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DBS Tax Sticks

A federal appeals court has rejected an attempt by DirecTV and Echostar to overturn a state tax in North Carolina.

The direct-broadcast satellite providers took their case to the U.S. District Court of Appeal for the Fourth Circuit, seeking to reverse the ruling of U.S. District Court Judge Louise Flanigan. The DBS companies argue that the 7% state sales tax, levied in 2006, on both satellite and terrestrial cable providers, is a violation of the Commerce Clause of the U.S. Constitution.

In 2005, the North Carolina legislature levied a tax on both providers, initially as a gross receipts tax. The state gave cable operators a 5% credit for the franchise fees they pay. The end result was 7% from each technology.

That year, the DBS companies filed their suit against the state’s tax collector, E. Norris Tolson, challenging the tax computation. But in 2006, North Carolina changed the tax, eliminating the 5% franchise fee (and credit) and charged a 7% state sales tax against all providers, instead.

The DBS providers amended their suit, arguing the 2006 tax scheme is still unfair, for now cable operators get the benefit of the use of public rights-of-way without paying for it directly. The tax scheme forces satellite providers to subsidize that free use, attorneys argued.

But the appeals court panel agreed with the lower federal court judge, who dismissed the suit. The federal courts can’t enjoin states from levying taxes, both courts said, adding that DirecTV and EchoStar have not been injured in fact.

The satellite video providers have aggressively fought state taxes, filing lawsuits in the last decade against North Carolina, Kentucky, Tennessee, Ohio and Florida. They had no better luck in the U.S. Court of Appeal for the Sixth Circuit, which upheld the Kentucky tax scheme last September. Kentucky charges a 3% excise and 2.4% gross revenues tax, and the appeals panel ruled that model is not unconstitutional, either.