BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 530 HEARING: 5/11/11
AUTHOR: Wright FISCAL: Yes
VERSION: 3/23/11 TAX LEVY: Yes
CONSULTANT: Miller
DIRECT BROADCAST SATELLITE TELEVISION SERVICE TAX.
Imposes a tax on direct broadcast satellite television
service providers at the rate of 6% of gross revenues.
Background and Existing Law
Under existing law, there is no state-imposed tax or fee on
the satellite service subscriptions or the monthly charges
billed in connection with the provision of direct broadcast
satellite television service to subscribers or customers.
In general, direct broadcast satellite television service
providers (DBS service providers) either pay a sales tax or
collect the use tax associated with the monthly rental or
lease of the satellite receiver by the subscriber for use
in the subscriber's home or business location.
Under existing law, cable service in California is subject
to direct local taxation based on the rationale that they
use public rights-of-way and are granted a local monopoly.
Cable service is regulated by the federal government and
the State of California and is subject to a regulatory fee
levied by the FCC. In California, two principal fees and
charges are levied on cable television connections.
1. Franchise fees are paid to local governments by
privately-owned cable companies for the privilege of
using local government property and rights-of-way.
Federal law prohibits franchise fees from exceeding 5
percent of gross revenues, while state law also limits
franchise fees to a percentage of gross revenues.
State and federal law also prevents companies from
providing cable services without acquiring a
franchise. California has delegated to cities and
counties the franchising authority over cable
companies, whose fee payments represent a general fund
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revenue source.
2. Utility-user taxes (UUTs) are gross proceeds taxes
levied by some local governments on cable television
services and other utilities, such as telephone, gas,
and electric services. UUT rates generally range from
5 percent to 7 percent and represent a general fund
revenue source for local governments.
Proposed Law
Senate Bill 530 imposes an excise tax on direct broadcast
satellite television service providers in an amount equal
to 6 percent of their gross revenues. The revenues from
the proposed tax would be deposited into the Local Safety
and Protection Account established in the Transportation
Tax Fund.
The bill provides the following definitions:
"Direct broadcast satellite television service" and
"DBS service" would mean any television programming
transmitted or broadcasted by satellite directly to
the subscriber's premises.
"DBS service provider" or "DBS provider" would mean
any person that sells DBS service.
"Subscriber" would mean any person, firm,
partnership, corporation, limited liability company,
or other entity paying to receive video service in
this state.
In addition, the bill defines "gross revenues" to mean all
revenue of the DBS service provider, as determined in
accordance with generally accepted accounting principles
derived from the sale of DBS service in this state.
Revenues included
All charges billed to subscribers in this state for
any and all DBS service, including all revenue related
to programming provided to the subscriber, equipment
rentals, late fees, and insufficient fund fees.
SB 530 -- 3/23/11 -- Page 3
Compensation received by the DBS service provider
such as commissions paid to the DBS service provider
as compensation for promotion or exhibition of any
products or services on the provider's network, such
as "home shopping" or similar channel.
A pro rata portion of all revenue derived by the
DBS service provider or its affiliates pursuant to
compensation arrangements for advertising derived from
DBS service in this state. The allocation shall be
based on the number of subscribers in this state
divided by the total number of subscribers in relation
to the relevant regional or national compensation
arrangement.
Revenues not included
Amounts not actually received, by the DBS service
provider, even if billed, such as bad debt; refunds,
rebates, or discounts to subscribers or other third
parties.
Revenues received by any affiliate or any other
person in exchange for supplying goods or services
used by DBS service provider to provide DBS services.
Revenue derived from services other than DBS
service such as internet access service,
telecommunications services, and information services.
Revenues paid by subscribers to "home shopping" or
similar networks directly from the sale of merchandise
through any home shopping channel offered as part of
the DBS services.
Revenues from the sale of DBS services for resale
in which the seller is required to collect the tax
under this part from the reseller's subscribers.
Amounts billed to, and collected from, subscribers
to recover any tax, fee, or surcharge imposed by any
governmental entity on the DBS service provider such
as utility user's taxes, public service taxes,
SB 530 -- 3/23/11 -- Page 4
communication taxes, and any other fee not imposed by
this section.
Revenue from the sale of capital assets or surplus
equipment not used by the purchaser to receive DBS
services from the seller of those assets or surplus
equipment.
Revenue from directory or internet advertising
revenue, including, but not limited to, yellow pages,
white pages, banner advertisement, and electronic
publishing.
Revenue received as reimbursement by programmers of
specific, identifiable marketing costs incurred by the
DBS service provider for the introduction of new
programming.
Security deposits received from subscribers of a
DBS service provider, excluding security deposits
applied to the outstanding balance of a subscriber's
account and thereby taking into revenue.
Bundled services
In the case where the DBS service is bundled with
other products or services, so that a subscriber pays
a single fee for more than one service or receives a
discount on DBS services, gross revenues will be
determined based on an equal allocation of the package
discount, that is, the total price of the individual
service at advertised rates compared to the package
price, among all services comprising the bundle. If
the DBS service provider does not offer any component
of the bundled package separately, the DBS service
provider will declare a stated retail value for each
component based on reasonable comparable prices for
the service for the purpose of determining the tax
based on the package discount.
SB 530 -- 3/23/11 -- Page 5
General
The bill specifies that the tax would be collected and
administered by the Board of Equalization (BOE) in
accordance with the Fee Collections Procedure Law.
The act is an urgency statute but would not become
operative until the first day of the first calendar quarter
commencing more than 90 days after the effective date of
the act.
State Revenue Impact
The BOE estimates the following revenue impact for imposing
a 6% tax on DBS service providers
2011-12 (1/2 year implemenation): $96 million
2012-13: $196.2 million
2013-14: $200 million
Comments
1. Purpose of the bill . This bill is intended to create a
funding source to protect vital public safety programs by
imposing a tax on satellite. According the author, the
Telecommunications Act of 1996 exempted DBS service from
local taxes and fees in an effort to relieve DBS service
providers of the administrative burden of filing with over
6,000 local jurisdictions. At that time, the DBS industry
was a nascent competitor to cable in the video delivery
market and Congress wanted to minimize barriers to market
for the industry. They did, however, empower states to
impose taxes and fees on the DBS industry. Nine states
have imposed this tax. DBS providers use the same type of
video programming as cable and other providers such as
phone companies but do not pay any of the $530 million
annual franchise fee. Since the DBS industry has now
achieved the level of competitive parity intended under the
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act, and the tax and fee disparity between DBS, Cable and
other video service providers should be eliminated. The
imposition of a 6% tax on DBS providers would not only
create equity pursuant to the federal law but also provide
vital funding for this state.
2. Calling a tie or picking a winner? SB 530 is intended
to create a fair and equitable taxing structure for DBS
service providers partially because the current tax
structure has not protected the revenue base of the
evolving video service market and also because the
Telecommunications Act of 1996 assumed that states would
eventually tax satellite TV. The cable providers are
required to pay a franchise fee to local governments; the
fee is based on a percentage of the franchise holder's
gross revenues, with "gross revenues" defined in terms
almost identical to those used in this bill. The cable
industry was instrumental in defining the definitions both
for their franchise fee and this bill. Does it make sense
to impose the identical tax on the satellite industry even
though they have an entirely different business model? The
Committee may wish to consider whether this bill is
creating an equitable taxing structure or if it is taxing
one industry to support another.
3. The Commerce Clause. SB 530's findings and
declarations state that Congress anticipated that the
Legislature would enact a state DBS tax framework when it
passed the Telecommunications Act of 1996, which prohibits
locally imposed and administered taxes and fees on
satellite services but allows for state taxes. However,
the Satellite Broadcasting and Communications Association
(SBCA), argues that SB 530's tax violates the commerce
clause of the U.S. Constitution because satellite taxes
discriminate against their industry. Satellite providers
have challenged taxes imposed in several states, arguing
that franchise fees paid by cable companies are not the
same as taxes, so applying a tax to satellite that doesn't
apply to cable is discriminatory. In these cases, DBS
providers state that the franchise fee is paid to a local
government as a rent for property right, such as the right
to lay cables and use the public right-of-way.
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In, DIRECTV, Inc. v. �Levin], 2009-Ohio-636, the court
disagreed with the satellite industry, stating that the tax
complied with the Commerce clause stating: "The sales tax
imposed by Ohio on satellite television providers and not
upon cable television providers does not violate the
dormant Commerce Clause. The clause protects interstate
commerce and the interstate market for products, but does
not protect "the particular structure or methods of
operation in the retail market," Exxon Corp., 437 U.S. at
127." The court stated "the Commerce Clause is not
violated when the differential tax treatment of two
categories of companies 'results solely from differences
between the nature of their businesses, not from the
location of their activities.' " Kraft Gen. Foods v. Iowa
Dept. of Revenue & Finance (1992), 505 U.S. 71, 78, 112
S.Ct. 2365, 2369, quoting Amerada Hess, 490 U.S. at 66. As
the North Carolina court noted, "neither satellite
companies nor cable companies are properly characterized as
an in-state or out-of-state economic interest," based upon
their physical presence and corporate organization in Ohio
and other states." The Committee may wish to consider
whether this tax is in fact discriminatory as the satellite
industry claims, or implements federal law as the author
posits.
4. With this bill, I make you a promise. This bill
promises not only to raise revenue for the state and
protect public safety services but also to bring more
equity to the tax system by taxing cable and satellite in a
similar fashion. The Committee may wish to consider
performance measures to see if there is a new technology
that compromises the equitable tax system and also a sunset
to study the efficacy of the new tax. In addition, the
Committee may wish to consider a seven year sunset on this
bill to reevaluate the tax in 2019.
5. Cost of performance & market rule. With the new
technologies that provide video such as Apple TV, Google
TV, Hulu and other streaming video, is SB 530 an attempt to
catch up too late? The author argues that government by
definition always trails technology and that these
platforms, while delivered over cable, are headquartered
outside the state to avoid tax. The author argues that
these platforms function on advertising revenue that are
substantially different to the argument in this bill. The
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Committee has considered the issue of Cost of Performance
versus the Market Rule for allocating the sales of services
like cable for the corporate income tax; specifically,
should the corporate tax occur where most of the cable
company made investments in the past (cost of performance),
or where it sells its service (market rule). California
would have adopted a market rule for all industries under
SBx3 (Calderon, 2009)/ABx3 15 (Krekorian, 2009), but last
year's SB 858 (Committee on Budget) applied it only for
firms electing to apportion income using only the sales
factor. The Governor proposes to adopt the market rule as
part of his Budget Proposal, repealing SB 858's change. If
modernization is the issue, the committee may wish to
consider changing the state's approach to sourcing services
for income tax purposes to tax all video transmissions
equitably by including these new Internet platforms by
imposing a mandatory market rule for all providers.
6. What do you mean? SB 530 lacks definitions in many
areas and the BOE notes various concerns with SB 530 that
would make it extremely difficult to implement. For
example:
"Gross revenues" is defined for cable as it is for
satellite even though satellite may have a different
model. Should the satellite industry be instructive
in this definition?
The bill requires the DBS service providers to
self-report certain bundled services. The BOE would
not be able to audit such figures. Should the
satellite industry be required to provide industry
data and averages for purposes of these charges?
The definition of revenues includes commissions.
Does this definition include royalties? What if the
advertising structure for DBS service providers is
different than those for cable?
What are "identifiable marketing costs?" This is a
vague term that has no meaning under current law.
Advertising revenues are not clearly defined.
Would these include yellow pages, banner advertising
and electronic publishing?
The pro rata portion of advertising is pegged to
the number of subscribers in this state divided by the
total number of subscribers. It seems necessary to
require providers to report revenues for prior time
periods as the basis for future reporting for BOE to
audit the data.
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The definition of gross revenues depends on the
generally accepted accounting principles but that
depends on which state the DBS service provider is
located.
The Committee may wish to consider directing the author to
work with the BOEto define the terms in accordance with the
DBS service provider business model and also so that the
bill can be effectively implemented by the BOE.
7. Have we met before? Three bills over the last several
years have been introduced that were also related to direct
broadcast satellite television service.
SB 1849 (Comm. on Budget & Fiscal Review, 2002)
would have imposed a tax on each subscriber of DBS
service in this state at a rate of 5% of the total
gross charges incurred by the subscriber. This budget
trailer bill died on the Senate unfinished business
file.
AB 1016 (Ridley-Thomas, 2005) contianed legislative
intent language to impose a tax on DBS service
providers in an amount equal to 8% of the amount the
provider charges its customers for monthly service.
This bill died at the Assembly desk.
SB 354 (Wright, 2009) required the BOE to study the
impact of new video and voice alternatives, including
DBS services, on local tax and fee revenues and report
its findings to the Legislature. This bill was not
heard in a policy or fiscal committee.
Support and Opposition (5/5/11)
Support : Peace Officers Research Association of
California; California Taxpayer Reform Association.
Opposition : Direct TV; DISH Network; Satellite
Broadcasting and Communications Association.