court it should reject challenges to the FCC's decision to count in-kind cable franchise requirements--network capacity, channels, grants, sponsorships, specially created programming, local retail facilities, cash 'contributions,' free advertising" and more--toward its cap on franchise fees and other elements of its 2019 franchise fee deregulation decision. 

Related: Dems Seek to Re-Regulate Franchise Fees 

In a filing with the court Tuesday (Aug. 11) both agencies said that each of the FCC's decisions "was reasonable, reasonably explained, and consistent with [legislative] text, structure, and history. In other words: Nothing to appeal here, move on. 

The FCC voted along party lines back in August 2019 to hold that cable franchising authorities (LFAs) cannot regulate a cable operator's broadband service and that in-kind services or equipment they require those cable operators to provide must count toward the FCC's 5% (of cable revenues) cap on franchise fees charged by the LFAs. It also preempted state or local franchise regs that conflicted with those conclusions and extended its rules to state as well as local franchises. 

FCC chair Ajit Pai said counting in-kind "exactions" from LFAs was necessary "to prevent local authorities from unlawfully evading the 5% statutory cap on franchise fees" via those non-monetary conditions.  

Related: Markey & Co. Ask FCC to Rethink Franchise Fee Item 

Various parties sued over various parts of the decision in various courts, the Third, Sixth and D.C. Circuits, with the case consolidated in the Sixth. 

Cable operators have told the FCC that state and local regulators have not made a case for staying the FCC's decision that in-kind considerations in franchise agreements count toward the statutory on such fees. 

The National League of Cities, United States Conference of Mayors, the National Association of Regional Councils, the National Association of Towns and Townships, and the National Association of Telecommunications Officers and Advisors asked the FCC to stay its Aug. 1 decision that any in-kind services or equipment local cable franchising authorities (LFAs) require cable operators to provide count toward the FCC's 5% (of cable revenues) cap on franchise fees charged by the LFAs.  

There is an exception from the in-kind counting for some, but not all, capital costs of providing public, educational and government (PEG) channels, whose public interest value the FCC said it continues to recognize.  

FCC chair Ajit Pai said counting in-kind "exactions" from LFAs was necessary "to prevent local authorities from unlawfully evading the 5% statutory cap on franchise fees" via those non-monetary conditions.  

In its opposition to the cities' request for a stay, NCTA-The Internet & Television Association told the FCC that the cities' challenge failed the four tests for granting a stay.  

It said they had not shown a likelihood on 1) succeeding on the merits or to make a convincing case the FCC was arbitrary and capricious or that its ruling was unconstitutional; 2) had not shown the LFAs would suffer irreparable harm absent a stay, since they could recover the lost fees if they won; 3) or that a stay would be in the public interest (NCTA says the LFAs "conflate their own interests in maximizing municipal budget revenues with the broader public interest); 4) and did not show that NCTA's members would not be harmed by the stay--NCTA says its members arguably could not recover the added revenue they would be forking over in in-kind contributions not counting toward the cap.  

Some Democrat senators are trying to get the FCC to reverse course on its plan to vote Aug. 1 to count non-monetary considerations in cable franchise agreements toward the 5% cap on franchise fees.

They are concerned that allowing cable companies to assign a monetary value to franchise requirements related to schools, libraries, public safety or PGE (public, educational and government) channels will force localities to choose between PEG and other services, and both might lose out in that choice.

Related: Mayors Unite Against Franchise Fee Reforms

“[PEG] stations connect Americans to their communities, catalyze civic engagement, and keep us up to date on the local issues and activities that affect our lives,” the Senators wrote in a letter to FCC chair Ajit Pai. “Your proposal would force local governments to decide between supporting PEG stations and supporting other important services for critical community institutions like schools and public safety buildings. We strongly urge the Commission to avoid any policy changes that will harm PEG channels and limit needed services to the communities we represent.”

Pai almost certainly has the votes of his Republican majority to require the changes, which cable operators have asked for.

NCTA-the Internet & Television Association, has told the FCC that despite clear direction from Congress, local franchise authorities (LFAs) have been abusing the prices through excessive fees and in-kind "contributions," which include but are not limited to "courtesy equipment, I-Net construction, network capacity, channels, grants, sponsorships, specially created programming, local retail facilities, cash 'contributions,' and free advertising," NCTA has said.

Given the stranded investment of built-out systems, cable providers lack power to refuse the LFA demands, NCTA told the FCC in comments on the proposed reforms.

Signing on to the Markey letter were Sens. Tammy Baldwin (D-Wisc.), Richard Blumenthal (D-Conn.), Tina Smith (D-Minn.), Ben Cardin (D-Md.), Chris Murphy (D-Conn.), Maggie Hassan (D-N.H.), Pat Leahy (D-Vt.), Chris Van Hollen (D-Md.), Elizabeth Warren (D-Mass.), Mazie Hirono (D-Hawaii), Jeanne Shaheen (D-N.H.), Bernie Sanders (I-Vt.), Ron Wyden (D-Ore.), and Amy Klobuchar (D-Minn). 

WASHINGTON — Some powerful minority groups have come to the aid of cable operators looking to get out from under what they say are duplicative franchise fees masquerading as taxes.

The Minority Media, Telecom & Internet Council (MMTC) filed a letter on the issue with the Federal Communications Commission on behalf of a dozen and a half civil-rights organizations.

“Allowing a state to impose its own rights-of-way access fee on top of a 5% franchise fee imposed by the local franchising authority would deplete resources that cable operators could otherwise use for broadband deployment,” NCTA–The Internet & Television Association told the FCC, and the MMTC and company are on the same page.

The FCC is looking at ways to update or revamp how cable franchisees are regulated at the state and local level.

In their letter, the groups told the FCC such “duplicative fees” are a definite threat to closing the digital divide, one of the agency’s prime directives.

The fees, ultimately passed on to consumers, represent a regressive tax “most burdensome to lower-income households that spend a far larger share of their income on broadband than wealthier families.”

The groups did not, but could have, mentioned that the fees can be viewed as regressive in another way. If the added expense discourages some from getting broadband access, they would be denied the price break on some services for online transactions. For example, many states offer discounts for renewing a car registration online.

“In effect, these fees make home broadband access even less affordable for those who can least afford it, and widen the digital divide,” they told the commission.

Being able to charge a right-of-way fee in addition to the franchise fee is obviously a way for states, some cash-strapped, to raise more revenue, but that should not justify the move, they say.

Among those signing on to the letter were the NAACP, the Rainbow/PUSH Coalition, and the National Council of Negro Women.

NCTA-The Internet & Television Association has signaled its patience has been taxed by states it says have found creative ways to extract extra money from their cable providers.

It told the Federal Communications Commission in a filing that states should not be allowed to impose a targeted and duplicative franchise fee masquerading as a general tax.

At the direction of a federal court (the 6th U.S. Circuit Court of Appeals, which remanded the FCC decision in Montgomery County, Maryland, et al.) the FCC is currently looking into how local franchising authorities may, and may not, regulate cable operators.

The cable trade group told the FCC that state governments continue to try and impose a fee for access to rights of way in their franchise areas, which NCTA said “cannot be squared” with the statutory 5% franchise-fee cap. It says the franchise fee is the sole levy that can be charged for access to rights of way in a franchise area, and that states, which vest franchising authority at the local level, should have to live with their decision as to what constitutes the fee.

“Allowing a state to impose its own rights-of-way access fee on top of a 5% franchise fee imposed by the local franchising authority would deplete resources that cable operators could otherwise use for broadband deployment,” NCTA said, playing the “deployment” card that has become a fixture in the capital.

NCTA pointed out that some states — it cited California — try to get around that by “styling” their fees in excess of that 5% as taxes. California styles its tax as one on a cable operator’s “possessory interest” in occupying rights of way, though operators have already paid a local franchise fee for that same right.

NCTA concedes the Cable Act does not define a franchise fee as including a tax of general applicability. It argues, though, that the California fee is a duplicative franchise-fee wolf in “general applicability tax” clothing, and that the Cable Act also makes clear that a franchise fee includes “any tax, fee, or assessment of any kind imposed by a franchising authority or other governmental entity on a cable operator or cable subscriber, or both, solely because of their status as such.”

The NCTA says it flouts statutory interpretation to allow states to evade the 5% cap by calling what is in fact a second franchise fee a tax that nominally applies to other rights-of-way users. It says the valuation of that possessory interest tax is based on cable revenues, which are “inextricably intertwined with the provision of video services,” while the tax is supposed to be levied on the value of the right to be in the rights of way — something the franchise fee has already paid for.