Amicus Curiae Brief — Leathers v. Medlock

PILED |

nov 5 OR

2 — F. SPANIOL, K.

In THE

Supreme Court of the United States

OCTOBER TERM, 1990

JAMES C. PLEDGER, COMMISSIONER OF

REVENUES OF ARKANSAS, et al.,

Petitioners

DANIEL L. MEDLOCK, et al.,

Respondents

DANIEL L. MEDLOCK, et al.,

Petitioners,

JAMES C. PLEDGER, COMMISSIONER OF

REVENUES OF ARKANSAS, et al.,

Respondents.

On Writ of Certiorari to the

Supreme Court of Arkansas

BRIEF AMICUS CURIAE OF THE

CALIFORNIA CABLE TELEVISION ASSOCIATION

IN SUPPORT OF DANIEL L. MEDLOCK, et al.

SPENCER R. KAITZ

President

ALAN J. GARDNER

Vice President

Regulatory & Legal Affairs

CARRINGTON F. PHILLIP

Assistant General Counsel

JEFFREY SINSHEIMER

Director of Regulatory Affairs

CALIFORNIA CABLE TELEVISION

ASSOCIATION

4341 Piedmont Avenue

P.O. Box 11080

Oakland, California 94611

(415) 428-2225

November 15, 1990

FRANK W. LLoyp, III *

DIANE B. BURSTEIN

CAROLINE O. ROBERTS

MINTZ, LEVIN, COHN,

FERRIS, GLOVSKY &

PopEo, P. C.

1825 Eye Street, N. W.

Suite 1200

Washington, D.C. 20006

(202) 293-0500

Counsel for Amicus Curiae

California Cable

Television Association

* Counsel of Record

WILSON - EPpes PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

TABLE OF CONTENTS

STATEMENT OF INTEREST OF AMICUS

I. CALIFORNIA CABLE TELEVISION SYS-

TEM OPERATORS ENGAGE IN SPEECH

ACTIVITIES PROTECTED BY THE FIRST

A. Editorial Discretion Exercised By Califor-

B. State and Local Programming Produced Or

Transmitted By California Cable Operators..

1. CAL-SPAN: California’s Public Affairs

4. Public, Educational and Governmental

Access .................. .

II. CALIFORNIA CABLE OPERATORS ARE

BEING SUBJECTED TO DISCRIMINATORY

E —

A. Cable Television Systems Are Being Valued

County Are Being Taxed In A Discrimina-

tory Manner Based On The Assessor’s Opin-

ion That The Cost Of Cable Television Is

C. Utility User Taxes Are Also Being Applied

In A Discriminatory Manner To California

CONCLUSION

ii

TABLE OF AUTHORITIES

CASES:

Arkansas Writers’ Project, Inc. v. Ragland, 481

U.S. 221 (1987)

Century Communications Corp. v. FCC, 885 F.2d

2 Cir. 1987), cert. denied, 486 U.S. 1082

City of Los Angeles v. Preferred Communications,

476 U.S. 488 (1986) *

City of New York v. FCC, 486 U.S. 57 (1988)

County of Stanislaus v. Assessment Appeals

Board, 218 Cal. App. 3d 1445, 262 Cal. Rptr.

489 (1989)

Cox Cable of San Diego, Inc. v. County of San

We ieee

FCC 5 Midwest Video Corp., 440 U.S. 689

(1979

Minneapolis Star and Tribune Co. v. Minnesota

Commissioner of Revenue, 460 U.S. 575 (1983)

Pacific Telephone and Telegraph Company v. City

and County of San Francisco, 197 Cal. App. 2d

188, 17 Cal. Rptr. 687 (1961)

Quincey Cable TV, Inc. v. FCC, 768 F.2d 1434

— as 1985), cert. denied, 476 U.S. 1169

Rancho Santa Margarita Cablevision v. Jacobs,

Case No. X-625669, Orange County Superior

Court (filed July 20, 1990 and refiled October

81, 1990) :

Sacramento Cable Television v. City of Sacra-

mento, No. 510433, Sacramento Superior Court

(December 28, 1989), appeal docketed, No. 3

CIVIL C008872 (Ct. of App., 8d Dist., filed Feb.

20, 1990)

The Applications of American Television and

Communications Corporation for Change in

1987, 1988 and 1989 Assessments (Assessments

Appeals Board No. 1 of the County of Orange,

Nov. 2, 1990)

—

11

11

18

14. 15

19

15

iii

TABLE OF AUTHORITIES—Continued

CONSTITUTIONAL PROVISIONS, STATUTES

AND REGULATIONS: Page

United States Constitution, First Amendment passim

United States Constitution, Article 6, Clause 2 18

Cable Communications Policy Act of 1984, 47

U.S.C. $621 et . pe ek hae passim

r 18

F cesnsemenonnnnnaes 10

r cesemnatons 17

F LE 18

Cal. Pub. Util. Code

e 18

r 18

§ 6281 (West 1965 and Supp. 1990⸗ 18

Cal. Rev. & Tax. Code § 107.7 (West Supp. 1990) 11

Oroville, Cal., Code art. VII, §§ 24-127 to 143 19

Pasadena, Cal., Municipal Code Ordinances

88 4.56.080, 4.56.040, 4.56.050, 4.56.060 and

eren 19

OTHER:

enen 4

Declaration of Judd C. Ostrom in Opposition to

Defendant’s Demurrer, Rancho Santa Marga-

rita Cablevision v. Jacobs, Case No. X-625669,

Orange County Superior Court (filed Ju/y 20,

RSE RRS SPE OS 14

The Kagan Census of Cable and Pay TV (1989) — 9,12

Los Angeles Times, May 22, 1999h0 15

Multichannel News, Nov. 5, 199hh

Supreme Court Rule 87.332222 1

Television & Cable Factbook (1990 ed.) 4,9

1984 U.S. Code Cong. & Admin. News 4668 i)

In THE

Supreme Court of the United States

OCTOBER TERM, 1990

No. 90-29

JAMES C. PLEDGER, COMMISSIONER OF

REVENUES OF ARKANSAS, et al.,

* Petitioners

DANIEL L. MEDLOCK, et al.,

Respondents

No. 90-38

DANIEL L. MEDLOCK, et al.,

9 Petitioners,

JAMES C. PLEDGER, COMMISSIONER OF

BRIEF AMICUS CURIAE OF THE

CALIFORNIA CABLE TELEVISION ASSOCIATION

IN SUPPORT OF DANIEL L. MEDLOCK, et al.

STATEMENT OF INTEREST OF AMICUS CURIAE

The California Cable Television Association (“CCTA”)

submits this brief as amicus curiae in support of Daniel

L. Medlock, Community Communications Company and

the Arkansas Cable Television Association.“

CCTA is a trade association representing cable tele-

vision system operators that provide cable television serv-

1 Consistent with Sup. Ct. R. 37.3, both parties have given CCTA

their consent to the filing of this brief.

of

rently the subject of litigation in the California state

courts. CCTA has filed amicus briefs in California pro-

— involving discriminatory taxation of its mem-

CCTA is also a central clearinghouse for information

SUMMARY OF ARGUMENT

In order to decide this case, the Court need 18 decide

all of the questions as to cable television’s First Amend-

ment status left open in its 1986 Preferred decision.

2 City of Los Angeles v. Preferred Communications, 476 U.S.

488 (1986). In a concurring opinion, Justice Blackmun, joined by

Justices Marshall and O’Connor, noted: “Different communications

media are treated differently for First Amendment purposes,”

and that, with respect to cable television, the Court aad yet to

have a factual record to determine whether the characteristics of

cable television “make it sufficiently analogous to another medium

to warrant application of an already existing standard or whether

the characteristics require a new analysis.” Id. at 496. News-

papers, magazines, and cable television are analogous in that they

are either purchased directly or by subscription by their readers or

viewers, and unlike television and radio, are not subject to spectrum

scarcity.

For the purposes of this case, the Court need only find

that cable television is a medium engaged in expressive

activities of the type the First Amendment was designed

to protect, that it is subject to discriminatory taxation,

and that the discriminatory treatment of cable television

in the particular instance before the Court has no basis

in a valid governmental purpose other than the mere

raising of revenue.

CCTA contends that, based on the experience of cable

operators in California, precisely the same vices of poten-

tial speech restraint that were present in the Minneapolis

Star and Arkansas Writers’ Project* cases are inherent

in the discriminatory taxation of cable television. The

Court should therefore hold the principles articulated in

these cases to be fully applicable to discriminatory taxes

against cable television.

ARGUMENT

I. CALIFORNIA CABLE TELEVISION SYSTEM OP-

ERATORS ENGAGE IN SPEECH ACTIVITIES

PROTECTED BY THE FIRST AMENDMENT

While this Court has not yet delineated the precise

limits of the First Amendment protections extended to

cable television, it is clear that cable operator’ exercise

“a significant amount of editorial discretion regarding

what their programming will inelude.“ Operators of

cable television systems in California engage in three

types of speech activities over their cable television fa-

cilities: (1) as originators of expression, (2) as dis-

tributors of the expression of others, and (3) as facilita-

tors for access users. In all of these roles the cable sys-

Minneapolis Star and Tribune Co. v. Minnesota Commissioner

of Revenue, 460 U.S. 575 (1983).

Arkansas Writers’ Project, Inc. v. Ragland, 481 U.S. 221

(1987).

5 FCC v. Midwest Video Corp., 440 U.S. 689, 707 (1979).

broadeast signals, choosing among the three major net-

work affiliates, Fox affiliates and other commercial inde-

pendents, and public television stations in the local area.*

California cable operators also decide whether to import

broadcast signals that cannot be received over the air

with ordinary home antenna equipment."

California cable operators also select from among the

more than 100 satellite-delivered program networks

created specifically for the cable industry.* Nearly all of

the over 5 million California cable subscribers have ac-

cess to twenty-four hour news from CNN and coverage

of the United States Senate and House of Representa-

tives from C-SPAN as part of their basic cable package.“

* Since the 1985 D.C. Circuit decision striking down the FCC’s

former local broadcast signal “must-carry” rules, these editorial

decisions are solely those of the cable operator. See Quincy Cable

TV, Inc. v. FCC, 768 F.2d 1434 (D.C. Cir. 1985), cert. denied, 476

U.S. 1169 (1986); Century Communications Corp. v. FCC, 835

F.2d 292 (D.C. Cir. 1987), cert. denied, 486 U.S. 1032 (1988).

™These signals, such as superstations“ WTBS, Atlanta, or

WGN, Chicago, are brought into the cable operator’s service area

either by microwave or by satellite.

8 See Television & Cable Factbook at C-1 (1990 ed.) (10 pay, 70

basic, and 27 sports network programming services available to

cable systems.) See also Cablevision, June 18, 1990, at 84.

(Twenty-four satellite-fed services have been announced for intro-

duction over next 24 months.)

Two other national networks planning to cover legal affairs

and the courts will also soon be available to California operators.

c

5

A cable television system operator's selection of pro-

gramming involves a classic editorial function protected

by the First Amendment. The fact that the expression

may in some cases be originated by another party does

not remove the First Amendment protection that these

editorial decisions usually enjoy. The Los Angeles Times

or San Francisco Chronicle is not considered entitled to

less First Amendment protection when it publishes an

article as reported by the Associated Press, or the opinion

of a syndicated columnist. A broadcaster is no less pro-

tected when it selects network or syndicated program-

ming.

Selection of Cable News Network, Black Entertainment

Television, or The Disney Channel and rejection of an-

other service competing for limited channel space reflect

conscious editorial choices by cable operators. Cable opera-

tors carefuliy review the program networks they carry

and, over time, some are dropped and others added based,

in part, on their content. Seldom do two cable systems in

California select precisely the same programs to offer to

the public.

R State and Local Programming Produced Or Trans-

mitted By California Cable Operators

California cable television system operators also pro-

duce their own programming and facilitate cablecasting

through public, educational and governmental access

channels. In addition, there are a number of state and

regional networks unique to California. Much of this

programming concerns public affairs. Sometimes cable

television is the only source of such local information and

opinion. To tax an entity creating and distributing this

programming in a manner different from competing

media, such as newspapers and magazines, without a

nexus to a purpose other than the raising of revenue, not

only creates a chilling effect on highly valued program-

ming, but also impermissively places the government in

the position of handicapping competition in the market-

place of ideas.

6

1. CAL-SPAN: California’s Public Affuirs Network

In August, 1990, a state version of C-SPAN, “CAL-

SPAN,” distributed live and taped sessions of the Cali-

fornia legislature, its committees 2d subcommittees to

over 2 million California cable subscribers. This test gave

California citizens their first video access to the state

legislature.

In future months, CAL-SPAN plans to transmit live

and taped coverage of both the California Assembly and

Senate to homes, schools, and businesses throughout the

state. In addition, CAL-SPAN plans to cover proceedings

of regulatory boards, executive branch commissions and

departments, state supreme court oral arguments, and

press conferences. It also plans to disseminate news and

analysis.

Even before a regular feed of CAL-SPAN has begun,

California cable system operators with over 2 million

subscribers have made written commitments to carry

CAL-SPAN programming. In many cases, their ability

to meet this commitment depends upon their financial

ability to upgrade their cable systems in order to create

adequate channel capacity to add the CAL-SPAN service

to their current full menu of programming.

2. Regional California News Networks

California cable operators also carry unique regional

news networks. For example, in September 1990, Orange

County NewsChannel began 24 hour televised local news,

sports, public affairs and cultural events coverage of

Orange County, California, where most over the air news

comes from television stations that focus on neighboring

Los Angeles County.“ NewsChannel is being operated

by Freedom Newspaper Corporation, which owns the

Orange County Register, a local newspaper. Newspaper

% NewsChannel is currently distributed to almost 200,000 of the

450,000 cable subscribers in Orange County.

7 a

staff are helping to write and produce the programming

for this channel.“

Several California cable operators in conjunction with

local broadcasters or newspapers are providing four and

one-half minute local news and public affairs inserts each

half-hour to Turner Broadcasting’s “Local Edition“ in its

national CNN Headline News cable service.“

3. Local Origination Programming

Local origination refers to cablecasts produced by the

cable system operator. Usually, the cable system opera-

tor hires a staff producer and constructs its own studio.

In some California communities, cable local origination

is highly developed, with daily newscasts that rival local

broadcasters’ newscasts “ and with depth of coverage that

goes well beyond a “Metro” section of the local news-

paper. Yet, as shown infra, property taxation of these

media is very different in California.

As Orange County continues to develop a separate

identity from Los Angeles, cable local origination has be-

come the most logical way to serve the television news

needs of the community.“ California cable operators pro-

11 Telecommunications, Inc., a California cable operator, is plan-

ning a similarly unique loca] news service for Contra Costa County

in the San Francisco Bay Area.

12 Over 500,000 subscribers receive local news in this fashion in

San Diego, over 250,000 in Orange County, and over 150,000 in

San Jose.

18 Cable operators also program local advertising spots for local

and national products and services, including paid political adver-

tisements. These may be run on local programming or inserted into

national cable program services. This distribution of commercial

speech is also a form of expressive activity.

14“Dimension Forum”, produced by Times Mirror Cable Tele-

vision in Orange County, in its third year of production, is a 30

minute weekly public affairs cablecast that features interviews with

local officials, community leaders and candidates for local elections.

Other local programs include live and tape-delay cablecasts of city

vide essential additional services by covering poli-

tical affairs even where broadcasters have regular local

news and public affairs programming, such as Los An-

geles or San Francisco.”

other debates on community concerns.

M.L. Media Partners/Multivision, an Anaheim cable operator,

provides “Newsline 3,” d daily local news program covering hard

news as well as political issues. It also produces debates and fea-

tures on politically sensitive issues such as Orange County’s pro-

posal to locate a large jail in Anaheim.

1

:

!

3

-*

43

candidates for state treasurer to al! California cable systems. Cen-

tury recently carried an exclusive interview with Vice President

Quayle. Multichannel News, Nov. 5, 1990 at 16.

9

California operators air views critical of local govern-

ment officials on their local origination channels. In fact,

one Orange County system has editorialized on its local

origination channel against discriminatory property taxes

levied against it and other cable television operators.“

4. Public, Educational and Governmental Access

The most common form of access programming offered

by California cable operators is on one or more channels

offered on a first come, first served basis for any member

of the public to use.“ Almost two-thirds of California

cable operators also make access channels available to

local governments for coverage of public, government,

and business activities and to local schools for educa-

tional programming.” These channels provide an outlet

for local public expression.”

programming and facilitate public access programming. Viacom 6

has three regular half-hour shows: “Viewpoint,” an interview

show, features public officials; “City Desk,” a live round table discus-

sion, features journalists discussing San Francisco news and

events; “Helping Hands,” a public health show, with a particular

emphasis on AIDS. Monthly shows and specials on the arts, poli-

tics, neighborhood viewpoints and earthquake safety have also been

produced.

17 See infra pp. 13-17.

18 Cable operators do not play an entirely passive role in the

presentation of access programming. Often the public can use the

cable systems’ studios to produce programs subsequently carried

on the access channels. In addition, many operators provide equip-

ment and training to community and educational groups to facili-

tate their use of the video medium.

19 The Kagan Census of Cable and Pay TV at 25-49 (Dec. 1989);

Television and Cable Factbook at A108-A179 (1990 ed.)

2 The provision of access channels furthers a congressionally-

articulated goal of diversity of expression inherent in the First

Amendment. See legislative history of the Cable Communications

Policy Act of 1984, Pub. L. No. 98-544 (“Cable Act”), 1984 U.S.

Code Cong. & Admin. News, 4655, 4668. The Cable Act also re-

quires designation of a certain number of a cable operator’s chan-

10

II. CALIFORNIA CABLE OPERATORS ARE BEING

SUBJECTED TO DISCRIMINATORY TAXATION

Under California law, the intangible assets of a cable

television operator are not taxable. Nonetheless, county

assessors have been attempting to levy property taxes on

cable television operators based upon assessments that

directly subject the cable operators’ intangible assets to

taxation. This has resulted in facially discriminatory

taxation where other First Amendment speakers or

non-speech businesses are not taxed by the same methodol-

ogy. Moreover, Orange County cable operators have been

singled out for discriminatory tax treatment because of

their status as disfavored members of the media and in

retaliation for the Assessor’s opinion that the cost of cable

programming is excessive. California cable television

operators are also subject to discriminatory utility user

taxes.

A. Cable Television Systems Are Being Valued For

Property Taxation Purposes Differently Than Other

Competing Media

Under California law, property taxes are levied an-

nually on each taxpayer’s real and tangible personal

property. Intangible assets are exempt from property

taxation.” In 1986, the California Court of Appeals held

nels for commercial use by “persons unaffiliated with the operator.”

47 U.S.C. 5 532 (b) (Supp. 1990). California operators with 36 or

more activated channels must designate from 10 to 15 percent of

their channels not otherwise required for use for leased access.

Asian, Hispanic, Black and other ethnically-oriented programmers,

as well as real estate and other businesses seeking direct access

to the public. have leased space from California cable operators.

21 Cable television systems are stated not to be subject to ad

valorem property taxes on the value of their intangible assets or

rights, including without limitation: “franchises or licenses to

construct, operate, and maintain a cable television system for a

specified franchise term (excepting therefrom that portion of the

franchise or license which grants the possessory interest), sub-

scribers, marketing, and programming contracts, non-real prop-

11

that a cable operator's right to use the publie rights of

way constituted a taxable possessory interest. The opin-

ion failed to provide guidance on how to value this unique

property right. As a result, many of California’s 58

county assessors began to take widely divergent positions

on how to value the possessory interest.

In 1988 the California Legislature »assed A.B. 3234

in an effort to bring about uniformity and certainty in

assessments of possessory interests of cable television oper-

ators in the wake of the Cox decision.* The legislature’s

action was necessary because vertain California cable

operators had been singled wut for differential treatment

for property tax purposes.

Unfortunately, despite the legislation and a California

court decision that specifically held that a cable com-

pany’s right to do business is protected by the First

Amendment and not subject to property taxation,” some

erty lease agreements, management and operating systems, a work

force in place, going concern ,value, deferred, start up, or pre-

maturity costs, covenants not to compete, and good will.” Cal. Rev.

& Tax. Code § 107.7(d) (West Supp. 1990).

22 Cox Cable of San Diego, Inc. v. County of San Diego, 185 Cal.

App. 3d 368, 229 Cal. Rptr. 839 (1986).

28 At least twelve California counties have taken a discriminatory

approach to taxing cable television systems over the last several

years. Appeals of these decisions are pending in several California

courts.

2 Cal. Rev. & Tax. Code § 107.7 (a) (West Supp. 1990). Pursu-

ant to that statute, an assessor may value the possessory interest

using any acceptable statutory method. However, “the preferred

method of valuation of cable television possessory interest is capi-

talizing the annual rent, using an appropriate capitalization rate.”

Id. at § 107.7 (b) (1). This method avoids the taxation of nontax-

able intangible assets. Jd. at § 107.7(d).

25 County of Stanislaus v. Assessment Appeals Board, 213 Cal.

App. 3d 1445, 1454, 262 Cal. Rptr. 489 (1989) (“The levying of

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ing effect upon the operators’ expressive activities. More-

over, it impairs their ability to provide existing or future

programming, including local origination and access pro-

Other media businesses or similarly-situated businesses

radio stations, television stations and motion picture

theaters are bought and sold on the basis of cash flow

when they change hands, very much like cable, they are

not treated like cable television by the assessors. Unlike

cable television system operators, their substantial in-

tangible assets are not assessed.

ad valorem taxes on Post-Newsweek’s right to do business as a

cable operator would be unique to nonutility taxpayers in Cali-

fornia.” )

The Kagan Census of Cable and Pay TV at 49 (Dec. 1989)

(average basic rate in California of $16.70 per month).

13

A January, 1990 study by Kagan Media Appraisals,

Ine. provided startling findings of discrimination.” In

eleven of twelve counties, on average over a three-year

period, non- cable media properties were being assessed at

only about 25 percent of sales price while cable television

systems were being assessed at an average of 131 percent

of sales price. Broadcast properties were assessed at an

average of 19 percent of sales price and newspapers at

an average of 35 percent of sales price.

The inescapable conclusion is that cable television op-

erators in many California counties are being taxed on

the value of a cable business’ substantial intangible assets,

while other media, including television, radio and news-

papers, are not. No California taxing authority has ar-

ticulated a valid governmental objective for treating

cable television differently from other speech media with

which it competes, and none exists.

B. Cable Television Operators In Orange County Are

Being Taxed In A Discriminatory Manner Based

On The Assessor’s Opinion That The Cost Of Cable

Television Is Excessive

One of the most important concerns of this Court in

its prior decisions on differential taxation of media speak-

ers has been the potential for such taxes to be used for

censorial purposes. Such a purpose is overtly present in

the property taxation of cable operators in Orange County.

Prior to 1989, the Orange County Assessor’s Office as-

sessed a cable television company’s taxable, tangible prop.

erty by determining original cost and the year of ac-

quisition and then depreciating this taxable property to

determine its present value in light of its remaining use-

* Relevant portions of this study are appended to this brief.

Kagan Media Appraisals, Inc. (“KMA”) w Carmel, California

based company specializing in the valuation of broadcast, cable

television, and other media and enteriainment businesses. Over

the past 17 years KMA personnel have appraised nearly $17 billion

of media properties. This KMA study was commissioned by CCTA.

. m w ům . ˙¹wA m

14

ful life. The identical assessment method w

|

Orange County is 16% of estimated fair market value,

and the assessed value of other media businesses besides

cable is 28% of their estimated fair market value. In

stark contrast, the assessed value of cable television

tems was 168% of their estimated fair market value.

The situation in Orange County has led to a virtual

state of siege between the local cable operators and the

county Assessor. Some cable companies were forced to

Under this method, a cable television system’s tangible prop-

condition and the remaining useful life of a system’s tangible

property. For one company, American Cablesystems of California,

this resulted in an annual increase in property taxes from 1988 to

1989 of 371%.

Declaration of Judd C. Ostrom of Kagan Media Appraisals,

Inc. in Opposition to Defendant’s Demurrer, Rancho Santa Mar-

garita Cablevision v. Jacobs, et al., Case No. X-625669, Orange

County Superior Court (filed July 20, 1990), at 5-6.

=>

-

As a result of these complaints, the Assessor lashed out.

He accused “Big Cable” of “violating campaign reform

laws by lying to residents and using a monopoly to gouge

customers with inflated rates, and filed meritless com-

The Assessor’s own statements make clear that the

Orange County cable operators are being taxed differently

because they are disfavored members of the media. More-

over, the Assessor has publicly expressed his opinion that

the ccst of cable television service is excessive.”

% Notably, in the first of these appeals, the Assessment Appeals

Board specifically rejected the Assessor’s unitary method because it

tions Corporation for Change in 1987, 1988 and 1989 Assessments

(Assessment Appeals Board No. 1 of the County of Orange, Nov.

2, 1990).

* “Assessor Says Cable TV Firms Lie, Gouge“, Los Angeles

Times, May 22, 1990 at B4. (See Appendix).

82 Each of the affected Orange County cable operators filed Sec-

tion 1983 civil rights actions in state court alleging violations of

the First Amendment, Fourteenth Amendment, Commerce Clause

and the Cable Act to enjoin their discriminatory assessments and

to obtain damages from the Assessor and Orange County. Rancho

Santa Margarita Cablevision v. Jacobs, et al., supra n.29 (refiled

Oct. 31, 1990). :

16

Such punitive taxation poses a danger to fundamental

liberties that the First Amendment was intended to pro-

tect. The Assessor’s judgment as to the value of cable

television programming is implicitly a judgment as to

its content. His attack on the cost of cable television is,

however indirect, content-based.

The cable operators in Orange County have a legitimate

basis to fear further retaliation by the Assessor should

they either continue to object to discriminatory taxation,

or choose to carry programming critical of the Assessor

or his policies, or select programming he does not like, or

price their product in a way he feels is inappropriate.

This environment can have a chilling effect on cable tele-

vision system operators’ speech and may encourage self-

censorship.

Application of the unitary method burdens the Orange

County operators’ ability to provide existing or future

programming. Ceble operators continue to seek to im-

prove the quality as well as the quantity of their pro-

gramming. To the extent that their disposable income

must be committed to the payment of dramatically in-

creased taxes, this restricts their future ability to pur-

chase any additional programming without passing that

expense on to subscribers. California cable operators

caught in this web of discriminatory taxation will also be

forced to allocate less funds to local origination and access

programming, including the political speech most highly

valued by our Constitution.

Discriminatory taxation of cable television system op-

erators in California has had and will have other signifi-

cant negative impacts on cable speech. The dramatically

increased tax burden has reduced operators’ cash flow and

operating margins, thereby eliminating, deferring or re-

ducing their ability to upgrade or improve equipment,

facilities, programming or services or to adopt new

technology.

17

Increases in taxes on cable television systems has re-

and will require those systems to increase the

rates that they charge subscribers to defray additional

expenses. Because of increased prices for cable services,

the pace of new subscriptions has dropped, and the number

of subscribers disconnecting their cable service, or choos-

ing to drop one or more pay services, is up. Increased

prices caused by new discriminatory tax assessments have

thus adversely affected subscriber retention as well as

acquisition, providing cable operators with less net

revenues.

To the extent that the financial burden of discrimina-

tory taxation defers or delays system upgrades, increases

in system channel capacity that allow for more viewer

choice will be retarded.- This diminishes the possibility that

such new channels as CAL-SPAN or the Orange County

News-Channel will be carried. No other California First

Amendment speakers are burdened by taxation in such a

manner that reduces both the quantity of speech and

diversity of expression.

C. Utility User Taxes Are Also Being Applied In A

Discriminatory Manner To California Cable Opera-

tors

Utility user taxes are imposed on customers of Cali-

fornia utilities, as well as on users of cable television.™

These taxes are collected by the cable operator or utility

and appear on the user’s monthly bill.

Utility user taxes as applied to cable ‘television custom-

ers in California range from a low of three percent to a

high of ten percent. In general, these taxes are equal to

those taxes applied to users of gas, electric, water, and

telephone utilities.

This apparent consistency is deceiving since cable tele-

vision companies are burdened by franchise fees on top of

The Cable Act makes it clear that cable is not a utility. 47

U.S.C. § 541(c) (Supp. 1990).

18

utility user taxes. No California city can by law charge

a franchise fee for telephone utilities.“ Water, gas and

electric utilities are limited to a two percent maximum

franchise fee (except for charter cities). Thus the total

local tax burden on cable television operators, adding

franchise fees and utility user taxes, is far greater than

on gas, electric, water, and telephone utilities.“ And, no

other First Amendment speakers are burdened by such

taxation.

Moreover, in certain localities, gas, electric, water, and

telephone utilities are charged a significantly lower utility

user’s tax than cable television operators. In Oroville,

California, for example, cable television viewers are sub-

ject to a five percent utility users’ tax. While telephone

and water customers pay the same tax, customers of

gas and electric utilities have a $150 exemption per month.

Thus, while most residential purchasers of gas and elec-

trical services pay no taxes on their monthly bills, cable

34 Cf. Pacific Telephone and Telegraph Co. v. City and County of

San Francisco, 197 Cal. App.2d 133, 17 Cal. Rptr. 687 (1961).

8 Cal. Pub. Util. Code §§ 6006, 6205, 6231 (West 1965 and Supp.

1990).

% Discriminatory taxation of cable ope tors by taxes not of

genera! application also violates the Cal Act to the extent that

such taxation, when added to franc)’ se fees, rises to a level of more

than five percent of a system operu er's gross revenues. 47 U.S.C.

§542(b) (Supp. 1990). The Cable Act preempts state law to the

extent state action violates its purposes. City of New York v. FCC,

486 U.S. 57 (1988). The Cable Act’s basic purpose in placing limi-

tations on state actions is to “promote competition in cable com-

munications and minimize unnecessary regulation that would im-

pose an undue economic burden on cable systems.” 47 U.S.C.

§521(6) (Supp. 1990). Congress apparently believed that fran-

chise fees of above five percent would impose an undue economic

burden on cable operators. Discriminatory taxation in any form—

sales tax, utility user tax, or property tax—of such a magnitude is

unconstitutional under the Supremacy Clause. U.S. Const. art.

6, el. 2.

19

television users are subject to a five percent tax on their

total bill.“

Discrimination with respect to the utility user’s tax is

even greater in Pasadena, California. There, cable tele-

vision subscribers pay a utility user tax of 8.92 percent as

compared to a utility user tax on water and electricity

customers of 7 percent, gas of 7.58 percent, and telephone

of 7.86 percent.“ Thus Pasadena cable subscribers pay

over one percent higher utility user taxes than purchasers

of any other service.

Since these taxes appear on cable company bills, they

add to the total perceived cost of cable service, and deter

customers from subscribing to cable service. Thus utility

user taxes inhibit the dissemination by cable operators of

speech as surely as a direct tax on cable operator revenues.

A Sacramento, California cable operator has sued the

city with respect to its utility user tax on the basis that

it is unconstitutional under the First Amendment. In

granting the city’s motion for summary judgment the city

tax was upheld as constitutional,“ but the case is now on

appeal.“ Thus the question of the constitutionality of dis-

criminatory utility user taxes placed on cable television

users is pending in the California courts and could be

affected by this Court’s decision.

* Oroville, Cal., Code art. VII, §§ 24-127 to 143. (Exémptions

appear at g 24-131.1).

Pasadena, Cal. Ordinances 4.56.030 (telephone tax), 4.56.040

(electricity), 4.56.050 (gas), 4.56.060 (water), 4.56.070 (cable tele-

vision).

% Sacramento Cable Television v. City of Sacramento, Case No.

510433, Sacramento Superior Court (December 28, 1989).

Id., Case No. 3 CIVIL C008372 (Ct. of App. 3d Dist., filed

Feb. 20, 1990).

—

- 20

- CONCLUSION

The cumulative effect of these discriminatory assess-

ment and taxation policies in California is oppressive. In

some markets, the combination of a cable operator’s fran-

chise fee of five percent of gross revenues, property tax-

ation under diseriminatory valuation of intangibles, and

a utility user’s tax at a higher rate of up to 10 percent

creates a tax burden of up to 25 percent of gross revenues

per month. This means that almost 25 percent of each

cable subscriber’s monthly bill, or a quarter of a system

operator’s gross revenues, must be dedicated to taxation,

much of which is imposed on a discriminatory basis

against cable operators.

At the same time, many of cable’s competitors in the

electronic media, such as over the air broadcasters, satel-

lite master antenna systems, microwave distribution sys-

tems, or direct broadcast satellites, and its competitors

in the print media, such as newspapers and magazines,

pay no franchise fee, no utility user tax, and are not sub-

ject to the same discrimination in property taxation. This

has a direct and immediate adverse impact on the First

Amendment rights of cable operators and subscribers.

CCTA has demonstrated that the dangers inherent in

discriminatory taxation of communications media extend

beyond print. California represents an area where dis-

criminatory taxation of cable television has been used for

the very purpose this Court has feared. CCTA therefore

urges the Court to find that the dangers of discriminatory

taxation are equally applicable to cable television and to

indicate clearly in its decision that any form of discrim-

inatory taxation of cable television unsupported by a valid

governmental purpose other than the raising of revenue is

unconstitutional.

SPENCER R. KAITz

President

ALAN J. GARDNER

Vice President

Regulatory & Legal Affairs

Director of Regulatory Affairs

CALIFORNIA CABLE TELEVISION

ASSOCIATION

4341 Piedmont Avenue

P.O. Box 11080

Oakiand, California 94611

(415) 428-2225

November 15, 1990

21

Respectfully submitted,

FRANK W. LLoyp, III *

1825 Eye Street, N.W.

Suite 1200

Washington, D.C. 20006

(202) 293-0500

Counsel for Amicus Curiae

California Cable

Television Association

Counsel of Record

APPENDIX

la

APPENDIX

Tuesday, May 22, 1990 /OC Los Angeles Times

ORANGE COUNTY

ASSESSOR SAYS CABLE TV FIRMS LIE, GOUGE

Assessments: Bradley L. Jacobs lashes back at ‘Big

Cable’ in the face of a TV industry advertising blitz com-

plaining about tax hikes.

By ROSE ELLEN O’CONNOR

Times Staff Writer

SANTA ANA—In the face of a cable industry adver-

tising blitz complaining of higher tax bills, Orange County

Assessor Bradley L. Jacobs lashed back Monday, accusing

“Big Cable” of violating campaign reform laws by lying

to residents and using a monopoly to gouge customers with

inflated rates.

“That monopoly allowed Big Cable to raise prices by

more than 400% since 1983, and it’s about time that the

people got some of that back,” Jacobs said in a press

release.

Jacobs, who is up for reelection in June, has not re-

turned phone calls over the past two weeks and was un-

available for comment Monday.

“The law says that the cable industry has to pay its

fair share of taxes just like everyone else,” the statement

continued, “and I’m going to see that no one gets special

treatment just because they have a lot of money to throw

around.”

Incensed by tax assessments that have climbed by as

much as 400% in a single year, the industry spent $50,000

2a

on full-page newspaper advertisements earlier this month

urging county residents to complain to Jacobs and the

Board of Supervisors. The cable companies have also sent

out 800,000 notices to businesses and residents informing

them that their cable rates either already have—or soon

will—increase as a result of the bigger tax bills. Similar

warnings have aired on cable channels.

In addition, the industry has hired a public relations -

consultant to handle its war against Jacobs. Consultant

Harvey Englander angrily dismissed Jacob’s counter-

attack Monday.

“Brad Jacobs is a damn liar,” Englander said, denying

that cable company profits have risen as much as Jacobs

asserts. “Let’s see him prove it,” Englander said.

Englander also dismissed Jacobs’ charges that a rich

and powerful cable industry is trying to place unfair

political pressure on him.

“T read it. I just finished laughing,” Englander said

of Jacobs’ campaign press release. “Nowhere anywhere

have we talked about his being up for reelection or urged

anyone to vote for him or against him.. . What Mr.

Jacobs is doing is trying to hide behind the political re-

form act to get around free speech.”

Cable operators have threatened to sue the county over

the assessments. And two weeks ago, industry representa-

tives met privately with county supervisors and urged

them to weigh the cost of such a legal battle before agree-

ing to provide money for Jacobs’ defense.

At issue is a method of computing a cable company’s

property taxes, which was first used by the Orange County

tax assessor’s office last fall. Under this method, the

assessor considers the value of a cable company’s exclusive

franchise and other intangibles in computing the value of

its property and so-called possessory interest. This refers

to the value of the public easements the company has been

granted to lay cables under roads and other public land.

8a

FIELD STUDY REPORT

THE TAXATION OF MEDIA PROPERTY

INTANGIBLES

PREPARED BY:

KAGAN MEDIA APPRAISALS, INC.

January 31, 1990

4a 5a

FINDINGS FINDINGS (Continued)

Of the 33 documented sales of cable TV systems, radio TABLE 1

and television stations and daily newspapers transacted AV

in the subject counties in 1986, 1987 and 1988, sufficient ian jai 2 —

2 ceeds a ok tetas edo —_ — N (BP) v Ca¥) . —

and 12 non- cable media properties. The information is 3 $(000) 8000) (000)

American Cbleys. 9/87 6,785.0 14.713.1 217% (7,928.1)

Comcast Cable 6/86 $49,186.0 $90,3033 184% $(41,117.3)

Continental Cablwsn. 10/86 12,227.9 17,928.33 147% (5,700.4)

Post Newsweek Cable 1/86 40,000. 0 52,700.00 132% (12,700.0)

Cable 7/87 899.8 1,159.4 129% (259.6)

Cablven. 10/86 15,772.1 19,765.7 125% (3,993.6)

Falcon Telecable 7/87 6,995.9 8,061.5 115% (1,065.6)

Jones Intercable 10/87 17,424.0 19,431.9 112% (2,007.9)

Premiere Cable 3/88 675.0 719.2 107% (44.2)

Jones Intercable 2/88 19,000.0 19,707.0 104% (707.0)

Multivision Cable 12/86 59,9420 59,1704 99% 771.6

Calvideo Cable 8/88 11,478.5 11,387.99 99% 90.6

Totals $240,386.3 $315,047.88 131% $(74,661.5)

Straight Averages $20,0382.2 $26,254.00 131% $(6,221.8)

Non-Cable Media Properties 9

Daily Pilot 8/88 810,000. 0 7,461.3 75% 32.538. 7

KNTI-FM 11/88 415.0 287.2 69% 127.8

KOBO-AM 10/88 880.0 135.6 386% 244.4

Daily Transcript 1987 2,750.0 735.6 27% 2014.4

Press Tribune 1/89 19,000.0 3,980.0 21% 15,020.0

KPLA-AM 11/87 1,100.0 213.8 19% 886.2

Vista Press 1/87 6,317.0 11904 19% 5,126.6

KWTR-AM/KXBX-"M 5/88 1,350.0 226.9 17% 1,123.1

KWIZ- 2/88 6,250.0 702.9 11% 5,547.1

KPGA-FM/KVEC-AM 3/88 1,500.0 60.9 4% 1,439.1

KCST-TV 10/87 275,000.0 9,751.5 4% 265,248.5

KWSP-FM 12/88 1,260.0 15.4 1% 1,244.6

Totals $325,322.0 $24,761.5 8% $300,560.5

Straight Averages $27,110.2 $2,063.5 25% $25,046.7

Avg. Exclu. KCST- TV $4,574.7 $1,3645 27% $3,210.2

FINDINGS (Continued)

This comparison clearly shows a wide disparity in

assessment. The cable properties were assessed at an

average of 131% of sales price, while the non-cable prop-

erties were assessed at an average of only 25%.

Among the non-cable properties, broadcast properties

were assessed at an average of 19% of sales price while

for newspapers the assessment to sales price ratio aver-

aged 35%. The relatively higher assessment for news-

papers is expected given the higher investment in plant,

property and equipment required to operate such business

versus broadcast properties which often lease facilities

and require comparatively minimal investment in operat-

ing equipment.

As Table 2 shows, the pattern is also consistent among

the counties.

7a

CONCLUSIONS

The findings of this study of actual assessments over

a three-year period support the following conclusions

regarding assessment practice in the 10 subject counties:

1. Cable systems are, as a rule, being assessed on the

basis of full enterprise value;

2. Since intangibles constitute a substantial portion

of cable system value, cable intangibles are being

assessed for property tax purposes;

3. Other comparable media properties, specifically,

radio and television stations and daily news-

papers are not being assessed at full enterprise

value;

4. Since intangibles constitute the largest single class

of statutory exemptions, it is reasonable to con-

clude that the intangibles of comparable media

properties are not being assessed ;

5. Cable system owners are not being treated equally

for property tax purposes with other comparable

media business, in general, or with other First

Amendment speakers.