Did Florida Gov. Jeb Bush open Pandora's Box on the Direct Broadcast Satellite (DBS) industry when he signed his state's new telecommunications sales tax into law this month?
For Florida Sen. Jim Horne, R-Orange Park, introducing the new legislative bill that suddenly began taxing satellite-delivered content was just another way of evening the percentages of taxation among the various in-state subscription TV operators.
Thus, at the end of the day, Horne wished to have Florida subscribers pay the same basic taxes for cable as they would for wireless or for satellite-delivered content. The form of the allegedly uniform tax was to be a monthly fee of about 13 percent levied on all consumers' subscription TV bills.
Yet, for the U.S. satellite industry, and its closely allied consumer electronics adjunct, the fallout could be huge. This is because the new taxes will not only put new pressure on satellite sales, because of perceived increases in consumers' programming costs, but it may also open the floodgates to many — if not most — state legislatures across the country seeking to raise new funds.
So what happened?
In the past, the industry, largely through its lead trade association, the Satellite Broadcasting & Communications Association (SBCA), has had the budget to contact and lobby legislators in a state. This time around, that industry support apparently was not available, at least in the voice of Gov. Bush's office. A representative from that office said, "The satellite folks were notified. But no one was there."
A substantial bipartisan majority in both houses passed Florida State Communications Services Tax Bill No. 1878. It is scheduled for implementation beginning Oct. 1.
The bill allows for state taxation of just over 13 percent, added to every monthly service bill sent to satellite subscribers in Florida. Thus, for a $50 per month satellite TV bill, the new tax will add a bit more than $6.50 a month, for a total bill of about $56.50.
On an annual basis, that levies an additional $78 per Florida subscriber (estimated to number 750,000) on each DBS service provider, and accounts for an additional $58.5 million in new annual tax revenue to the state.
These costs are expected to be passed along to actual satellite customers, and will make future sales of satellite services and products that much more challenging.
Interestingly, although federal law (1996 Telecommunications Act) preempts local laws in the local taxation of satellite services, there is no similar prohibition against state-based taxes. In this instance, the result is the same, however, because the state plans to have almost a third of the total new tax funneled directly to local governments.
Breaking down the total 13.1 percent tax on DBS service providers, the governor's office reports 10.8 percent is state tax coupled with 2.36 percent in "gross receipts tax." Paring down the "state tax" portion further shows 6.8 percent of a Florida subscriber's bill actually goes to the state, while 4 percent will be distributed by the state to local municipalities.
In comparison, the state's tax rate to cable operators is a flat 6.8 percent, but cable operators say they must pay an additional 4.9 percent to 5.1 percent in taxes to local municipalities, unless those governing boards already assess cable permit fees.
By calling the satellite portion of the tax a "state tax" — even though such a large percentage of the total new tax and total sums raised will be distributed to the local authorities — the state of Florida avoided the federal DBS tax preemption (and presumably the intent of the U.S. Congress).
On this basis alone, lawsuits challenging the new law seem inevitable. Another possible ground of challenge, as cited in the SBCA's weekly report, suggests a "violation of federal law because the new tax rates apparently differ between satellite and cable (irrespective of what is paid to the localities)."
In the past, the SBCA and its supporters have been able to win battles in key states, such as Maryland, Virginia, Delaware and Pennsylvania.
This was in significant part because the SBCA's lobbyists and attorneys got in early and persuasively argued that there is little connection between a satellite-delivered signal, which involves no local infrastructure other than electricity, and the cable-delivered signal, which involves substantial use of local telephone wires, buildings, underground conduits, etc.
If and when the new tax, like most cost hikes, is passed on to the consumer, the satellite industry will be faced with having to make a tougher pitch to new customers. Further, DBS providers will find that increased rates make it harder to hold on to the subscribers they have, relative to satellite's competitors.
Yet the real damage may be years away, when hundreds of millions of dollars a year are collected from satellite consumers by states that see DBS as just another form of subscription TV. Based on a projected 20 million nationwide DBS subscriber base — which The Carmel Group estimates the U.S. DBS industry will achieve in 2002 — a tax like Florida's could add approximately $1.12 billion a year to state (and indirectly, local) coffers in by the end of next year.
This, in turn, will seriously impact DBS's ability to continue to battle the entrenched monopoly that was – and often still is – cable.
All of this raises the thought: Is it time for the U.S. Congress to again step in and clarify its intent vis-a-vis the 1996 Telecommunications Act?
Is it time for the Congress to enact another bill, which would prohibit states from taxing subscription TV services that have no ties to local communities and that do not hinder or draw from local services or infrastructure in any real way?
Otherwise, states like Florida will continue to circumvent the original protective intent of the U.S. Congress, which tried to keep local authorities out of the business of taxing satellite services, by simply calling the DBS taxes "state," as they funnel the proceeds to local municipalities.
Is it time for satellite retailers to take back some of the ground that has been surreptitiously taken from them via Florida Bill No. 1878? More important, is it time for the DBS industry and the CE industry to pay more attention and resources to support the SBCA in its lobbying activities?
Jimmy Schaeffler is a consumer electronics analyst at The Carmel Group (www.carmelgroup.com) , a publisher and consultancy based in Carmel-by-the-Sea, CA. The company, which publishes the DBS Investor newsletter, specializes in telecommunications, computers and the media. He can be reached by email at: email@example.com or by phone at: 831-643 2222.