Amicus Curiae Brief — Pledger v. Medlock

Nos. 90-29 Supreme Court, vad

4 FILED @

(Consolidated) aw 5 ie

OCTOBER TERM, 1990

JAMES C. PLEDGER, COMMISSIONER OF REVENUES

OF ARKANSAS,

Petitioner,

V.

DANIEL L. MEDLOCK, et al.,

Respondents,

- and -

DANIEL L. MEDLOCK, et al.,

Petitioners,

V.

JAMES C. PLEDGER, COMMISSIONER OF REVENUES

OF ARKANSAS, et al.,

Respondents.

On Writ Of Certiorari To The

Supreme Court Of Arkansas

BRIEF OF AMICI CURIAE CABLEVISION [INDUSTRIES

CORP., COMCAST CORPORATION, AND COX

COMMUNICATIONS, INC. IN SUPPORT OF PETITIONERS-

RESPONDENTS DANIEL L. MEDLOCK, ET AL.

BRENT N. RUSHFORTH

Counsel of Record

JUDITH A. MATHER

RoBIN H. SANGSTON

Dow, LOHNES & ALBERTSON

1255 Twenty-Third Street, N.W.

Washington, D.C. 20037

(202) 857-2500

Counsel for Amici Curiae

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

i

QUESTION PRESENTED

In Arkansas, a three percent state sales tax is im-

posed on cable television subscriptions. Under the

State’s taxing scheme, newspapers, magazines, and

television and radio broadcasting are not subject to

this tax. The question presented is whether, absent

a compelling State interest, this differential taxation

of cable television violates the guarantees of freedom

of speech and of the press under the First Amend-

ment to the United States Constitution.

TABLE OF CONTENTS

QUESTION PRESENTED . . .. . .

TABLE OF AUTHORTTIES . . . . . .

INTEREST OF AMICI . . . . —

STATEMENT OF THE CASE . . . .

SUMMARY OF THE ARGUMENT .. . .

I.

II.

Cable Television Is Subject to Differential

Taxation Under the Taxing Schemes of Nu-

x

IML

xem

azines Violates the First Amendment to the

Constitution of the United States by Singling

Out Cable Television for Differential

U

A. The Constitutionality of a Tax on Cable

Television Must Be Under the

Minneapolis Star and Arkansas Writers’

Project Principles. . . .. . .

B. Judicial Decisions Applying, — 4 —

Star and Arkansas 1174 Sup-

port Their Application in This Case

C. The Arkansas Sales Tax on Cable Tele-

vision Is Constitutionally Infirm. ............

1. Arkansas Has Singled Out Cable Tel-

evision for Special Tax Treatment.

2. Arkansas Has Failed To Meet Its Bur-

den of n Substantial

Justification for the erential Tax-

ation of Cable Television

CONCLUSION .......... . 8

oo mf w to E:

15

24

27

TABLE OF AUTHORITIES

CASES Page

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

. passim

Buckley v. Valeo, 424 U.S. 1 (1976) . . . . . 24-25

Communications Corp. v. FCC, 835 F.2d

(D.C. Cir. 1987), cert. 1 Of-

fice of Communication of United Church of

Christ v. FCC, 486 U.S. 1032 (1988) ............. 18

C Federal, Inc. v. Palo Alto, 648 F. Su

5 „

1 Communications,

ad Aa 476 488 ( —— passim

Department by Dalya v. — Publishers of

America, Inc., — Fla... 565 So.2d 1304

D 20

Elrod v. Burns, 427 U.S. 347 (1976) . . . 25

Katzenbach v. Morgan, 384 U.S. 641 (1966) .......... 24

McGraw-Hill, Inc. v. State Tax Comm n, 146

371, 541 N.Y.S.2d 252 (1989), aff'd, 75

852 ä 22

Medlock v. Pledger, 301 Ark. 483, 785 S. W. 2d 202

pn Ba granted. U.S. nns

1990), avd cert. granted, U.S. 111

85 . 5,6

— owt” No. 87-2401 (Ch. Ct. Pulaski

Mar. 10, 1989), reproduced in

7 RT SE,

2

r 5

Minneapolis Star & Tribune v. Minnesota Commis-

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

NAACP v. Alabama, 357 U.S. 449 (1958) ............. 25

Oklahoma Broadcasters Ass n v. Oklahoma Tax

Comm n, — Okla.— 789 P.2d 1312

e T 20.21.23

Table of Authorities Continued

Page

incy Cable TV, Inc. v. FCC, 768 F.2d 1434 (D.C.

. 1985), cert. denied sub nom. National Ass'n

Broadcasters v. Quincy Cable TV, Inc., 476

By Fe GRD 8 — 15-16,18

Schad v. Borough of Mount Ephraim, 452 U.S. 61

(1981) 1 — —— 15

Suburban Cable TV Co. v. Commonwealth, 131 Pa.

Commw. 368, 570 A.2d 601 (1990), juris. noted,

Pa. Sup. Ct., Sept. 4, 1990 .. . 10

United States v. Lee, 455 U.S. 252 (198277 25

United States v. O’Brien, 391 U.S. 367 (1968) ...... 5,25

STATUTES

Federal:

Cable Communications Policy Act of 1984,

47 U.S.C. §§ 521, 543 (1988) . . .. 14

State:

Ark. Stat. Ann.:

a 3

ee 3

I TEE TR 4

. 4

Z ae 4

EEE 4

I se 14

Conn. Gen. Stat.:

TT ec TT 10

K 10

OS —— —— 11

222 89— 11

Page

r 11

Fla. Stat. Ann

T ee 8

r ... 9

CT aS Oe 9

Ind. Code Ann.:

. 12

e 13

.... 13

r ee ae 13

Ky. Rev. Stat. Ann

0% 12

.. ˙—er ẽ̃ͤ ee 12

c 12

——— 1 — 11.12

e 11,12

a ee 12

Mich. Comp. Laws Ann

EE 13

EE ae 13

Neb. Rev. Stat.:

. x

. — a 9

e ~

e 9

72 Pa. Cons. Stat. Ann ;

ES 9

Z 9

— — 9

1

Tex. Tax Code Ann.:

15 — — 8

1 ——ͤͤ c ———— —— 8

SG 00—Ä———— 9

9

Va. Code Ann. § 58. 1-37030(8 03) . . 14

LEGISLATIVE HISTORY

H.R. Rep. No. 98-934, 98th , 2d Sess.,

in 1984 U.S. Code & Admin.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

Nos. 90-29

90-38

(Consolidated)

JAMES C. PLEDGER, COMMISSIONER OF REVENUES

OF ARKANSAS,

Petitioner,

V.

DANIEL L. MEDLOCK, et al.,

Respondents.

- and -

DANIEL L. MEDLOCK, et al.,

Petitioners,

V.

JAMES C. PLEDGER, COMMISSIONER OF REVENUES

OF ARKANSAS, et al.,

Respondents.

On Writ Of Certiorari To The

Supreme Court Of Arkansas

BRIEF OF AMICI CURIAE CABLEVISION INDUSTRIES

CORP., COMCAST CORPORATION, AND COX

COMMUNICATIONS, INC. IN SUPPORT OF PETITIONERS-

RESPONDENTS DANIEL L. MEDLOCK, ET AL.

2

INTEREST OF AMICI

Cablevision Industries Corp. (‘‘Cablevision’’), Com-

cast Corporation (““Comcast’’), and Cox Communica-

tions, Inc. (“Cox’’) are three of the largest multi-

system cable television operators in the United States.

Cablevision owns or has management responsibility

for cable television systems in 18 states which serve

approximately one million subscribers. Comcast owns

and has management responsibility for cable television

systeias in 18 states* which serve more than 2.5 mil-

lion subscribers. Cox operates cable television systems

in 16 states* and provides cable television to more

than 1.5 million subscribers.‘

As described below, 12 states tax the cable tele-

vision operations of Cablevision, Comcast, and Cox

but do not subject other mass communicators, such

as newspapers, magazines, and broadcasters, to these

taxes. These taxing structures are generally of recent

The states in which Cablevision operates cable television sys-

tems include Alabama, California, Florida, Georgia, Kansas, Lou-

isiana, Massachusetts, Michigan, Mississippi, Nebraska, New

York, North Carolina, Oklahoma, Pennsylvania, South Carolina,

Tennessee, Virginia, and West Virginia.

The states in which Comcast owns or has management re-

sponsibility for cable television systems include Alabama, Ar-

kansas, California, Connecticut, Delaware, Florida, Illinois,

Indiana, Kentucky, Maryland, Michigan, Mississippi, New Jersey,

Ohio, Pennsylvania, South Carolina, Tennessee, and Virginia.

The states in which Cox operates cable television systems

include California, Connecticut, Florida, Georgia, Illinois, Iowa,

Louisiana, Michigan, Nebraska, Ohio, Oklahoma, Rhode Island,

South Carolina, Texas, Virginia, and Washington.

Letters from the parties to this proceeding consenting to the

filing of this brief have been filed with the Clerk of this Court.

3

vintage as one state after another has begun to single

out cable television as a source of increased revenue.

They have been and continue to be the subject of

administrative and judicial First Amendment chal-

lenges in the various states. The decision in this case

will establish the constitutional guidelines against

— tones wil be sadeed and by which state

legislatures will be guided in structuring future taxing

schemes. Most importantly, then, this case concerns

the right of cable television operators to communicate

information and ideas on the same basis as other mass

communicators, free of the inhibiting effects of dif-

ferential taxation.

STATEMENT OF THE CASE

Since 1941, Arkansas has imposed a sales tax on

all tangible personal property ard on certain enum-

erated services. In 1987, the Arkansas General As-

sembly adopted Act 188 of 1987, amending the

Arkansas Gross Receipts Tax of 1941 by adding cable

television service to the list of services subject to the

tax. Ark. Stat. Ann. § 26-52-30 1( 30D) (1987). Subsec-

tion (D) provided for the levy of a three percent tax

upon gross proceeds or gross receipts derived from

sales of cable television services. Id.“ Section 26-52-

401 expressly exempted from the sales tax: (1) gross

receipts or gross proceeds derived from the sale of

newspapers; (2) gross proceeds derived from sales of

advertising space in newspapers and publications and

* Other services subject to the sales tax include telephone ser-

vice; the service of furnishing rooms by hotels, apartments, lodg-

ing houses, and tourist camps; and the service of alteration,

addition, cleaning, refinishing, replacement, and repair of motor

vehicles. Ark. Stat. Ann. § 26-52-301(3).

4

billboard advertising services; and (3) religious,

professional, trade and sports journals and publica-

tions printed and published within the State and sold

through regular subscriptions. Ark. Stat. Ann. §§ 26-

52-401(4), (13), (14). On March 21, 1989, by Act 769,

the Arkansas General Assembly further amended the

gross receipts tax to include satellite broadcast tel-

evision subscription services’ within the provision tax-

ing cable television service.“

Petitioners-Respondents Daniel L. Medlock, Com-

munity Communications Co., and the Arkansas Cable

Television Association, Inc. (hereinafter ‘‘the Medlock

6 Notwithstanding this Court’s decision in Arkansas Writers’

Project, Inc. v. Ragland, 481 U.S. 221 (1987), section 26-52-401

has never been amended to expand the exemptions from the

sales tax to include ali subscription magazines.

Satellite broadcast television systems, also known as satellite

master antenna television (hereinafter “SMATV’’) systems, em-

ploy a central dish antenna that receives television signals from

a satellite in fixed orbit. Satellite dish antennas may be located

at the building site, or signals may be received by microwave

through small receiving antennas on top of the building. The

signal is thereafter distributed by wire to subscribers who pay

a fee for the service.

*As amended by Act 769, effective July 1, 1989, the tax

applied to community antenna television, and any and all other

distribution of television, video, or radio services with or without

the use of wires provided to subscribers. Ark. Stat. Ann.

§ 26-52-301(3XD\Xi) (Supp. 1989).

Because the Arkansas legislature did not enact a correspond-

ing amendment to the Arkansas use tax, subscription fees for

SMATV are subject to Arkansas’s sales tax only when they are

paid to an in-state collecting agent, e. g., a local cable operator.

Subscription fees charged for SMATV to subscribers located in

Arkansas, therefore, are not taxed when they are paid by the

Arkansas subscriber directly to an out-of-state provider.

5

petitioners’’) challenged Act 188 as violative, inter

alia, of their rights of freedom of speech and freedom

of the press guaranteed by the First Amendment to

the United States Constitution. The trial court applied

the four prong test enunciated in United States v.

O’Brien, 391 U.S. 367 (1968), for determining whether

governmental regulation passes constitutional muster

under the First Amendment, and held that Arkansas’s

stated interest in raising revenues was a sufficiently

compelling governmental interest to justify the bur-

den of the tax on cable television operators’ First

Amendment rights. Medlock v. Pledger, No. 87-2401

(Ch. Ct. Pulaski Cty., Div. 1, Mar. 10, 1989), repro-

duced in Petition for Certiorari at 20a-21a, Medlock

v. Pledger (No. 90-38).

On appeal to the Arkansas Supreme Court, the

Medlock petitioners requested a finding that the Ar-

kansas ‘axing scheme was unconstitutional because

both before and after its amendment it taxed the

provision of cable service while exempting the sale of

newspapers and other publications. The Arkansas

Supreme Court found the tax on cable television to

be unconstitutional prior to the 1989 amendment, but

on a narrower ground. The court reasoned that it did

not apply to SMATV and “a tax which discriminates

between mass communicators delivering substantially

the same service runs afoul of the First Amendment

... Medlock v. Pledger, 301 Ark. 483, 487, 785

S.W.2d 202, 204 (1990), cert. granted, U.S. __ ,

111 S. Ct. 41 (1990), and cert. granted, U.S.

111 S. Ct. 42 (1990). According to the court, the

*The court concluded that the mere fact that cable service

uses public rights-of-way is irrelevant to a determination of

6

inclusion of SMATV within the provision taxing cable

television by Act 769 cured the constitutional infirm-

ity. Id.

Notwithstanding this conclusion regarding the con-

stitutionality of the tax as amended, the court pro-

fessed an unwillingness to consider the Medlock

petitioners’ position that the tax impermissibly dif-

ferentiated between cable television and newspapers

and magazines because that would have called into

question the validity of Act 769, which had not been

before the trial court and, therefore, was not before

the Arkansas Supreme Court. Jd. The court nonethe-

less went on to state its opposition to a holding that

“all mass communications media must be taxed in the

same way.” Id.

SUMMARY OF THE ARGUMENT

This case concerns the differential taxation of cable

television in Arkansas. Many other state taxing

schemes also single out cable television for taxation

or treat cable difierently from other communications

media for taxing purposes. While other forms of me-

dia such as newspapers and magazines may be taxed,

the tax must be a generally applicable one, and this

Cour’’s decisions hold that for a differential tax on

newspapers and magazines to survive constitutional

scrutiny, it must further a substantial governmental

interest. There is no justification under the First

Amendment for differential treatment of cable tele-

vision in the taxing area. Providers of cable television

service engage in the same types of First Amer dment

whether the sales tax on cable service, which exempts other

communications media, is constitutional. 301 Ark. at 485-86, 785

S.W.2d at 203.

activity as do other mass communicators, such as

newspapers, magazines, and radio and television

broadcasters. In providing news, information, enter-

tainment, and other ideas, cable television operators

have the very same First Amendment rights as other

media providers, and the rights of some media prov-

iders are not more worthy of protection than others.

Thus, cable television operators, like newspapers and

magazines, are also entitled to have their First

Amendment rights protected from the unwarranted

burdens of discriminatory state and local taxing

schemes.

In determining whether cable television operators

are entitled to First Amendment protection from dif-

ferential taxation, the Court need not determine the

full extent of First Amendment protection for cable

television in all areas of economic regulation, includ-

ing such matters as franchising and access.“ Equally

so, in order to protect éable television from the in-

hibiting effects of differential taxation presented “by

this case, the Court need not conclude generally that

10 Indeed, this is not the appropriate case for the Court to

determine the extent of First Amendment protection for cable

television in any areas other than taxation. As the Court rec-

ognized in City of Los Angeles v. Preferred Communications,

Inc., 476 U.S. 488 (1986), before the Court can resolve the

constitutional issues concerning cable television in the franchis-

ing area, the factual issues unique to a franchising case must

be fully developed. Consequently, in Preferred Communications

the Court remanded the case to the United States District Court

for the Central District of California for development of the

record with regard to the uses of the public utility poles and

rights-of-way and how the petitioner cable company proposes to

instal] and maintain its facilities on them. Jd. at 496. That case

is pending before the district court.

8

cable television is an “electronic newspaper” or

“magazine” for all regulatory purposes such that the

First Amendment implications affecting the regula-

tion of the print media are also applicable to cable.

Whatever unique special characteristics might justify

other regulatory measures on cable television which

would not be justified with respect to other media,

they certainly do not justify burdening cable television

operators with differential taxation. Accordingly, the

Court should hold the Arkansas sales tax on cable

television, both before and after its amendment, con-

stitutionally impermissible because it discriminates

against cable television without advancing a suffi-

ciently compelling governmental interest.

ARGUMENT

I. Cable Television Is Subject to Differential Taxation

Under the Taxing Schemes of Numerous States.

Cablevision, Comcast, and Cox are subject to a

broad array of state and local taxing schemes that

tax cable television differently from other mass com-

munications media. A non-exhaustive summary of

these taxing schemes follows:

1. Florida, Nebraska, Rhode Island, South Carolina,

and Texas each impose a sales tax on cable television

service." The sales tax rates are five and six percent,

with some localities within the states levying an ad-

ditional .5 percent to 2.5 percent sales tax. In each

i See Fla. Stat. Ann. § 212.05 (West 1989); Neb. Rev. Stat.

§§ 77-2702, 2703 (1986); R. I. Gen. Laws §§ 44-18-12, 13, 18 (1989

& Supp. 1990); S.C. Code Ann. §§ 12-35-140, 510 (Law. Co-op.

1976); Tex. Tax Code Ann. §§ 151.0101, .051 (Vernon 1982 &

Supp. 1990).

9

of these states newspaper circulation and advertising

are exempted by statute from the sales tax." In ad-

dition, Florida, Nebraska, Rhode Island, and Texas

exempt certain newspaper production materials, sup-

plies, equipment, and other items involved in the pro-

duction of newspapers from the sales tax.”

2. In Pennsylvania, cable television is subject to

both capital stock and sales taxes. Pennsylvania taxes

corporations at the rate of nine mills upon each dollar

of defined capital stock value. 72 Pa. Cons. Stat. Ann.

§ 7602 (Purdon 1990). The tax exempts the corporate

stock of entities organized for manufacturing or proc-

essing. Processing is defined to include the pub-

lishing of books, newspapers, magazines or other

periodicals, printing, and broadcasting radio and tel-

evision programs by licensed commercial or educa-

tional stations. Jd. § 7601(11).

In addition, Pennsylvania exempts from its sales

and use tax all transfefs for the purpose of manu-

facturing and processing. Jd. § 7201. Under the sales

tax exemption, processing' is defined to include the

broadcasting of radio and television programs of li-

censed commercial and educational stations. The

Pennsylvania Department of Revenue regulations de-

fining licensed commercial or educational stations“

See Fla. Stat. Ann. § 212.08(7Xw) (West 1989); Neb. Rev.

Stat. § 77-2704(d) (1986); R.I. Gen. Laws § 44-18-30(B) (Supp.

1990); S.C. Code Ann. § 12-35-550(7) (Law. Co-op. Supp. 1989);

Tex. Tax Code Ann. §§ 151.31%a), (f) (Vernon 1982 & Supp.

1990).

8 See Fla. Stat. Ann. § 212.0807 V2) (West Supp. 1990); Neb.

Rev. Stat. § 77-270 11a) (1986); R.I. Gen. Laws § 44-1%-30(H)

(Supp. 1990); Tex. Tax Code Ann. § 151.319%(d) (Vernon 1982 &

Supp. 1990).

si\

10

and broadcast“ specifically provide that registered

cable television companies operating under the au-

thority of the Federal Communications Commission

(“FCC”) are not considered licensed commercial or

educational stations. Accordingly, cable television

operators are subject to both the capital stock and

sales taxes, whereas newspapers, magazines, and ra-

dio and television broadcasters are not.

3. In Connecticut, cable television service is subject

to an eight percent sales tax, although other regulated

services including gas, water, and most electric ser-

vices are exempt. Conn. Gen. Stat. §§ 12-407, 12-

412(3) (1989). The sales tax does not reach certain

other suppliers of video programming, such as

SMATV, direct broadcast satellite (“DBS”), multi-

channel, multipoint distribution systems (““MMDS’’),"*

and satellite services. Newspapers and subscription

A recent decision of the Commonwealth Court of Pennsyl-

vania held that there is no statutory difference between a cable

television operator and a licensed commercial or educational sta-

tion and, therefore, that cable is entitled to the statutory ex-

emption for both the capital stock and the sales and use taxes.

An appeal of this decision is pending in the Pennsylvania

Supreme Court. Suburban Cable TV Co. v. Commonwealth, 131

Pa. Commw. 368, 570 A.2d 601 (1990), juris. noted, Pa. Sup.

Ct., Sept. 4, 1990.

16 DBS systems permit individuals to receive satellite delivered

television programming through a small receiving dish antenna

for a subscription fee.

1% MMDS involves over-the-air microwave transmission of tel-

evision programming from one point to multiple receiving points.

Since line of sight, or direct or unobstructed, transmission is

required, subscribers require a rooftop apparatus to receive the

microwave transmissions.

11

magazines are also exempt from the sales tax. Id.

§ 12-412(6).

In addition, cable operators are subject to a gross

earnings tax, although generally exempt from per-

sonal property taxes. Id. §§ 12-256, 12-268. Prior to

January 1, 1990, both cable operators and regulated

telecommunications services were subject to a nine

percent gross earnings tax and both were exempted

from personal property taxes. Since January 1, 1990,

cable operators have been subject to a five percent

gross earnings tax, whereas regulated and unregu-

lated telecommunications services are not subject to

the tax. Video programming providers of SMATV,

DBS, MMDS, and satellite services are not subject to

the gross earnings tax. Nor are newspapers, maga-

zines, and broadcast television. Although cable tele-

vision operators are exempted from personal property

tax and other communications media are not, the

gross earnings and personal property taxes tax cable

television operators differently from other communi-

cations media.

4. In 1990, the Kentucky General Assembly

amended the utility tax to make cable television sub-

ject to the tax. Ky. Rev. Stat. Ann. § 160.614 (Michie/

Bobbs-Merrill Supp. 1990). The tax levied is up to

three percent of the utility’s gross receipts. Id.

§ 160.613 (Supp. 1990). Initially, the Governor of Ken-

tucky proposed amending the general sales tax to

include cable television, radio, broadcast television,

and newsprint services and advertising. This proposal

was defeated and, subsequently, the legislature

amended the utility tax to include only cable televi-

sion. Unlike other utilities subject to the tax, however,

cable television is not permitted to pass the three

12

percent tax through to its customers. Compare Ky.

Rev. Stat. Ann. § 160.613 and § 160.617 with

§ 160.614 (Michie/Bobbs-Merrill 1987 & Supp. 1990).

In addition, cable television is subject to the Ken-

tucky public service tax. Ky. Rev. Stat. Ann. § 136.120

(Michie/Bobbs-Merrill 1982 & Supp. 1990). The public

service tax serves to classify a subject entity’s prop-

erty for purposes of ad valorem taxes. See id. Under

the property classification scheme, a cable system’s

property is divided into three categories: (i) operating

property; (ii) non-operating tangible property; and (iii)

non-operating intangible property. Id. § 136.120(2).

The first two categories are subject to both state and

third category is

Id. Operating

property is specifically defined to include both oper-

ating tangible property and the franchise. Id.

§ 136.115(2) (Michie/Bobbs-Merrill 1982). Thus, cable

television alone, unlike any other medium of mass

communication such as newspapers, magazines, and

radio and television broadcasting, is subject to taxa-

tion on its goodwill and going concern value by the

State at the rate for tangible property of 45¢ per

$100 of value, with county and local rates currently

adding up to an additional 90¢ per $100 of value.

Other mass communications media are not taxed on

these intangible assets, regardless of whether they

were generated over time or acquired. Jd. § 136.120

(Michie/Bobbs-Merrill Supp. 1990).

5. Indiana imposes a gross income tax on the gross

receipts a taxpayer receives from trades, businesses

or commerce in Indiana. Ind. Code Ann. § 6-2.1-1-2(a)

(West 1989). Virtually all enterprises in Indiana, in-

cluding cable television operators, radio and television

47

bide

ti

5

13

broade sters, and members of the newsprint media,

are subject to the tax. Although all members of the

mass communications media in Indiana are subject to

the tax, cable operators are taxed at the higher rate

of 1.2 percent, whereas other media are taxed at the

lower rate of .3 percent.

Indiana also imposes an excise tax of five percent

on gross retail income. Jd. § 6-2.5-2-1. The tax applies

to each “retail merchant” who is defined as ſa] per-

son ... making a retail transaction when he engages

in selling at retail.” Id. § 6-2.5-4-1(a). Cable television

operators are included specifically in the definition of

retail merchants. Id. § 6-2.5-4-11. The advertising sales

of radio and television broadcasters are not subject

to the tax by definition. Newspaper sales are ex-

pressly exempted from the tax.

6. Michigan imposes a use tax for “the privilege

of using, storing or consuming tangible personal prop-

erty in” the State of Michigan. Mich. Comp. Laws

Ann. § 205.93(1) (West 1986). The tax is equal to four

percent of the price of the property. The statute spe-

cifically exempts property purchased by persons li-

censed to operate a commercial radio or television

station when the property is used in the origination

or integration of the various sources of program ma-

terial for commercial, radio or television transmis-

sion.“ Id. § 205.94(0) (Supp. 1990). The Michigan

Department of Revenue has concluded that the phrase

licensed to operate a commercial radio or television

station, does not include cable television systems be-

cause they are not “licensed” by the FCC.

7. In California, intangible assets are exempt from

property taxation, and businesses other than cable

television, including non-cable media, are not taxed

|

aA

system with market value or purchase of

the entire system, which includes the value of

intangible

license to engage in the cable television business. The

property tax assessments of newspapers, magazines,

and radio television broadcasters do not include

taxation of such intangible assets.

8. In Virginia, a number of local governments re-

quire cable television operators to y a business li.

by the Cable Communications Policy Act of 1984, 47

U.S.C. §§521, 543 (1988). Businesses engaged in

“printing or publishing any newspaper, magazine,

newsletter or other publication ... or operating or

conducting any radio or television broadcasting sta-

tion or service” are exempted from paying the busi-

ness license tax. Va. Code Ann. § 58.1-3703(B\3)

(Supp. 1990).

In addition, the City of Norfolk recently amended

Norfolk City Ordinance No. 36,026 to include cable

television service within the definition of “‘utility ser-

vice.“ As a result, cable television service is addi-

tionally taxed as a utility at a rate of seven percent,

excluding any charge made for remote control tuning

15

devices. No other mass communications media are

subject to the utility tax.

II. A Sales Tax on Cable Television Service That Ex-

empts Newspapers and Subscription Magazines Vi-

olates the First Amendment to the Constitution of

the United States by Singling Out Cable Television

for Differential Taxation.

A. The Constitutionality of a Tax on Cable Television Must

Be Determined Under the Minneapolis Star and Arkan-

sas Writers’ Project Principles.

The examples of state taxing schemes described in

Section I above present a variety of ways in which

states have singled out cable television from among

other mass communications media and subjected it to

differential taxation. For the reasons set out in this

section, such schemes, like the Arkansas sales tax on

cable television, must be judged by the standards ar-

ticulated in Minneapolis Star & Tribune v. Minnesota

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

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

221 (1987).

Cable television operators engage in conduct pro-

tected by the First Amendment. City of Los Angeles

v. Preferred Communications, Inc., 476 U.S. 488, 494

(1986); Quincy Cable TV, Inc. v. FCC, 768 F.2d 1434,

1444 (D.C. Cir. 1985), cert. denied sub nom. National

* Many of these state taxing schemes further burden cable

television operators because the disputed tax must be paid before

the tax assessment can be challenged. In California, for example,

a cable operator may be required to pay millions of dollars in

disputed taxes and then sue for a refund. Even if the taxpayer

prevails and is entitled to a refund, the interest paid on the

refunded monies is at a rate less than the State has earned on

the refunded amount.

“sa

16

Ass n of Broadcasters v. Quincy Cable TV, Inc., 476

U.S. 1169 (1986); see also Schad v. Borough of Mount

Ephraim, 452 U.S. 61, 65 (1981). The business of

cable television, like that of broadcasters, newspapers,

and magazines, is to make available to the public a

mixture of news, information, and entertainment. Like

these entities, cable television operators, such as Ca-

blevision, Comcast, and Cox, editorially select and re-

transmit local broadcast signals, choosing stations to

carry from among the three major network affiliates,

Fox affiliates and other commercial independents, and

local public television stations. In addition, amici se-

lect signals from distant independent, specialty, and

educational broadcast stations. Amici make editorial

decisions regarding the selection of program networks

via satellite, such as Home Box Office, CNN, and C-

SPAN, as well as satellite-delivered pay-per-view ser-

vices. Finally, amici provide programming of their

own creation and facilitate the transmission of locally

originated programming, including local news events,

community features, and live or videotaped public ser-

vice and entertainment programs.”

As a result of cable television’s expanded role in

more recent years, it is now settled that the activ-

ities ... {of cable television] plainly implicate First

Amendment interests.“ Preferred Communications,

476 U.S. at 494.“ As this Court stated:

Indeed, there is no substantive difference between these

editorial decisions and those made, for example, by newspapers

in determining which wire service articles to reprint and which

syndicated columns to publish.

The Court’s conclusion is consistent with the opinion of Con-

gress, as expressed in the legislative history of the Cable Com-

17

[Through original programming or by exer-

cising editorial discretion over which stations

or programs to include in its repertoire, (ca-

ble] seeks to communicate messages on a

wide variety of topics and in a wide variety

of formats. We recently noted that cable op-

erators exercise a significant amount of ed-

itorial discretion regarding what their

programming will include.” [citation omitted]

Cable television partakes of some of the as-

pects of speech and the communication of

ideas as do the traditional enterprises of

newspaper and book publishers, public speak-

ers, and pamphleteers. Respondent’s pro-

posed activities would seem to implicate First

Amendment interests as do the activities of

wireless broadcasters, which were found to

fall within the ambit of the First Amendment

in Red Lion Broadcasting, Co. v. FCC, ....

475 U.S. at 494-95. It is not surprising, therefore,

that cable television generally has been accorded a

munications Policy Act of 1984:

As we enter the information age access to telecom-

munications networks has become increasingly impor-

tant to full participation in the political, economic,

social and cultural life of the nation. The First Amend-

ment’s guarantee of a free flow of diverse ideas will

be reduced to an empty promise if access to infor-

mation is not available to all our citizens.

H.R. Rep. No. 98-984, 98th Cong., 2d Sess., reprinted in 1984

U.S. Code Cong. & Admin. News 4673. If the current trend of

singling out cable television for taxation continues unchecked,

the corresponding increase in the cost of services will push cable

access beyond the reach of many Americans, contrary to Con-

gress’s express desire.

18

high level of constitutional protection. Century Com-

munications Corp. v. FCC, 835 F.2d 292 (D.C. Cir.

1987) (holding that ‘‘must-carry” rules must, at the

very least, “advance a substantial governmental in-

terest and must be no more restrictive than necessary

to accomplish that end.“) (citing O’Brien, 391 U.S.

at 377), cert. denied sub nom. Office of Communication

of United Church of Christ v. FCC, 486 U.S. 1032

(1988); Quincy Cable TV, Inc., 768 F.2d 1434 (ruling

that the “scarcity doctrine” does not apply to cable

television and that cable “must-carry” rules therefore

must withstand greater scrutiny than is applied to

broadcast media access regulations; Century Federal,

Inc. v. Palo Alto, 648 F. Supp. 1465 (N.D. Cal. 1986)

(applying O’Brien test in holding exclusive cable fran-

chising agreement unconstitutional).

The present case, however, does more than impli-

cate First Amendment interests. In Preferred Com-

munications, the question was whether someone

desiring to provide cable television service, and denied

a franchise to do so because of a city-imposed limit

on the number of cable franchises, had presented a

colorable First Amendment claim sufficient to survive

a motion to dismiss. This case concerns those who

have acquired cable television franchises and are in

fact engaging in speech and the communication of

ideas. Cable television operators are thus exercising

the very “rights protected under the First Amend-

ment“ addressed in Minneapolis Star, 460 U.S. at

582 and Arkansas Writers’ Project, 481 U.S. at 227-

32.

It is equally true that any tax to which cable op-

erators are subject imposes some burden on their First

19

Amendment rights.” Since the protection of their

First Amendment rights is at issue here, the principle

of Minneapolis Star and Arkansas Writers’ Project

that a taxing scheme which discriminates among

members of the press is unconstitutional is equally

applicable to a taxing scheme such as the present one

which singles out cable television for taxation while

exempting newspapers and magazines. In Minneapolis

Star, the Court stated the operative rule:

A tax that burdens rights protected by the

First Amendment annot stand unless the

burden is necessary to achieve an overriding

governmental interest. [citation omitted] Any

tax that the press must pay, of course, im-

poses some burden.“

460 U.S. at 582-83. The Minneapolis Star ‘wo-part

inquiry thus should be undertaken to determine

whether the burden of thé Arkansas sales tax on cable

television is permissible: first, under the tax scheme

at issue, is cable television merely subject to a tax

of general applicability or has it been “singled out’’

for “special treatment“; and, second, if cable is the

subject of differential tax treatment, has the State

0 This, of course, does not mean that cable television is free

from taxation or other economic regulations. Rather, it means

that it is subject to generally applicable taxes, as are newspapers

the Fair Labor Standards Act, and enforcement of subpoenas.

Minneapolis Star, 460 U.S. at 581. Such regulations do not

single out First Amendment speakers, but apply generaily to all

businesses.

20

met its burden of demonstrating that the tax is nec-

essary to achieve an overriding governmental inter-

est. 460 U.S. at 582.

B. Judicial Decisions Applying Minneapolis Star and Ar-

kansas Writers’ Project Support Their Application in

This Case.

Recently, state and lower federal courts have ap-

plied this Court’s Minneapolis Star and Arkansas

Writers’ Project principles to invalidate taxing

schemes that discriminate among, as well as against,

mass media communicators. For example, the Florida

Supreme Court held that a sales tax on magazines

which exempted newspapers violated the First

Amendment. Department of Revenue v. Magazine Pub-

lishers of America, Inc., __ Fla. __ , 565 So.2d 1304

(1990). Using the strict scrutiny standard, the Florida

court determined that the differential taxation was

constitutionally impermissible because the State could

not identify a counterbalancing interest of ene

importance that it could not achieve

other than differential taxation. Jd. at 1308. The —

interest the State asserted to justify the scheme was

the public interest in promoting publishers who en-

gage in the immediate dissemination of news. That

interest was rejected by the court. Jd. at 1308-09.

These decisions are not limited to discriminatory

taxation affecting the print media. The Oklahoma

Supreme Court recently held that a tax structure

which taxed broadcasters but exempted the print me-

dia violated the First Amendment. Oklahoma Broad-

casters Ass n v. Oklahoma Tax Comm un, — Okla.

789 P. 2d 1312 (1990). The Oklahoma court stated

In Oklahoma Broadcasters, three taxation schemes were

21

that while both Minneapolis Star and Arkansas Writ-

ers’ Project found First Amendment violations re-

sulting from differential tax schemes between

members of the print media, there is nothing to

suggest that this court should, without sufficient jus-

tification, approve preferential treatment of print me-

dia over the broadcast media, where both are

members of the press. The First Amendment guar-

antees freedom of the press—not just the printed

press.” Jd. at 1316 (emphasis in original).

A New York appellate court has also held that

treating print media and broadcast media differently

by imposing a franchise tax on all advertising income

challenged: (i) an excise tax on the gross receipts or gross sales

of licensing agreements to exhibit motion pictures or to receive

— telecast that 44 net extend to compareble —

agreements entered into by newspapers and radio broadcasters;

(ii) a sales tax on gross receipts of sales of advertising that

contained an exemption for thé sale of advertising space in news-

papers, periodicals, and billboards; and (iii) a sales tax that ap-

ied to purdhaans — —Eæ which exempted

purchases of equipment used in the production of newspapers.

The excise tax on licensing agreements was held to be uncon-

stitutional because the only difference between the licensing

agreements of radio broadcasters and newspapers from televi-

sion broadcasters was the manner in which the material subject

to the agreement is finally presented to the licensee. Okla.

at . 789 P.2d at 1316-17. The sales tax on advertising failed

since the sale of the advertising service by broadcasters was

taxed, while the sale of the same service by a newspaper was

exempt. The court found no merit in the tax commission’s ar-

gument that the result was permissible because broadcast media

has been subject to a higher degree of regulation than print

media. Jd. The tax on broadcasting equipment was also found

to be constitutionally infirm. The court rejected the tax com-

mission’s distinction that print media produces a tangible product

while broadcast media does not. Jd.

22

of magazine publishers did not serve a compelling

interest and violated the First Amendment. McGraw-

Hill, Ine. v. State Tax Comm’n, 146 A.D.2d 371, 541

N.Y.S.2d 252 (1989), aff'd, 75 N.Y.2d 852 (1990). The

court stated that a taxing scheme which taxes some

members of the press but exempts others of the press

does not escape Ist Amendment scrutiny even if busi-

nesses outside the press are also not exempt.” 146

A.D.2d at 375, 541 N.Y.S.2d at 255. The tax com-

mission argued that the unique nature of the elec-

tronic media makes it more susceptible to

governmental regulations and that there are many

differences between the print and visual media.

While that may be true,” the court ruled that such

an argument fails to show any compelling State in-

terest in taxing the two types of media differently.

Id.

C. The Arkansas Sales Tax on Cable Television Is Con-

stitutionally Infirm.

1. Arkansas Has Singled Out Cable Television for Spe-

cial Tax Treatment.

The Arkansas sales tax suffers from the type of

discrimination identified in Minneapolis Star because

it taxes cable television differently from other com-

munications media. Section 26-52-301 levies an excise

tax of three percent on the gross proceeds or gross

receipts derived from all sales to any person of cable

television services. The tax targets cable television as

compared to other communications media because the

sales tax does not apply to any other mass media

communicator with which cable television directly

competes.” For example, program distribution via tel-

* As amended by Act 769 of 1989, the tax was made to apply

to SMATV.

23

evision or radio, i. e., the advertising transaction that

funds the program distribution, is not covered by the

tax. Nor does the tax apply to newspaper sales; sales

of advertising space in newspapers and publications

and billboard advertising services; and religious,

professional, trade, and sports journals and publica-

tions printed and published within the State and sold

through regular subscriptions.”

These preferences for newspapers and subscription

magazines make this case analogous to Oklahoma

Broadcasters; for as in that case there is no justifi-

cation for approvſing] preferential treatment of the

print media over cable. __ Okla. at —, 789 P.2d

at 1316. The magazine and newspaper exemptions

mean that only a few members of the Arkansas com-

munications media pay any sales tax. This type of

discrimination poses a particular danger of abuse by

the State:

A power to tax differentially, as opposed to

a power to tax generally, gives a government

a powerful weapon against the taxpayer se-

lected. When the state imposes a generally

applicable tax, there is little cause for con-

cern. We need not fear that a government

will destroy a selected group of taxpayers by

burdensome taxation if it must impose the

same burden on the rest of its constituency.

Minneapolis Star, 460 U.S. at 585. Accordingly, as

with the discriminatory taxes in Minneapolis Star and

The proceeds of the over-the-counter sale of books and mag-

azines are subject to the tax. As previously noted, the tax has

not been amended to exempt all subscription magazines in ac-

cordance with the decision in Arkansas Writers’ Project.

24

Arkansas Writers’ Project, the State must demon-

strate that the discriminatory tax on cable meets a

heightened level of scrutiny before it passes consti-

tutional muster.”

2. Arkansas Has Failed To Meet Its Burden of Dem-

onstrating a Substantial Justification for the Differ-

ential Taxation of Cable Television.

Because the differential taxation of cable television

under the Arkansas statute imposes acute burdens on

rights protected by the First Amendment, the regu-

lation must withstand a high level of constitutional

scrutiny. Where a First Amendment violation is al-

leged, the rule of rationality which will sustain leg-

islation against other constitutional challenges

typically does not have the same controlling force.“

Preferred Communications, 476 U.S. at 496. Such in-

fringements cannot be justified by a mere showing

of some legitimate governmental interest.” Buckley

* Petitioner-Respondent Pledger, in his Petition for Certiorari

in Docket No. 90-29, asserts that because the Arkansas legis-

lature was unaware of the existence of SMATV, the unconsti-

tutionality of the tax is at least partially ameliorated. Petition

tor Certiorari at 8-13, Pledger v. Medlock (No. 90-29). Evidently,

Pledger believes that unconstitutional regulations may validly be

enforced as long as the legislature in question is unaware of

the consequences of its actions. This position raises the adage

“ignorance is bliss to a unique place in constitutional juris-

prudence.

In support, Pledger cites only Katzenbach v. Morgan, 384 U.S.

641 (1966), arguing it stands for the proposition that legislative

findings of fact must be given due respect” in making judicial

determinations. Petition for Certiorari in No. 90-29 at 11. The

alleged obliviousness of the Arkansas legislature to the existence

of SMATV, however, cannot be considered a finding of fact.”

It was at best an oversight, and is entitled to no deference.

25

v. Valeo, 424 U.S. 1, 63 (1976). The interest served

must be “paramount, one of vital importance, and the

burden is on the government to show [its] existence

.... Elrod v. Burns, 427 U.S. 347, 362 (1976). In

serving the asserted interest, the regulation must be

narrowly drawn to avoid imposing unnecessary bur-

dens on the protected First Amendment rights. Id.

at 363.

Consonant with these principles, the Court in Min-

neapolis Star, following a long line of precedents,”

stated that regulations burdening First Amendment

rights can survive only if the governmental interest

[served] outweighs the burden and cannot be achieved

by means that do not infringe First Amendment rights

as significantly. * 460 U.S. at 585 n.7. Thus, a dif-

ferential tax scheme which burdens First Amendment

rights is invalid unless “the State asserts a counter-

balancing interest of compelling importance that it

cannot achieve without differential taxation.“ Jd. at

of cases followed in Minneapolis Star illustrates

of First Amencment interests to which this stand-

where the rights of the

cases involving the in-

3

:

»

8

Fek

the First Amendment burden inherent in a tax which

singles out cable television for discriminatory treat-

ment. See Minneapolis Star, 460 U.S. at 586; Ar-

kansas Writers’ Project, 481 U.S. at 231-33.

Nor will a lack of improper motive on the part of

the State cure the unconstitutionality of the tax.

Whether or not the Arkansas legislature intended to

* Respondent Pledger has argued that the challenged tax

meets the requirement that regulations burdening First Amend-

ment rights must be narrowly drawn because the tax goes no

Sesther than — .

r ͤ aS ae a ae ee Sho a a SL ee Se lL ee OW ———

discriminate against cable operators is irrelevant. As

stated in Minneapolis Star, the motives of the leg-

islature need not be impugned since “‘iJllicit legisla-

tive intent is not the sine qua non of a violation of

the First Amendment.” 460 U.S. at 592 (citations

omitted). The Arkansas sales tax is not narrowly

drawn to achieve the stated government interest. It,

therefore, must be struck down as unconstitutional.

CONCLUSION

The judgment of the Arkansas Supreme Court hold-

ing unlawful the sales tax placed on cable television

services by Act 188 of 1987 should be affirmed. To

the extent the Arkansas Supreme Court ruled that

the tax placed on cable television services as amended

by Act 769 of 1989 was lawful, such ruling should be

reversed.

BRENT N. RUSHFORTH

Counsel of Record

JUDITH A. MATHER

RoBIN H. SANGSTON

Dow, LOHNES & ALBERTSON

1255 Twenty-Third Street, N.W.

Washington, D.C. 20037

(202) 857-2500

Counsel for Amici Curiae

Cablevision Industries Corp.,

Comcast Corporation, and

Cox Communications, Inc.

November 15, 1990