[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                  STATE VIDEO TAX FAIRNESS ACT OF 2007

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

                               H.R. 3679

                               __________

                           FEBRUARY 14, 2008

                               __________

                           Serial No. 110-170

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov



                     U.S. GOVERNMENT PRINTING OFFICE
40-744 PDF                 WASHINGTON DC:  2008
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001

                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                LINDA T. SANCHEZ, California, Chairwoman

JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
ZOE LOFGREN, California              RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
STEVE COHEN, Tennessee

                     Michone Johnson, Chief Counsel

                    Daniel Flores, Minority Counsel


                            C O N T E N T S

                              ----------                              

                           FEBRUARY 14, 2008

                                                                   Page

                                THE BILL

H.R. 3679, the ``State Video Tax Fairness Act of 2007''..........     3

                           OPENING STATEMENT

The Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................     1

                               WITNESSES

Mr. Mike Palkovic, Executive Vice President, Operations, DIRECTV 
  Group, Inc.
  Oral Testimony.................................................     8
  Prepared Statement.............................................    10
Howard J. Symons, Esq., Mintz, Levin, Cohn, Ferris, Glovsky and 
  Popeo PC
  Oral Testimony.................................................    23
  Prepared Statement.............................................    25
Ms. Kristina Rasmussen, Director of Government Affairs, National 
  Taxpayers Union
  Oral Testimony.................................................    37
  Prepared Statement.............................................    38
Mr. David C. Quam, Director of Federal Relations, National 
  Governors Association
  Oral Testimony.................................................    42
  Prepared Statement.............................................    43

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Chris Cannon, a 
  Representative in Congress from the State of Utah, and Ranking 
  Member, Subcommittee on Commercial and Administrative Law......     5
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member, Subcommittee 
  on Commercial and Administrative Law...........................    47

                                APPENDIX
               Material Submitted for the Hearing Record

Letter from Gary Shapiro, President and CEO, the Consumer 
  Electronics Association (CEA)..................................    54
Letter from Andrew Jay Schwartzman, President and CEO, Media 
  Access Project.................................................    55
Letter from Pete Sepp, Vice President for Communications, the 
  National Taxpayers Union (NTU).................................    56
Letter from Gigi B. Sohn, President, Public Knowledge............    57
Prepared Statement of the Federation of Tax Administrators.......    58
Letter from Chris Murray, Senior Counsel, Consumers Union........    60
Letter from Niel Ritchie, Executive Director, League of Rural 
  Voters.........................................................    61
Letter from Mark C. Ellison, Senior Vice President, Business 
  Affairs & General Counsel, the National Rural 
  Telecommunications Cooperative (NRTC)..........................    62
Response to Post-Hearing Questions submitted to Mike Palkovic by 
  the Honorable Linda T. Sanchez, a Representative in Congress 
  from the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................    63
Response to Post-Hearing Questions submitted to Howard Symons, 
  Esq., by the Honorable Linda T. Sanchez, a Representative in 
  Congress from the State of California, and Chairwoman, 
  Subcommittee on Commercial and Administrative Law..............    72
Response to Post-Hearing Questions submitted to Kristina 
  Rasmussen by the Honorable Linda T. Sanchez, a Representative 
  in Congress from the State of California, and Chairwoman, 
  Subcommittee on Commercial and Administrative Law..............    74
Response to Post-Hearing Questions submitted to David Quam by the 
  Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................    75


                  STATE VIDEO TAX FAIRNESS ACT OF 2007

                              ----------                              


                      THURSDAY, FEBRUARY 14, 2008

              House of Representatives,    
                     Subcommittee on Commercial    
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 2:15 p.m., in 
room 2141, Rayburn House Office Building, the Honorable Linda 
T. Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Conyers, Johnson, Cannon, 
Keller, and Franks.
    Staff Present: Norberto Salinas, Majority Counsel; Adam 
Russell, Majority Professional Staff Member; and Stewart 
Jeffries, Minority Counsel.
    Ms. Sanchez. This hearing of the Committee on Judiciary, 
Subcommittee on Commercial and Administrative Law will now come 
to order. And I apologize for the late start, but we had votes 
across the street, and we are expecting more, so we have 
decided to press on with the hearing and get as much done as we 
can before the next votes. I would like to recognize myself 
first for a short statement.
    In an era where genre-specific networks rule the airways 
and the public wants their entertainment on demand, cable and 
satellite services are more popular than ever. Nearly 100 
million U.S. households receive their television programming 
either from cable or satellite providers. Consumers choose 
their television service provider based on a variety of 
factors, including the benefits offered, the availability in 
the particular location and the cost. No matter which other 
considerations are important, for most consumers the total cost 
of a subscription will always be one of the deciding factors. 
State and local taxes and fees are often overlooked by 
consumers trying to make smart choices. Because consumers don't 
know how much those fees might be or how those fees might 
change if the chosen service provider changes few can make an 
informed decision between satellite and cable on the basis of 
price. Many simply are not aware that, depending on the State, 
a consumer may pay more depending on the chosen television 
service. Considering the current economic outlook the 
differences in the taxes could lead some consumers in a 
particular State to choose one television programming service 
provider over another to save money. Such decisions taken 
together could reduce competition for all consumers and 
therefore lead to higher prices. Today's hearing will discuss 
whether there is discriminatory tax treatment by State 
governments in the video programming services industry. 
Additionally we will examine what accounts for the differences 
in tax treatment between the two industries.
    Finally, we will examine H.R. 3679, the ``State Video Tax 
Fairness Act of 2007,'' and whether this approach ensures 
competition in the industry for the benefit of consumers. 
Accordingly, I look forward to hearing today's testimony.
    [The bill, H.R. 3679, follows:]

    
    
    
    
    Ms. Sanchez. At this time, I would now like to recognize my 
colleague, Mr. Cannon, the distinguished Ranking Member of the 
Subcommittee and co-author of the legislation, for his opening 
statement.
    Mr. Cannon. I thank you, Madam Chair. And I want to thank 
you for holding the hearing in my--or holding the beginning of 
the hearing in my absence. And I apologize to our panelists for 
being late. In light of the shortness of time that we 
encounter, I would ask unanimous consent to have my statement 
included in the record.
    [The prepared statement of Mr. Cannon follows:]

 Prepared Statement of the Honorable Chris Cannon, a Representative in 
 Congress from the State of Utah, and Ranking Member, Subcommittee on 
                   Commercial and Administrative Law

    I am pleased that we are holding this hearing after the passage of 
the Internet Tax Freedom Act Amendments Act of 2007. As the Chairwoman 
well knows, while I am supporter of this bill, I was also a supporter 
of the Internet tax moratorium. I am pleased that we are finally having 
a hearing on this bill, and equally pleased that its consideration did 
not slow the passage of the Internet tax moratorium extension.
    Multichannel video programming distribution services such as cable 
television and direct broadcast satellite (DBS) providers are the 
methods by which most Americans receive their television programming. 
There are currently two DBS providers: DirecTV and EchoStar, which 
operates the DishNetwork. In addition, a number of the large phone 
companies, such as Verizon and AT&T, are beginning to roll out new 
television services over the Internet, which are frequently referred to 
as IPTV. Each of these platforms for providing television is subject to 
various state and local taxes.
    For example, some states have the same sales tax rate for both DBS 
and cable providers. Some states have differing rates. Under federal 
law, DBS providers are exempt from the collection and remittance of 
local taxes and fees. However, DBS providers must collect and remit 
sales taxes to the states, which are free to send a portion or all of 
that money to the localities. By contrast, both cable and phone 
companies are subject to a multitude of local taxes and fees. It should 
be noted that in all cases the applicable sales taxes and franchise 
fees are passed directly onto the consumer.
    One of those fees is the franchise fee that cable companies pay 
localities for the right to do business in that community. In several 
jurisdictions around the country, including Utah, cable companies have 
successfully lobbied state legislatures to adopt discounts in the state 
sales tax for the franchise fees that cable companies pay. These 
franchise fees are paid by cable companies for the right-of-way that 
they must use to lay down their infrastructure for delivering cable TV 
to consumers' homes. But satellite TV does not tear up the streets of a 
town in order to deliver satellite TV to consumers. Yet satellite 
consumers still have to pay a higher tax even though their service does 
not utilize a locality's rights of ways and telephone poles.
    In still other jurisdictions, satellite TV subscribers face a 
higher state sales taxes rate than do cable customers. In Florida, 
satellite customers pay 13.17% in state sales tax whereas cable 
customers pay 9.17% in state sales tax--a difference of 4%. In Ohio, 
only satellite customers pay a 5% state sales tax; cable subscribers 
pay no sales tax, and this tax was recently struck down as a violation 
of the Commerce Clause but is under appeal.
    The cable companies will argue that they are merely trying to 
equalize the state and local tax burden that their customers must bear. 
That, at least, is an argument I can understand. On the other hand, the 
evidence suggests that at least in some jurisdictions, cable companies 
are lobbying the state legislatures to raise their competitors' costs. 
While understandable, that is a bad deal for consumers. In the long 
run, I would agree most with our witness from the National Taxpayers' 
Union, who argues that we should be lowering taxes for all customers.
    The states will certainly argue that they should be free to tax 
corporate entities in any way that they see fit. However, state 
legislatures and Congress should not be picking technological winners 
and losers. That is for the market to decide. If satellite TV provides 
better picture and service at a lower price, then consumers will move 
toward satellite TV. If cable is the better service provider, consumers 
will flock to cable. Government should not be advantaging--or 
disadvantaging--one platform over the other in the form of tax policy.
    I think this bill goes a long way to establishing that platform tax 
neutrality, and I support it.
    Madam Chairwoman, I commend you for holding a hearing on this 
legislation, there are yet other issues affecting interstate commerce 
that I hope we will consider. To that end, may I suggest that the 
Subcommittee hold hearings on bills that prevent states from imposing 
discriminatory taxes on pipelines, rental cars, and cell phones, just 
to name a few. In the case of wireless industry, I would like to put on 
the record that discriminatory and regressive taxes imposed on this 
industry are estimated to be nearly $5 billion a year. An astonishing 
number and something that warrants study by this Committee.
    I thank the Chair for her indulgence and yield back.

    Ms. Sanchez. Without objection, so ordered.
    Mr. Cannon. I will yield back.
    Ms. Sanchez. Thank you.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing at any point.
    I am now pleased to introduce our witnesses for today's 
hearing. Our first witness is Mike Palkovic. Did I pronounce 
that correctly?
    Mr. Palkovic. You did.
    Ms. Sanchez. Thank you.
    Mr. Palkovic is executive vice president of operations for 
DIRECTV, Inc. In his role, Mr. Palkovic oversees primary 
contacts with customers from the initial point of sale through 
the life of the customer's programming service, including 
customer service, field services and supply chain management. 
Prior to his current role, Mr. Palkovic was executive vice 
president and chief financial officer of DIRECTV. He also 
served as the director of financial planning for DIRECTV. Prior 
to joining DIRECTV, Mr. Palkovic spent 14 years at Times Mirror 
Cable Television, where he held a number of positions, 
including director of business operations; director of contract 
negotiations and pricing; and director of financial planning 
and analysis; and corporate accounting manager.
    Welcome to our panel today.
    Our second witness is Howard Symons. Mr. Symons is a member 
of Mintz, Levin, Cohen, Ferris, Glovsky and Popeo. Is that 
correct?
    Mr. Symons. Yes.
    Ms. Sanchez. Thank you. And practices in the communications 
section where he represents a wide range of cable, wireless and 
telecommunication companies and trade associations in 
regulatory and legislative matters, including implementation of 
the Telecommunications Act of 1996. Before joining the firm, 
Mr. Symons served as senior counsel to the Energy and Commerce 
Subcommittee on Telecommunications in the U.S. House of 
Representatives. During his 4 years in that capacity he was 
responsible for the development of legislation on matters 
ranging from domestic, telephone policy to cable franchising 
and international communications. He was also responsible for 
the Subcommittee's oversight of Federal Communications 
Commission activities in the areas of telephone and cable 
policy. Welcome to you as well. From 1978 to 1981, Mr. Symons 
was a staff attorney with Public Citizen's Congress Watch where 
he was responsible for telecommunications policy issues. And 
for 10 years, he was an adjunct professor of the National Law 
Center of George Washington University, teaching a course in 
telecommunications law and regulations. That is quite a 
background.
    Our third witness is Kristina Rasmussen. Is that correct?
    Ms. Rasmussen. Rasmussen.
    Ms. Sanchez. I am sorry, can you repeat that again?
    Ms. Rasmussen. Rasmussen.
    Ms. Sanchez. Rasmussen. Thank you.
    Ms. Rasmussen serves as the National Taxpayers Union's 
director of government affairs. Her primary duties are lobbying 
on Federal and State issues; conducting policy research and 
analysis; assisting in taxpayer education efforts; and 
formulating reports and opinion editorials. Ms. Rasmussen has 
been with the National Taxpayers Union since the summer of 
2005. Ms. Rasmussen--pardon me, repeat that again.
    Ms. Rasmussen. Rasmussen.
    Ms. Sanchez. Rasmussen. I will get that correct by the end 
of the hearing. Ms. Rasmussen previously hailed from the 
National Federation of Independent Business, where she served 
as a Federal public policy assistant and intern for former 
Congresswoman Katherine Harris. In 2003, Ms. Rasmussen traveled 
to Copenhagen, Denmark, to serve as a research fellow for the 
Organization for Security and Cooperation in Europe. Ms. 
Rasmussen's opinion pieces have been featured in the Washington 
Post, Forbes Magazine, National Review online, Investor's 
Business Daily, The Hill and the Baltimore Sun, among others. 
Her television appearances include CNN and C-SPAN, and she has 
been a guest on numerous radio shows.
    Our final witness is David Quam, director of the Office of 
Federal Relations for the National Governors Association. Mr. 
Quam manages NGA's legal and advocacy efforts, working closely 
with Governors, Washington D.C. Representatives and NGA's 
standing committee to advance the association's legislative 
priority. Prior to working at NGA, Mr. Quam served as director 
of International Affairs and general counsel of the 
International AntiCounterfeiting Coalition, Inc. He was also an 
associate of the law firm, Powell, Goldstein, Frazer and 
Murphy, LLP. Additionally, Mr. Quam was counsel on the U.S. 
Senate Subcommittee on the Constitution, Federalism and 
Property Rights for the Committee on the Judiciary.
    I want to thank you all for your willingness to participate 
in today's hearing. Without objection, your written statements 
will be placed into the record. And we are going to ask that 
you limit your oral remarks to 5 minutes. You will note that we 
have a lighting system on the table. And it begins with a green 
light when your testimony time starts. At 4 minutes, you will 
get a yellow indicator light letting you know you have about a 
minute to finish your testimony. And then the light will turn 
red when your time has expired. If the light turns red and you 
are in mid sentence, we will allow you to complete your final 
thought before moving on to our next witness. After each 
witness has had an opportunity to present his or her testimony, 
Subcommittee Members will be permitted to ask questions subject 
to the 5-minute limit.
    With that, I am going to try to squeeze in Mr. Palkovic's 
testimony prior to the next series of votes. So would you 
please begin your testimony.

     TESTIMONY OF MIKE PALKOVIC, EXECUTIVE VICE PRESIDENT, 
                OPERATIONS, DIRECTV GROUP, INC.

    Mr. Palkovic. Thank you. Good afternoon.
    Chairwoman Sanchez, thank you for the opportunity to 
comment today in support of Chairman Conyers and Ranking Member 
Cannon's proposed State Video Tax Fairness Act, the bill that 
would benefit all 100 million paid TV subscribers in the United 
States.
    The essence of this fight is a clear matter of consumer 
welfare; 30 million of your constituents have fled cable 
largely because satellite companies have offered them more 
channels, better customer service, better picture quality and 
typically do it all at a lower price. Now cable is fighting 
back, but not by competing in the marketplace. Rather cable is 
persuading State legislatures to raise consumer prices by 
asking satellite customers to subsidize one of the cable 
industry's costs of doing business, a franchise fee. It makes 
no sense, and this Committee and Congress have rejected this 
premise once before.
    H.R. 3679 is a simple amendment to current law that 
proclaims no discrimination. That is all this bill says. 
Consumers should be free to choose TV service based on what 
they care about: price, quality and service. States should not 
be allowed to punish consumers for their choices by hitting 
them with higher taxes. Congress has long accepted this 
nondiscrimination principle clarifying just last fall in a 
protected IP video from discriminatory State taxes. It should 
do the same for all competitors in the market. Congress has 
repeatedly embraced the premise of this bill.
    Fair competition benefits everyone. Congress bet on fair 
competition 16 years agowhen they bet on satellite TV at a time 
when cable was the only game in town. Competition has kept 
prices down and improved the quality of service, spurring 
innovations that consumers now take for granted, like all 
digital programming, hundreds of Spanish and multicultural 
channels, DVR technology and a recent explosion in the number 
of high definition channels. Competition is taking hold, and 
consumers of video programming are increasingly price-
sensitive. Thus, adding 5 percent or more to a satellite 
subscriber's bill to compensate the cable industry for their 
franchise fees hurts the competitive balance.
    When cable urges you to vote no on H.R. 3679, it is arguing 
that States should be allowed to discriminate against 
satellite, literally. Just look at the language of the bill. It 
is that simple. Cable calls it tax parity. What does tax parity 
mean to cable? It means that satellite customers should pay 
higher taxes in order to offset a cost that is unique to cable. 
The cost comes in the form of local franchise fees. Cable 
companies voluntarily negotiate these payments with local 
governments for the privilege of digging up public streets and 
running cable on public property to subscribers' homes. So 
franchise fees are not taxes; they are rent.
    Don't take my word for it. NGA says it in their written 
testimony. And cable repeatedly tells its shareholders in their 
SEC filings, franchise fees are not taxes; they are payments 
for highly valuable property rights worth billions of dollars. 
Should satellite TV customers pay franchise fees? Of course 
not. Their service does not rely on an infrastructure built by 
digging up public streets or hanging wires on utility poles. 
This is particularly unfair for those rural customers who do 
not even have the option of choosing cable.
    Congress understood all of this. In the Telecommunications 
Act of 1996, Congress made it illegal for local governments to 
impose franchise fees on satellite, even while continuing to 
allow local governments to collect franchise fees from cable. 
The House report explained the difference, quote, unlike other 
video programming distribution systems, satellite-delivered 
programming services do not require the use of public rights-
of-way or physical facilities or services of a community, 
unquote.
    In short, Congress prohibited local governments from 
charging rent for property rights satellite TV providers don't 
use and don't need. The latest trend of discriminatory State 
taxes in six States with more following suit is an end run 
around congressional intent. The States act as the local 
government's collection agent, essentially collecting the same 
franchise fees from satellite that they collect from cable and 
handing the proceeds right back to their local governments.
    In conclusion, we urge you to close this loophole. We are 
not alone. Groups across the political spectrum support H.R. 
3679. You will hear from the National Taxpayers Union 
momentarily. They are joined by the National Rural 
Telecommunications Cooperative, Consumers Union, The Media 
Access Project, Public Knowledge and the Consumer Electronics 
Association in urging you to adopt this nondiscrimination 
policy. These diverse consumer groups all understand what is 
going on here. They know the difference between discrimination 
and parity. They know the difference between rent and taxes. 
They know cable once again is angling for an unfair advantage, 
a way to win in the marketplace without actually competing. 
Congress has prohibited these ploys before, and it should 
prohibit them now by passing H.R. 3679.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Palkovic follows:]

                  Prepared Statement of Mike Palkovic

























                               ATTACHMENT


    Ms. Sanchez. Thank you very much for your testimony. We 
have been called across the street for votes, so we will stand 
in recess. We will return immediately following the last vote.
    [Recess.]
    Ms. Sanchez. The Subcommittee will come to order. And I 
believe we left off with Mr. Symons. And I have been advised 
that I have been mispronouncing your name, and my apologizes.
    Mr. Symons. That is quite all right, Madam Chairwoman.
    Ms. Sanchez. I would invite you to please give your 
testimony at this time.

   TESTIMONY OF HOWARD J. SYMONS, ESQ., MINTZ, LEVIN, COHN, 
                  FERRIS, GLOVSKY AND POPEO PC

    Mr. Symons. Thank you very much, Madam Chairwoman, and 
Members of the Subcommittee.
    My name is Howard Symons, and I am here today on behalf of 
the National Cable and Telecommunications Association. Thank 
you for inviting NCTA to testify today. We strongly oppose H.R. 
3679. We believe it represents an unjustified interference into 
efforts being undertaken by State legislatures to ensure that 
consumers have a choice of video providers that is neutral as 
to government-imposed taxes and fees.
    The Telecommunications Act of 1996 exempted DBS operators 
from the administrative burden of collecting and remitting 
local taxes and fees, but it did not exempt the DBS industry 
from having to pay taxes that benefit local governments. In 
practice, however, the law has resulted in a significant 
disparity between what DBS pays and the taxes and fees imposed 
on cable operators. In many States, for instance, both DBS and 
cable operators are subject to State sales taxes, but only 
cable operators pay additional taxes and fees to localities. In 
Santa Monica, California, for instance, local taxes and fees 
add $7.50 to a monthly cable bill of $50.00. Six States have 
determined that this situation is unfair to cable customers, 
and they have enacted legislation that equalizes the tax burden 
between cable and DBS providers taking into account all taxes 
and fees that both providers pay at the State as well as at the 
local level. The DBS industry unsuccessfully opposed 
legislation in these six States. And its subsequent court 
challenges have likewise been unsuccessful save for one local 
trial court.
    Unable to prevail in the State legislatures or in Federal 
Court, the DBS industry has come to Congress asking you to 
substitute your judgment for the judgment of State 
legislatures. We do not believe such a radical step is 
necessary or appropriate. The DBS industry has ample 
opportunity to argue against tax parity. In each State 
legislature that considers this issue, it simply prefers not to 
do so. DBS argues that States should be federally foreclosed 
from considering local taxes and fees when determining cable's 
overall tax burden. It claims that local franchise fees are 
nothing more than payments for local public resources and that 
allowing an offset to State tax is unfair to DBS operators who 
do not use these resources. But State governments should be the 
final arbiters of the tax structure in their own States as long 
as they exercise that judgment within constitutional bounds, as 
they have.
    And DBS's core assertion that franchise fees represent no 
more than a payment for rights-of-way is incorrect. As the 
Fourth Circuit noted in rejecting this claim, franchise fees 
are spread among a wide proportion of the population because 
they are passed through to all cable subscribers. And the 
proceeds go to general operating funds of localities, not for 
rights-of-way maintenance. In fact, cable operators generally 
pay separately for any repairs to the rights-of-way related to 
the installation and upgrade of their networks. DBS also argues 
that franchise fees must be rent for rights-of-way because 
businesses don't get rights-of-way for free, but that is simply 
not true. Telephone companies, for instance, generally do not 
pay for public rights-of-way. And as a Sixth Circuit explained, 
State and local governments are under no mandate to charge for 
rights-of-way. This is readily apparent from the fact that not 
every road is a toll road. And there are other taxes imposed on 
cable operators at the local level that are separate and apart 
from franchise fees that have no link whatsoever to the use of 
rights-of-way. There is certainly no rationale for excluding 
such fees from a comparison of cable and DBS's tax burdens.
    Today, DIRECTV and Echostar are the second and third 
largest video distributors in the United States with more than 
30 million subscribers and $25 billion in annual revenue. They 
certainly don't need an unfair tax advantage over cable, phone 
and wireless competitors. It is wholly appropriate for State 
legislatures to let the marketplace rather than artificial 
distinctions in taxes and fees drive consumer choice from among 
multichannel video alternatives. The Federal Courts, having 
found that the States are acting appropriately, there is simply 
no problem that requires congressional intervention. Thank you 
very much, and I would be happy to answer any questions.
    [The prepared statement of Mr. Symons follows:]

                 Prepared Statement of Howard J. Symons

























    Ms. Sanchez. Thank you very much for your testimony.
    Ms. Rasmussen, I would invite you to give your testimony at 
this time.

    TESTIMONY OF KRISTINA RASMUSSEN, DIRECTOR OF GOVERNMENT 
               AFFAIRS, NATIONAL TAXPAYERS UNION

    Ms. Rasmussen. Thank you. Once again, my name is Kristina 
Rasmussen. I am director of government affairs for the National 
Taxpayers Union. We are a grassroots organization of taxpayers 
with 362,000 members nationwide.
    NTU believes that H.R. 3679, the ``State Video Tax Fairness 
Act of 2007,'' would help ensure that consumers, not State 
governments, pick marketplace winners and losers. Americans 
really expect nondiscriminatory tax treatment; yet six States, 
that of Ohio, Florida, Kentucky, North Carolina, Tennessee and 
Utah, levy discriminatory taxes on satellite TV. In the case of 
Ohio, lawmakers approved a special tax on satellite TV viewers 
but completely exempted cable users. As a result, satellite 
consumers paid over $26 million in extra taxes in 2005. In 
Tennessee, the first $15 of monthly cable service charges is 
exempted from a tax paid by both cable and satellite. For 
price-sensitive consumers, these differences can determine 
which service they ultimately purchase. At the end of the day, 
consumers shouldn't have to pay higher taxes just because they 
use satellite instead of cable or vice versa.
    Now the need for this bill rests largely on how we measure 
and compare the various government-imposed burdens on the video 
services industry. Defining a franchise fee as a cost of doing 
business as opposed to an outright tax has much to do with 
reconciling the situation at hand. Yes, a franchise fee remains 
a mandatory burden that customers, employees and shareholders 
ultimately bear. However, NTU believes that the recovery of an 
actual and legitimate expense of a given government service, 
especially those for which an entity voluntarily avails itself, 
can meet the definition of a user cost rather than a tax. We 
have a long record of opposing unreasonable fees, especially 
when they have no connection to the resulting services. 
However, there are distinct benefits received in exchange for 
cable franchise fees, such as rights-of-way for laying cable 
and, historically, exclusive rights to provide service within a 
given jurisdiction.
    If cable companies believe they are being overcharged by 
localities, they should negotiate to reduce their fees. If 
franchise fees are used solely as revenue spigots for local 
governments, we support efforts to change existing law to 
remedy that. Until then, NTU believes that H.R. 3679 provides a 
logical starting place, the State level, for reconciling some 
of these tax burdens to ensure that no one is put at a 
competitive disadvantage. From NTU's viewpoint, our laws should 
reflect low taxes and free markets. We are not ignorant of the 
federalism concerns involved with this issue. However, we need 
to recognize the urgency of protecting residents of all 50 
States from predatory taxes at the non-Federal level. As a 
practical matter, States and localities can sometimes be 
oblivious to the blight of consumers and businesses facing 
unfair taxation. Until citizen activists can establish 
comprehensive tax limitation and reduction measures in their 
communities, we believe it is perfectly reasonable for Congress 
to set some sensible boundaries through Federal law and the 
Constitution's commerce clause. We have seen this occur with 
great success with the Internet Tax Freedom Act, and similar 
nondiscrimination protection for wireless service is being 
pursued in this Congress. Consumers of video services should 
not be forgotten.
    Now, much of this debate over tax discrimination has 
focused on a form of fairness that only fills government 
coffers further. That is making sure providers of similar 
services suffer the misery of equally harsh taxes. While we 
recognize that some States could abuse H.R. 3679 and raise 
taxes on cable instead of lowering them on satellite systems, 
we understand the bill's intent as one that would keep any 
additional taxes on television service at bay when we would 
welcome language clarifying this point. But at the very least, 
State governments should not discriminate among products or 
services by disadvantaging one with heavier taxes.
    Thank you for allowing me to submit this testimony. While 
we see merits on both sides of the discussion, we ultimately 
feel that satellite consumers should not be forced to pay 
additional taxes to reach or surpass parity with franchise 
fees. At this time, we would classify a vote in favor of H.R. 
3679 as the pro-taxpayer position in our annual rating of 
Congress.
    Thank you very much.
    [The prepared statement of Ms. Rasmussen follows:]

                Prepared Statement of Kristina Rasmussen

                            I. INTRODUCTION

    Chairwoman Sanchez and Members of the Committee, my name is 
Kristina Rasmussen. I am Director of Government Affairs for the 
National Taxpayers Union (NTU), a grassroots organization of taxpayers 
with 362,000 members nationwide. I encourage you to find out more about 
NTU on our website: www.ntu.org.
    I offer this testimony in support of H.R. 3679, the State Video Tax 
Fairness Act. This bill would address the issue of discriminatory video 
services tax policy by prohibiting inequitable state taxes that are 
dependent on the mode of programming delivery.
    NTU approaches this bill not from the corporate or government 
perspective, but that of the taxpayer and the consumer. We look for 
indications of neutrality, simplicity, and transparency when we review 
proposals to change tax policy, and we believe all three goals are 
furthered by this bill. In deciding to support H.R. 3679, we were 
particularly mindful of tax/fee distinctions and issues of federalism, 
as evidenced by the following testimony. NTU believes that passage of 
H.R. 3679 would help ensure that consumers--not the states--pick 
marketplace winners and losers.

        II. TELECOM TAXATION VERSUS OTHER PRODUCTS AND SERVICES

    Telecommunication services of all varieties have been targets for 
disproportionate and punitive taxes since the Spanish-American War. 
These taxes have slowed much of the progress and productivity that 
could have emerged to enrich our society sooner.
    Indeed, a recent survey completed by researchers at the Heartland 
Institute found that taxes and fees on telecommunication services 
(e.g., TV and telephone) were typically more than twice as high as 
those on other retail goods. The average difference was a rate of 13.4 
percent for telecommunication, versus 6.61 percent for other products. 
The same study noted that taxes and fees on communication services 
directly cost taxpayers more than $37 billion annually, not to mention 
the yearly ``deadweight loss'' to the economy of more than $11 billion.
    There is a clear need to reduce overall telecommunication tax 
burdens, promote consumer choice, and provide a neutral playing field 
among similar products. As such, NTU regularly supports efforts to cut 
or eliminate telecommunication taxes and fees. We have also advocated 
in favor of statewide franchising reforms that allow the entry of new 
competitors into the video, voice, and data delivery markets. At the 
federal level, we have endorsed efforts to prevent discriminatory 
taxation of Internet and wireless services (specifically, the Permanent 
Internet Tax Freedom Act of 2007 and the Cell Phone Tax Moratorium 
Act), and we support the application of this principle to video 
services.

                III. STATE TAXATION AMONG VIDEO SERVICES

    ``Playing favorites'' is an accusation often leveled at authority 
figures like bosses and teachers, but TV fans never expected 
discriminatory treatment to come from a state's Tax Code. Currently, 
six states (Ohio, Florida, Kentucky, North Carolina, Tennessee, and 
Utah) levy state video service taxes on satellite TV that are higher 
than those levied on cable TV or other similar consumer products.
    In the case of Ohio, lawmakers approved a special 5.5 percent tax 
on TV viewers getting their signal from a satellite service. Cable 
users, on the other hand, are completely exempt from the tax. So a 
viewer and his neighbor could be enjoying the same TV program, but one 
would be paying more in taxes if he uses a satellite dish while the 
other viewer uses cable. And the resulting bill isn't insignificant--
satellite consumers in Ohio paid $26.2 million in extra taxes in 2005. 
In Florida, satellite TV is taxed by the state at a higher rate than 
cable (13.17 percent versus 9.17 percent).
    In the state of Kentucky, recent statewide reforms levied a 
combined 5.4 percent tax on both satellite and cable, and then sent 
revenues back to localities proportionate to the franchise fees they 
had been receiving from cable prior to the reform. North Carolina 
employs a similar set-up. We are concerned that satellite consumers are 
now being squeezed by new taxes to pay funds toward fee totals they 
would never have had to pay. We believe this system violates Congress's 
intent in the Telecommunications Act of 1996 to keep local franchise 
fees off satellite service.
    In Utah, both cable and satellite pay a 6.25 percent tax, but cable 
can apply half of any franchise fees paid toward this burden, thereby 
lowering the operative tax rate. In Tennessee, both cable and satellite 
consumers pay a sales tax of 8.25 percent, but the first $15 of monthly 
cable service charges are exempted from this tax (charges above $27.50 
are taxed at a 7 percent state rate). For price-sensitive taxpayers, 
these differences can determine which service they ultimately purchase.
    Imagine paying a higher tax rate if you received your salary via 
direct deposit instead of a check. Or paying taxes on chocolate ice 
cream but not vanilla. The same thing goes with TV service: Consumers 
shouldn't have to pay higher taxes just because they use satellite 
instead of cable, or vice versa.

     IV. TAX PARITY AND FRANCHISE FEES: A DIFFICULT RECONCILIATION

    The need for H.R. 3679 rests largely on how the various government-
imposed burdens of the video services industry are measured--which, in 
turn, could help determine what types of taxes are discriminatory in 
nature. The answer is, admittedly, not a simple one. Yet, this very 
question is reason to embrace rather than shun enactment of H.R. 3679.
    Opponents of the legislation contend that the ``franchise fees'' 
local governments often extract from cable companies are not 
sufficiently accounted for when comparing state-level tax policies 
toward cable and satellite television products. Defining a franchise 
fee as a ``cost of doing business'' as opposed to an outright tax has 
much to do with reconciling differences at the state level. While this 
fee remains a mandatory burden that customers, employees, and 
shareholders ultimately bear, NTU believes that the recovery of an 
actual and legitimate expense of a given government service, especially 
those for which an entity voluntarily avails itself, can meet the 
definition of a user cost rather than a tax.
    We recognize that a franchise fee is a form of extraction by the 
government, and we have supported and will continue to support efforts 
to reduce this cost. NTU has a long record of opposing fees and efforts 
to increase them, especially when they bear little relation or have no 
connection to the services they are supposed to support. For example, 
NTU recently opposed attempts to prolong the existence of a special 
Virginia vehicle registration fee that had been created to fund the 
now-concluded Jamestown 2007 celebration. The extension of this fee 
beyond the life of the event it was created to fund would be a clear 
example of a fee bearing no relation to the promised service.
    However, there are distinct benefits received in exchange for cable 
franchise fees, such as ``rights of way'' for laying cable necessary 
for delivering a product. As an aside, we note the strange logic 
between tying a company's right-of-way cost to an unrelated measurement 
such as gross revenues. Presumably the cost of ``renting'' space to run 
cable is fixed to local property values, so why should the cost be a 
set portion of their earnings? Regardless, if cable companies believe 
they are being overcharged by localities for this benefit, we strongly 
believe they should be working to convince state and local governments 
to reduce their fees.
    There is, however, another important consideration in the debate 
over H.R. 3679. Unlike many user charges, which entities simply figure 
as a baseline necessity in order to do business, franchise fees 
actually deliver a reverse benefit to the payer: historically, in the 
case of cable TV, the exclusive right to provide service within a given 
jurisdiction. Surely the value of these franchises is considerable to 
their holders. Despite various government pricing and service-provision 
regulations, a franchise fee confers protection from competitors using 
the same mode of transmission and, in the case of competition from 
other modes of transmission, serves as a way to muddy the fiscal waters 
and argue for higher taxation.
    In truth, comparing the tax burdens of video providers depends upon 
many variables. Cable companies contend that the franchise fees they 
pay constitute a dollar-for-dollar tax burden that their competitors 
don't face, but the situation is not cut and dry. Some states provide a 
credit for franchise fees paid in order to offset other taxes. 
Meanwhile, for many years, satellite providers have had to 
competitively bid for the use of federally owned spectrum over which 
they can transmit their signals. One could argue that this ``right of 
way'' through space is somewhat analogous to the terrestrial rights of 
way cable companies are paying for under franchise agreements. For 
their part, however, satellite providers do not seem to be operating 
under the premise that cable companies should pay an equivalent of 
spectrum auction costs in order to ``level the playing field.''
    Certainly, satellite companies also pay a ``cost of business'' in 
preparing, launching, and maintaining their satellites as a 
precondition of getting their products into homes and businesses. This 
cost is reflected in the price of their product as opposed to a 
separate line-item charge on a cable bill. We don't begrudge the right 
of cable companies to pass along their business costs to consumers. NTU 
recognizes that visibility and transparency of government costs are 
good things for the consumer and the tax reform movement as a whole. 
However, satellite consumers shouldn't be forced to pay an additional 
tax for the appearance of parity, especially when satellite's delivery 
costs are already accounted for in its price.
    Insomuch as franchise fees are used solely as revenue spigots for 
local governments instead of a payment rendered in exchange for certain 
tangible benefits, we support efforts by the cable industry to change 
existing law to reflect this actuality.
    Until then, NTU must work toward parity for taxpayers among truly 
comparable costs. NTU believes that H.R. 3679 provides a logical 
starting place--the state level--for reconciling some of these tax 
burdens to ensure that no one is put at a competitive disadvantage.

                  V. FEDERALISM AND COMPETITION ISSUES

    From NTU's viewpoint, the color of law should always take on a hue 
that reflects low taxes and free markets, which is a major reason why 
we support H.R. 3679. However, we are not unmindful of federalism 
considerations surrounding this measure. During NTU's nearly 40-year 
history, we have often observed the benefits of tax competition in 
America's vibrant ``laboratory of the states.'' This phenomenon has, 
among other things, kept taxpayers in nine states free from a homegrown 
income tax, and, in five states, unburdened by a general sales tax.
    Some elected officials have raised an objection to H.R. 3679 on the 
grounds that the legislation would further curtail the ability of 
states and localities to craft tax policy that can be tailored to the 
specific conditions and outcomes they seek. This concern is not 
completely devoid of merit, but it does not approach the urgency of 
protecting residents of all 50 states from predatory taxes at the non-
federal level.
    Surely, state and local officials would concede that their current 
taxation powers are far from unlimited, and are often proscribed by 
other levels of government. California, Oregon, and Washington, for 
example, limit the rate of tax and/or the annual growth of assessments 
allowable under city and county property tax systems. Other states, 
such as Colorado, Michigan, Missouri (and again, California), 
specifically compel localities to seek the approval of voters prior to 
levying some or all types of new taxes. Further limitations are 
established through regulatory decisions, one of the more notable being 
the California Franchise Board's ruling earlier in this decade that the 
Los Angeles County Assessor could not claim situs for property tax 
purposes on satellites in permanent earth orbit simply because they 
were once manufactured in the County.
    There are more direct analogies to the legislation before us today. 
For all of its regulatory drawbacks and lack of clarity in some areas, 
the federal Cable Communications Act has for nearly 25 years capped the 
level of franchise fees that local governments can charge at 5 percent. 
This provision, incidentally, had strong support from the cable 
industry, which at the time made many of the same arguments on behalf 
of a federal limit that we are making today.
    Established law has long recognized--sometimes to the detriment but 
mostly for the good of taxpayers--that telecommunications services can 
often defy state boundaries as well as the jurisdiction of taxing 
authorities. Subsequent FCC rulings and legislative acts in the 1970s 
and 1980s lifted the restrictions on cable operators that traditional 
broadcasters sought to impose so as to avoid competition.
    The federal Internet Tax Freedom Act, which became law in 1998 and 
has been renewed under various names since, has shielded online 
consumers from discriminatory tax burdens on Internet access. Current 
legislation in Congress, H.R. 436, would provide for a three-year 
moratorium on new mobile telephone service taxes whose rates exceed 
those on comparable non-mobile products. Both approaches have strong 
support from NTU.
    But why should federal intervention be the solution to taxpayer 
protection issues such as these? Don't citizens have other options, 
including the electoral process, to effect change? In several senses 
they do. In addition to participating in elections, citizens can--in 
some states--initiate binding statewide legislation through the 
petition process.
    As a practical matter, however, states and localities can sometimes 
be oblivious, and often contemptuous, toward the plight of consumers 
and businesses facing unfair taxation. The City of Corvallis, Oregon 
provides but one example of where elected leaders resorted to a noxious 
tax scheme to make wireless phone services far less affordable. Voters 
demolished this proposal when it was referred to them in 2006, but this 
laudable outcome entailed extraordinary efforts on the part of local 
residents (including our own members) to beat back the tax hike. Until 
citizen activists can establish comprehensive tax limitation and 
reduction measures in their communities, it is perfectly reasonable for 
Congress to set some sensible boundaries under federal law and the 
Constitution's Commerce Clause.
    What about cases in which tax collusion, dressed up as tax 
competition, poses a direct threat to the well-being of taxpayers and 
consumers across the nation? For example, many officials are seeking 
Congress's blessing for a ``Streamlined Sales and Use Tax Agreement'' 
(SSUTA) that would establish a common regime for the application of 
sales taxes across state borders.
    Yet, the SSUTA battle is not being fought over the small share of 
retail sales that are not subject to direct purchase taxes; the 
ultimate objective is to dramatically increase sales tax rates and 
their reach through interstate collusion, and put a padlock on the 
``laboratory of the states.'' Such an action may not be on the 
immediate horizon for taxes on cable and satellite television service, 
but legislation that would increase discrimination between these modes 
of video is being introduced throughout the nation. Moreover, federal 
jurisprudence in this area is not as well established as it has been on 
the question of state taxation of remote sales. These factors argue in 
favor of an ``insurance policy,'' in the form of H.R. 3679, to prevent 
harm to taxpayers in the future.

               VI. FAIRNESS, COMPLEXITY, AND TRANSPARENCY

    The fight over what does and does not constitute a tax, an offset, 
and so forth, reflects the complexity found in our tax laws. Many of 
the taxpayers who make up our membership believe that the entire Tax 
Code is desperately in need of an overhaul that promotes simplicity and 
transparency. Although H.R. 3679 is aimed at one narrow area of our tax 
laws, NTU supports it because it provides for a crisp prohibition 
against discrimination and sets up strong ``base rules'' for future 
reform efforts.
    Much of the debate over tax discrimination in the video services 
community has improperly focused on a form of ``fairness'' that only 
fills government's coffers further--that is, making sure providers of 
similar services suffer the misery of equally harsh taxes. Policymakers 
would do well to remember that the ``fairest'' fee or tax rate--for 
providers and taxpayers alike--is zero.
    Failing the most far-sighted tax policy of a zero rate (which 
happens to be simple and transparent), at the very least, state and 
local governments should not discriminate among products or services by 
disadvantaging one with heavier taxes. Yet, as I just mentioned, 
inflicting the same measure of pain on all entities is no solution to 
the question of ``fairness.'' Rather, taxes should be eased across the 
board. This is why NTU has championed reforms that would lower the tax 
burdens on all participants in the video services market.
    While we recognize that states could abuse H.R. 3679 and raise 
taxes on cable instead of lowering them on satellite systems, we 
understand the bill's intent as one that would keep any additional 
taxes on television service at bay.

                            VII. CONCLUSION

    Thank you, Chairwoman Sanchez, for allowing me to submit this 
testimony. Many issues of interest to taxpayers are found within the 
debate over state tax treatment of video services. While we see merit 
on both sides of the discussion, we ultimately feel that satellite 
consumers should not be forced to pay additional taxes that demand 
``parity''--or more--with fees imposed for unrelated benefits.
    If the House and Senate were to consider the State Video Tax 
Fairness Act today, we would classify a vote in favor of H.R. 3679's 
original language as the ``pro-taxpayer'' position in our annual Rating 
of Congress.
    And again, on behalf of our 362,000 members, NTU is pleased to 
offer our thoughts to the Subcommittee as you move forward with this 
important measure.

    Ms. Sanchez. Thank you Ms. Rasmussen, is that correct? By 
the end of this hearing I promise you I will have that down.
    Mr. Quam.

  TESTIMONY OF DAVID C. QUAM, DIRECTOR OF FEDERAL RELATIONS, 
                 NATIONAL GOVERNORS ASSOCIATION

    Mr. Quam. Chairwoman Sanchez, Representative Cannon, and 
Members of the Subcommittee. Thank you for inviting NGA, 
National Governors Association, to testify here again. It seems 
like I was here just a few months ago. Since I think we all 
have maybe Valentines reservations we have to get to, I will be 
brief.
    NGA opposes H.R. 3679 because decisions about State and 
local taxes must be made by State and local elected officials, 
not the Federal Government. It is a common refrain I have had 
before this Committee on several issues. Today I am also joined 
in opposition to this particular bill by the National 
Association of Counties, the U.S. Conference of Mayors and the 
National League of Cities. I should note that I believe it was 
2 years ago I was before this Committee, and we were having a 
general discussion on communications taxes and what needed to 
be done to reform them. There was a lot of recognition that the 
silos that we currently have with regard to communications, and 
I would say video services as well, do not necessarily serve us 
in the current climate that we face, both from a competitive 
standpoint, a regulatory standpoint and a tax standpoint. We 
discussed the need for possibly technology neutrality, 
competitive neutrality and also finding solutions that are 
revenue neutral for State and local government. From those 
basic principles, the NGA had hosted several industry meetings 
trying find some solutions that could work at the State and 
local level to address those concerns.
    One thing that became very clear, and it is one thing that 
I think we face with this particular bill, is that, from an 
industry standpoint, industry stakeholders either want to 
preserve any advantage they currently have or disadvantage 
their competitor if they can. The bill today, unfortunately, I 
think mirrors more of those concerns rather than finding 
technology neutrality, competitive neutrality and revenue 
neutrality for States.
    What I would argue is that several States have actually 
taken the steps since that hearing to try to find a more 
competitive framework, to try to bring the taxation or the 
treatment of two different types of video services into a 
single solution at the State level that works for both State 
and local government. This bill unfortunately would undo some 
of those solutions. Because we have a system whereby cable 
traditionally has been subject to franchise fees and satellite 
services have not--as a matter of fact, it is the Federal 
Government who said local governments cannot tax DBS service--
we have a natural unbalance that was caused really under 
Federal law. When you have apples and oranges, it becomes very 
difficult to reconcile those in some single one-size-fits-all. 
Leaving the solutions to State and local government and 
allowing State and local government to create parity is the 
solution to moving this forward and to finding a way to either 
get out from under a traditional silo approach or to move 
forward with something that is more streamline and ultimately 
can encompass all communications technologies, both on the 
video side and ultimately communications. Because I think that 
is where States and localities will have to go, I believe that 
is where they have started to go.
    Unfortunately, the bill before us, because it is unclear, 
because some of its definitions are not well-founded, 
ultimately what it would do is increase litigation; it would 
actually discourage State efforts to create tax parity; and 
together with existing Federal prohibitions, it would further 
entrenchestablished disparities between multichannel video 
providers. At the end of the day, Governors and State 
legislators, when you are talking about State taxes, need to 
make the decisions and find the solutions. You don't need 
another Federal restriction that would actually hamper those 
efforts at the State level. I think that is what this bill 
does, and that is why you see opposition from NGA and several 
of the local and national groups. Thank you.
    [The prepared statement of Mr. Quam follows:]

                  Prepared Statement of David C. Quam

    Chairwoman Sanchez, Ranking Member Cannon, and members of the 
Subcommittee, thank you for inviting the National Governors Association 
(NGA) to testify today.
    My name is David Quam, and I am the Director of Federal Relations 
for NGA. I am pleased to be here on behalf of the nation's governors to 
discuss the organization's perspective on H.R. 3679, the ``State Video 
Tax Fairness Act of 2007.''
    NGA opposes H.R. 3679 because decisions about state and local taxes 
must be made by state and local elected officials--not the federal 
government. The ability of states to structure their revenue systems is 
a core element of sovereignty that must be respected. If H.R. 3679 were 
to become law, it would effectively remove the authority of states to 
craft common-sense solutions that modernize existing state and local 
tax systems. If Congress is truly interested in encouraging states to 
reform taxes on multichannel video services, it should remove federal 
barriers to reform rather than imposing new restrictions.
    Although the U.S. Constitution grants Congress broad authority to 
regulate interstate commerce, the federal government, historically, has 
been reluctant to interfere with states' ability to raise and regulate 
their own revenues. State tax sovereignty is a basic tenet of our 
federalist system and is fundamental to the inherent political 
independence and viability of states. For this reason governors 
generally oppose any federal legislation that would interfere with 
states' sovereign ability to craft and manage their own revenue 
systems.
    The problem H.R. 3679 purportedly seeks to address--inequality in 
the taxation of multichannel video services--stems from the long-
standing tax treatment of cable television and satellite services. 
Historically, cable services have been required to obtain franchises 
from local governments to operate and provide multichannel video 
services in specific areas. Franchise fees, which cover the costs of 
using local rights-of-way and provide compensation for the franchise, 
are capped by the federal government at 5 percent of gross receipts. 
Revenues from franchise agreements typically flow into the general 
funds of local governments and support a wide range of government 
operations and services.
    In contrast, federal law prohibits local governments from imposing 
taxes or fees on multichannel video services delivered by direct 
broadcast satellite (DBS) providers. Federal law does, however, allow 
states to tax such services and distribute a portion of the proceeds to 
local governments. This prohibition on local government taxation was 
enacted as part of several 1996 telecommunications reforms to spur 
growth of DBS services and increase competition for incumbent cable 
service providers. Today DirecTV and Echostar, the two predominate 
providers of DBS services, serve more than 30 million subscribers and 
earn $25 billion in annual revenue.
    The differing federal treatment of cable and satellite services has 
resulted in a variety of state and local tax scenarios: 47 states 
authorize local governments to impose franchise fees on cable services; 
29 states tax DBS services; 24 states impose a sales tax on video 
services provided by cable companies; and 18 states allow local 
governments to impose sales taxes on cable video services.
    Recently, several states worked within the framework of existing 
federal restrictions to modernize their tax systems and create parity 
in the tax treatment of multichannel video providers. Specifically, 
some states have used their authority to impose taxes on satellite 
services to craft a new tax on both DBS and cable services. The tax 
replaces traditional local franchise fees in return for the states 
redistributing a portion of the taxes to local governments to 
compensate for lost local revenues. This is the case in North Carolina 
where in 2006 the state legislature replaced the authority of local 
governments to charge franchise taxes on cable service providers with a 
7 percent state sales tax on gross receipts of both cable and DBS 
providers. The state uses a portion of the proceeds to compensate local 
governments that formerly collected franchise fees and provides 
revenues on a formula basis to non-franchise localities.
    Alternatively, some states have chosen to retain the local 
franchise system, while imposing a new tax on all multichannel video 
providers. To help equalize the payments of satellite and cable 
providers, the state allows a cable provider to credit a portion of the 
franchise fees it pays against the state tax. This is the system in 
Utah, where the state imposes a 6.25 percent sales tax on all 
multichannel video services, but allows cable providers to credit 50 
percent of its franchise fees against the tax. These different 
approaches to taxing multichannel video services reflect the fiscal and 
political realities of individual states and their local governments 
and have withstood constitutional challenges in both state and federal 
court. (See DirecTV, inc, et al. v. Treesh, No. 3:05-CV-00024 (2007), 
and DirecTV, inc, et al. v. Treesh, No. 05-CI-01623 (2007); and 
DirecTV, Inc. v. Tolson, No. 07-1250 (4th Cir., Jan. 10, 2008)).
    H.R. 3697 would disrupt state efforts to streamline and modernize 
their tax systems by imposing yet another restriction on the authority 
of states to develop and manage their own systems of taxation. H.R. 
3697 would prohibit a state from imposing a discriminatory tax on any 
provider multichannel video service regardless of the technology used 
to provide the service. The bill defines a discriminatory tax as, ``any 
form of direct or indirect tax that results in different net State 
charges being imposed on substantially equivalent multichannel video 
programming services.'' The terms ``net State charge'' and 
``substantially equivalent'' are not defined. It is unclear how the net 
charge would be calculated or what type of taxes and charges it would 
include. This uncertainty would generate increased litigation, 
discourage state efforts to create tax parity, and together with the 
existing federal prohibition on local taxation of satellite services, 
further entrench established tax disparities between multichannel video 
providers.

                              CONCLUSION:

    Governors remain steadfast in their insistence that decisions 
regarding state and local taxation should remain with state and local 
officials. The independent and sovereign authority of states to develop 
their own revenue systems is a basic tenet of self government and our 
federal system. Governors also support and promote competition and 
encourage the development of tax and regulatory frameworks that are 
technology neutral, level the playing field for all competitors and 
provide necessary revenues to promote the public interest and support 
government services. Governors oppose H.R. 3697 because it 
unnecessarily interferes with state and local efforts to craft 
reasonable and constitutional tax systems that reflect market realities 
and serve the interests of state and local governments and consumers.

    Ms. Sanchez. I want to thank the panel for their testimony 
and for their patience with respect to our voting schedule. We 
will now begin our round of questioning. And I will begin by 
recognizing myself first for 5 minutes.
    Mr. Palkovic, how do you respond to Mr. Quam's assertions 
that H.R. 3679 would remove the authority of States to 
modernize existing State and local tax systems?
    Mr. Palkovic. It is our view that that is not the case. It 
is not what we are asking them to do. What we are asking them 
to do, whether it is modernizing the tax system or whether it 
is entertaining any tax of any kind, to simply not discriminate 
against satellite. This is simply a bill that we support 
because it eliminates their right to take into their own hands 
and apply their judgment on interpreting what Congress intended 
to do. So if they do it in a fair basis and a nondiscriminatory 
basis, we have got no argument with them.
    Ms. Sanchez. Okay.
    Mr. Symons, a Fifth Circuit decision in 1977 held that a 
franchise fee is not a tax but in fact a form of rent. Other 
courts and even Congress have agreed, if that is true, then 
franchise fees should be considered simply a cost of conducting 
business and therefore not related to tax. Why should we or 
States consider taxes and fees when determining parity in the 
tax treatment of video programming providers?
    Mr. Symons. Well, Madam Chairwoman, in fact, franchise fees 
really are much more closely akin to a tax than to a fee for a 
particular benefit. They go into general revenues, and cities 
use them for whatever they want to use them for. They are 
called franchise fees. That is what the Cable Act calls them, 
but in fact, they bear no relationship to the cost of rights-
of-way or rent. They are simply a fee for doing business, which 
really amounts to the same thing as a tax. And we think that it 
is completely fair and in fact just for the States to take 
those into account in determining the total taxes and fees that 
cable operators have to pay. In fact, they are wholly unrelated 
to being a regulated cable operator. If you are a deregulated 
cable operator, you still pay a franchise fee. There is simply 
another way for a city to collect money from an entity doing 
business in a town, and we believe that for these purposes are 
appropriately treated as a tax. And this is an issue that was 
presented to the courts in this particular context, putting 
aside the Fifth Circuit case. And in each case, five, four or 
five Federal Courts disagreed with the DBS industry's 
characterization of these as fees that shouldn't be counted and 
found that they should be counted as taxes as part of the 
overall burden that cable operators pay within a State.
    Ms. Sanchez. Thank you.
    Ms. Rasmussen, am I getting there, am I getting close?
    Ms. Rasmussen. Rasmussen.
    Ms. Sanchez. Can I just call you Ms. R?
    Ms. Rasmussen. That would be fine.
    Ms. Sanchez. I think that would eliminate a lot of trouble 
on my part.
    You represent a grassroots organization of taxpayers and 
therefore have the interest of consumers in mind. And you 
indicated in your written testimony that H.R. 3679 provides a 
logical starting place for reconciling some of the tax burdens 
placed on taxpayers. How would you improve this legislation to 
minimize or at least equalize the burden on all cable and 
satellite providers?
    Ms. Rasmussen. Well, as I indicated in my oral remarks, I 
definitely think it could benefit from the conclusion that this 
is not meant to equalize upwards. We don't want taxpayers to 
have to suffer the misery of equally harsh taxes. We are trying 
to keep their burdens as low as possible.
    Ms. Sanchez. Okay. Thank you.
    And Mr. Quam, welcome back to our humble little 
Subcommittee. Do you think that franchise fees should be 
considered a form of tax instead of a license to conduct 
business or rents for right-of-ways.
    Mr. Quam. Franchise fees, really, I think the discussion 
before sort of points out, they are somewhat of a hybrid 
really. You have got the courts saying that they should be 
treated more like a tax and actually look like a tax in the way 
they are collected; they are based on gross revenues, or gross 
receipts, and go into general funds, especially of local 
governments, much more akin to a tax. At the same time, there 
is a strong argument to say that this is for rent, rent of the 
use of the public right-of-way. And so I don't think really you 
can characterize them as one or another.
    However, one thing is true, and that is, ultimately the 
decision as to how franchise fees, franchises in particular, 
are handled, really again it has to be done--it has been done 
at the local level because it was with regard to local rights-
of-way. Right now you are seeing many more States take up the 
mantle and do it on a statewide basis. I think it is critical 
that in this time of transition, both on a technology 
standpoint and a competitive standpoint, that decision has got 
to remain with the State and local government.
    Ms. Sanchez. Even when adding taxes and fees in some 
States, such as Ohio, still imposes a higher burden on 
satellite providers. Can you explain the rationale for that 
disparity?
    Mr. Quam. I think you would have to ask the Ohio State 
legislature for where they came up. But ultimately the decision 
rests with the elected officials. And much as the debate we had 
before, if they make the wrong decision, that is what votes and 
elections are for. But ultimately those decisions on taxation 
and tax systems at the State level need to be made with the 
State.
    Ms. Sanchez. Thank you. And I thank you all.
    At this time, I would recognize the distinguished Ranking 
Member, Mr. Cannon, for questions.
    Mr. Cannon. Madam Chair, I would just as soon pass and come 
back and do my questions last if that is okay with you. But I 
thought I would make a comment first. I think I am the first 
Cannon in my family that married a Dane, and so the name 
Rasmussen comes easily to me. I am happy to help you out with 
that. She is in fact a Rasmussen a generation or two back. 
Thank you.
    Ms. Sanchez. I think that is the only name in the history 
of this Subcommittee which has truly stumped me. I usually get 
it by the end of the----
    Mr. Cannon. It is a culture that ought to be separated from 
the rest of us, except through their Viking ships that invaded 
my----
    Ms. Rasmussen. I will be sure to tell my Danish husband all 
of this tonight.
    Ms. Sanchez. Okay, so Mr. Cannon will pass until later. I 
would invite the Chairman of the full Committee and 
distinguished Member of the Subcommittee, Mr. Conyers, for 5 
minutes.
    Mr. Conyers. Well, I was here to celebrate the Ranking 
Member and I being back on the same track, and now he's backing 
out on me.
    Mr. Cannon. I was just going to make sure that everything 
works out fine. In fact, if you are going to take the last 
question, I will go now and you can wrap up.
    Mr. Conyers. Well, actually, there is another Subcommittee. 
And since you and I are all on board, and we even have Trent 
Franks, I am feeling pretty good about this.
    The one we don't know about is the Chairperson herself. I 
mean, she's been holding her cards pretty close here.
    Ms. Sanchez. I am waiting for a full and fair hearing on 
the matter before I determine which position to take.
    Mr. Conyers. Oh, gosh. This is wonderful. But I will put my 
statement in the record.
    Ms. Sanchez. Without objection.
    [The prepared statement of Mr. Conyers follows:]

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
 Judiciary, and Member, Subcommittee on Commercial and Administrative 
                                  Law

    Some economists suggest that our Nation may be on the verge of a 
recession in light of tightening credit in the financial marketplace, 
the growing mortgage foreclosure crisis, and the uncertain employment 
sector, among other concerns.
    In this climate of economic insecurity, American families are 
increasingly forced to pay even more attention to how they spend their 
money. Sadly, these decisions sometimes must be made based on the 
difference of only a few cents or dollars.
    For example, many households that pay for television programming 
service can choose to receive very similar services from cable or 
satellite providers. In certain states, however, consumers who receive 
television programming from satellite providers pay more in taxes than 
subscribers of cable television.
    Discriminatory taxes imposed on one type of service provider not 
only increases the cost to the consumer, but undermines the benefits of 
competition. Less competition usually means higher prices for all 
consumers.
    To address this imbalance with respect to the imposition of these 
taxes, I introduced--along with my colleagues from Utah (Representative 
Chris Cannon) and Arizona (Trent Franks)--H.R. 3679, the ``State Video 
Tax Fairness Act of 2007.''
    This bipartisan legislation accomplishes three critical goals. 
First, it will allow consumers to benefit from the lower prices that 
will result when a state imposes a fair and nondiscriminatory tax on 
all providers.
    Second, it will reinvigorate competition in the paid television 
programming industry by ensuring a level playing field for all 
providers.
    Third, it will preserve a state's ability to raise revenue. 
Although taxes constitute a significant state and local revenue source, 
they should be imposed evenly within an industry.
    This legislation is supported by various consumer rights groups, 
including the Consumers Union and the Media Access Project as well as 
the National Taxpayers Union, which is represented at our hearing 
today.
    Discriminatory taxation among similarly situated providers in an 
industry creates an economically unbalanced marketplace of winners and 
losers that is based on who receives the most favorable tax treatment, 
rather than who provides the best value to consumers.
    H.R. 3679 addresses this imbalance in imposed state taxes so that 
consumers will be the winners.
    Accordingly, I look very much look forward to hearing from the 
witnesses today.

    Mr. Conyers. And I am going to ask for a debriefing from 
the rest of our staff when I get back.
    But I am happy about the fact that we're keeping our word. 
We said when we'd introduce the legislation we would hold a 
hearing. And this looks like a very representative group of 
witnesses you've brought forward, Madam Chair. Thank you very 
much.
    Ms. Sanchez. Thank you, Mr. Chairman. We strive to be fair 
on this Committee.
    My distinguished colleague from Florida--the State eluded 
me for a moment--Mr. Keller, you are recognized for 5 minutes 
of questions.
    Mr. Keller. Thank you, Madam Chairwoman.
    Mr. Quam, you said that you'd be brief because of your 
Valentine's Day reservations. That really hurt my feelings. The 
fact that you would rather be at a romantic dinner with your 
wife instead of discussing comparative tax policy with a bunch 
of middle-aged politicians is just shocking.
    Ms. Sanchez. Hey, hey, hey, middle-aged, that's quite a 
stretch.
    Mr. Keller. All right.
    Mr. Cannon. Madam Chair, he has averaged the two of us.
    Mr. Keller. Mr. Palkovic, let me start with you, tell you 
what my concerns are. Just to simplify the issue a bit, you 
look at Florida. The cable TV service is taxed at 6.8 percent, 
and satellite is at 10.8 percent. And it's your position, 
essentially, that that is an unfair discriminatory tax, because 
they pay substantially more, correct?
    Mr. Palkovic. That's correct.
    Mr. Keller. Mr. Symons, your view is that it's really not 
fair because the cable companies, unlike the satellite 
companies, also have to bear the burden of paying the local 
franchise fee, is that correct?
    Mr. Symons. That's correct.
    Mr. Keller. And Mr. Palkovic says, yeah, but that's for 
right of way and other issues that you guys don't have to buy, 
whereas you guys have to go through the big expense of 
purchasing and maintaining satellites, correct?
    Mr. Palkovic. That's correct.
    Mr. Keller. All right. Now, with that as background, my 
concern, Mr. Palkovic, if we pass this legislation--and it 
sounds good on the face--is that instead of cable paying 6.8 
and satellite paying 10.8 in my State, I would be worried about 
the State legislature saying, ``Okay, you want it fair? Then we 
will then turn around and increase the cable service tax rate 
up to 10.8 as well.'' And that would cause me grief, because I 
don't want taxes to go up on anyone.
    How would you alleviate that concern?
    Mr. Palkovic. Well, we don't want that either. We're not 
here saying that we're in favor of higher taxes for consumers. 
There are other ways that you could resolve the issue in 
Florida. You could average the tax. You could lower the 10.8 to 
6.8. You know, you could do a number of things that would not 
affect the consumer. And if it is a revenue issue for the 
State, you could align them both at 8.8 percent. And we would 
live with whatever it is, as long as it's fair.
    Mr. Keller. So if we amended this language to essentially 
make sure that type of scenario didn't happen, that there was 
equalization but not through mandatory tax increases, is that 
something you could live with?
    Mr. Palkovic. Yes, we would live with that. We just want it 
to be fair.
    Mr. Keller. Mr. Symons, same question. Would you be 
concerned, if we passed this legislation, that instead of in 
Florida paying cable 6.8 and satellite 10.8, the response from 
the legislature was just an increase to make you guys now pay 
10.8 on top of the local fees?
    Mr. Symons. Well, we would certainly object to that. The--
--
    Mr. Keller. I mean, I know you'd object to that, but is 
that one of your concerns?
    Mr. Symons. Sure, if this bill passed, it would require--
or, it would require all equalization to be equalization up.
    Mr. Keller. Okay.
    Mr. Symons. And if you would indulge me for a second. In 
Florida, in fact there are two taxes imposed on cable, and the 
taxes are in fact equal. There is a pending challenge right now 
in the Florida courts to the tax scheme that the Attorney 
General down there, a former Member of this Committee, is 
defending against these very kinds of claims, I think very 
compellingly, I might add.
    Mr. Keller. Well, the 10.8 stat that I'm giving you versus 
6.8, that's Congressional Research Service, so I'm just going 
to use that for now for the sake of argument.
    Let me ask you a question, though, since I have you here. 
One the major points in your testimony is that Congress 
shouldn't interfere with the State's power to tax here. But 
isn't it true, in the interest of straight talk, that cable 
companies have supported legislation before this Committee that 
prevent States from enacting discriminatory taxes, such as the 
Internet Tax Freedom Act?
    Mr. Symons. Absolutely, Mr. Keller. We strongly supported 
the Internet Tax Freedom Act. And we believe that, when you are 
talking about the Internet and maintaining the competitiveness 
of that very important medium, the action of this Committee and 
Congress is very appropriate. By contrast, passing a tax break 
for the DBS industry doesn't rise to the level of justifying 
preemption.
    Mr. Keller. Okay.
    Ms. Rasmussen, I saw that you spent some time working for a 
Florida congresswoman there. You, as someone who is known to be 
a champion of taxpayers, your organization, I know you want low 
taxes for everybody. Are you concerned at all that in a State 
like Florida that the response of the legislature may be just 
to increase taxes on the cable companies versus lowering the 
satellite taxes? And if so, what are your thoughts about how we 
deal with that?
    Mr. Rasmussen. That's absolutely a concern of ours. And you 
can be guaranteed that, were that situation were to be 
suggested, we would be on the ground with our many, many 
thousands of Florida members, fighting such an increase. But as 
it stands right now, the status quo isn't acceptable to 
taxpayers either.
    Ms. Sanchez. The time of the gentlemanhas expired.
    Mr. Keller. Thank you. I yield back.
    Ms. Sanchez. Thank you.
    I would now like to recognize Mr. Johnson for 5 minutes of 
questions.
    Mr. Johnson. Thank you, Madam Chair.
    The satellite TV industry feels that it is being 
discriminated against by States that would tax satellite 
service as those States tax cable TV service, either through 
franchise fees or through other fees or taxes, whatever you 
would call them.
    What I want to ask is, does the satellite TV industry 
consider franchise fees to be in the nature of taxes? Of course 
it's been described as a hybrid, but isn't it a fee that's in 
the nature of a tax?
    Mr. Palkovic. No, we do not agree with that. We think it's 
fundamentally an operating cost that is required to negotiate a 
franchise agreement to get the right to provide service. 
There's a number of things in any of the franchise agreements 
that the cable operators signed. They have a number of 
obligations that they step up to in order to get the right to 
be the--if not the legal exclusive provider, the de facto 
exclusive provider of cable in these communities. And that's a 
cost they have been paying for decades. Literally decades 
they've been paying franchise fees and agreeing to that every 
time they renew these agreements.
    Mr. Johnson. And the States and localities to which they 
pay those franchise fees, the money goes into the general fund 
or for some other public purpose; is that correct?
    Mr. Palkovic. I believe that statement is correct. Our view 
is----
    Mr. Johnson. And so those services for the people are paid 
for through taxes, fees, whatever you call them, but it is a 
stream of income to the State and/or local governments?
    Mr. Palkovic. Typically it is the local.
    Mr. Johnson. And there are some States that, I suppose, 
States and localities, that do not levy a tax in addition to 
the franchise fee.Would that be accurate?
    Mr. Palkovic. That's correct.
    Mr. Johnson. And in those cases, would it not be fair to 
conclude that satellite TV would have a competitive pricing 
advantage over cable TV providers, because they don't have to 
pay any fees to the State for a public purpose?
    Mr. Palkovic. Well, we have our own set of operating costs 
that are different in terms of the way we deliver the signal. 
The cable industry doesn't have to put billions of dollars of 
satellites up and pay fees to the FCC to secure satellite 
spectrum to operate those satellites.
    Mr. Johnson. And, of course, there is no benefit to the 
State and local governments from the standpoint of fees or 
taxes that would be levied on the satellite TV provider if 
there is not the same fees being levied or the same tax being 
levied on the cable providers.
    Mr. Palkovic. Well, our issue today that we're talking 
about is not about various taxes that are applied at the local 
level. We're talking about----
    Mr. Johnson. Well, I know, but I'm just trying to get to 
the--I guess what I'll say is this. States and local 
governments benefit from the cable TV fees, franchise fees that 
are paid. And some States and localities also benefit from 
taxes that are paid. But when you have a situation where cable 
TV franchise fees are being paid, no taxes are being paid by 
the cable TV providers, it puts the satellite industry in a 
superior competitive position, but it leaves the taxpayers 
without the benefit of the services that they would get from 
the fees generated by the provider.
    Mr. Palkovic. Yes, that's correct. I think that's what 
Congress intended when they wrote the law the way they did.
    Mr. Johnson. And so now we're faced with a situation where 
the satellite industry is asking Congress to prevent States 
from imposing discriminatory taxes, or, in other words, taxing 
the satellite TV but not taxing cable TV to the same extent, 
with no offset for franchise fees.
    Mr. Palkovic. That's correct. We believe that's unfair.
    Mr. Johnson. And isn't it unfair to the taxpayer that--
isn't it unfair to the taxpayer that the cable franchise fees 
would subsidize the general fund in such a way that the 
satellite TV does not?
    Mr. Palkovic. Well, you're describing what the local 
communities decide to do with the money that they charge. Our 
view is that----
    Mr. Johnson. Well, they would actually have no money to 
decide how to allocate if----
    Mr. Palkovic. They negotiated a fee in exchange for 
allowing a cable operator the rights to provide cable service 
to that community. It was a negotiated agreement between the 
cable operator and the local community.
    Ms. Sanchez. The time of the gentleman has expired.
    I would now like to recognize Mr. Cannon, batting clean-up 
for the Subcommittee in the area of questioning. You're 
recognized for 5 minutes.
    Mr. Cannon. You know, one of the really nice things about 
many of the hearings we had this year, including this one, is 
that we've had great witnesses that have different viewpoints 
and have expressed them all pretty well.
    Is there any point that any of you feel like you need to 
make still? Because I think it has been a pretty darn good 
hearing and a very clarifying hearing.
    I am not seeing any looks or hands on the table, so I would 
yield back my time, Madam Chair.
    Ms. Sanchez. That's a first.
    Mr. Cannon. Actually, in defense, it's not a first. But 
this is a great panel.
    Ms. Sanchez. It feels like a first.
    I think we have had tremendous testimony from the 
witnesses. And, again, I want to thank you all for your 
patience, in particular with the delays, given the votes that 
we had across the street.
    Without objection, Members will have 5 legislative days to 
submit any additional written questions, which we will forward 
to the witnesses and ask that you answer as promptly as you 
can, so they, too, can be made a part of the record.
    And, without objection, the record will remain open for 5 
legislative days for the submission of any other additional 
materials.
    Again, I thank everybody for their time and their 
participation. And this hearing of the Subcommittee on 
Commercial and Administrative Law is adjourned.
    [Whereupon, at 4:45 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

             Letter from Gary Shapiro, President and CEO, 
               the Consumer Electronics Association (CEA)



                                

        Letter from Andrew Jay Schwartzman, President and CEO, 
                          Media Access Project



                                

       Letter from Pete Sepp, Vice President for Communications, 
                   the National Taxpayers Union (NTU)



                                

         Letter from Gigi B. Sohn, President, Public Knowledge



                                

    Prepared Statement of the Federation of Tax Administrators (FTA)
    The Federation of Tax Administrators (FTA) is an association of the 
tax administration agencies in each of the 50 states, the District of 
Columbia, Puerto Rico, and New York City. We are pleased to have the 
opportunity to present our views on legislation that would authorize 
states to require certain remote sellers to collect state and local 
sales taxes on goods and services sold into a state.
    FTA opposes The State Video Tax Fairness Act of 2007 (H.R. 3679) as 
an unwarranted intrusion into state sovereignty. The bill would:

          Result in significant litigation,

          Reverse state action upheld by state and Federal 
        appellate courts to reach parity in the tax treatment of cable 
        and video service providers,

          Freeze into place and exacerbate the preferential tax 
        treatment that satellite video service providers currently have 
        over cable video service providers.

                              BACKGROUND.

    Cable Video Service Taxes. Twenty-four states impose a sales tax on 
video services provided by cable companies. Local governments in 18 
states impose sales taxes on cable video services. In addition, 47 
states authorize local governments to impose a franchise fees on cable 
services. Such fees are capped at 5 percent of gross revenues by 
federal law. Franchise fees are intended, in part, to capture the costs 
of using the public rights of way by the cable companies and to provide 
compensation for the franchise granted to the cable company.\1\ From an 
economic standpoint, franchise fees operate like a tax in that they are 
based (in most cases) on gross receipts from sales of cable services 
and are assumed to be shifted forward to the consumer.
---------------------------------------------------------------------------
    \1\ The ``fee'' rationale is weakened as states and localities 
allow other video service providers (e.g., telecommunications 
companies) to provide video services via fiber optic cable they have in 
place, making the franchise fee even more like a tax.
---------------------------------------------------------------------------
    Satellite Video Service Taxes. Federal law (P.L. 104-104, Title VI, 
Sec. 602, Feb. 8, 1996) prohibits the imposition of local taxes and 
fees (i.e., sales taxes and franchise fees) on direct broadcast 
satellite services, but it preserves the ability of states to tax such 
services and distribute a portion of the proceeds of the taxes to local 
governments. Twenty-seven states impose a sales tax on satellite video 
service providers. Some states rebate a portion of the state sales tax 
to local governments. One state, Ohio places a sales tax on satellite 
companies that is higher than the regular state sales tax and pays over 
the extra amount to local governments.
    Legislative Analysis. The State Video Tax Fairness Act of 2007 
(H.R. 3679) prohibits a ``discriminatory tax,'' which is defined as any 
direct or indirect tax that ``results in different net State charges'' 
on substantially equivalent video services based on the means by which 
those services are delivered. The term ``net State charges'' has no 
meaning in state tax law, which will undoubtedly lead to litigation.
    H.R 3679 seeks to prohibit the two different approaches that 
several states have used to provide parity of tax treatment between 
cable and satellite service providers. The prohibition of these 
approaches would eliminate the steps taken to provide parity and freeze 
into place the preferential tax treatment of satellite service 
providers. The two approaches addressed in the legislation are:

        (1)  Some states have used the authority granted in 
        602 to levy a state sales or excise tax on satellite 
        services that is roughly equivalent to the combined state and 
        local sales or excise tax on cable television services and have 
        redistributed a portion of the state tax back to localities.

        (2)  Some states have considered a portion of the franchise fee 
        levied against cable service providers to be a tax and allowed 
        a portion of the franchise tax to be taken as a credit against 
        the state sales tax in an effort to bring the rate of combined 
        taxes and franchise fees on cable services into closer 
        alignment with the tax on satellite services.

    Judicial History. There have been several state and Federal 
judicial decisions that have ruled the various aspects of laws 
regulating the taxation of cable and satellite video service providers. 
All Federal and state appellate decisions have upheld the approaches 
taken by the states to the taxation of cable and satellite video 
service providers. H.R. 3679 would reverse the appellate decisions. The 
following is a summary of the various judicial decisions[F1].

                      FEDERAL APPELLATE DECISIONS

    In DirecTV Inc. and Echostar Satellite, L.L.C. v. State of North 
Carolina, 632 S.E.2d 543 (N.C. Ct. App., 8/1/06) two satellite 
companies contended that North Carolina's sales tax on satellite 
providers discriminated against interstate commerce in violation of the 
Commerce Clause, by favoring the cable companies against which they 
compete. The sales tax was not applicable to cable service, although 
cable companies had to pay a local franchise tax that did not apply to 
satellite companies. The satellite companies contended that they use 
satellites, which they characterized as ``out-of-state facilities,'' to 
deliver their programming, while cable companies use ``in-state 
facilities,'' their transmission facilities and cable infrastructure, 
to deliver their programming. The appellate court ruled that the tax 
did not discriminate against satellite providers. The court determined 
that whether a company is subject to the tax ``depends only upon how 
companies deliver television programming services to its subscribers, 
and not whether delivery of the programming services occurs inside or 
outside the state of North Carolina.\2\
---------------------------------------------------------------------------
    \2\ North Carolina has since revised its tax laws to prohibit local 
taxation of both cable and satellite TV and substituted a state level 
sales tax in its place.
---------------------------------------------------------------------------
    In DirecTV, Inc. and Echostar Satellite, L.L.C. v. Tolson, No. 07-
1250 (4th Cir., 1/10/08) the Fourth Circuit Court of Appeals has upheld 
the dismissal of a case that rejected claims by satellite companies 
that the elimination of a franchise fee by the State of North Carolina 
violated the Commerce and Supremacy Clauses of the U.S. Constitution. 
Previously the Court of Appeals of North Carolina rejected claims that 
a five-percent state sales tax on satellite subscriber service violated 
the federal and state constitutions. Two satellite companies had 
claimed that North Carolina's sales tax on satellite providers 
discriminated against interstate commerce in violation of the Commerce 
Clause, by favoring the cable companies against which they compete. The 
tax was not applicable to cable service, although cable companies had 
to pay a five-percent local franchise fee that did not apply to 
satellite companies.

                        STATE APPELLATE DECISION

    In Treesh v. DirecTV, Inc.n et al., No. 2006-CA-001983-MR (Ky. Ct. 
App., 9/7/07) the Kentucky Court of Appeals ruled the Federal 
Communications Act does not prevent the imposition of a school district 
utilities gross receipts license tax can be imposed on a satellite 
company. The Court determined that the Act contemplated the Kentucky 
tax structure. The Act exempts satellite video services from local 
taxes but does not prevent a state from taxing such services. The Act 
allows local governments to receive revenues from the state tax. The 
state required school districts to impose the tax unless the district 
opted out. The tax was paid to the state and the state distributed the 
revenues.\3\
---------------------------------------------------------------------------
    \3\ State law in Kentucky has been amended to subject both 
satellite and cable services to the same system of state taxation.
---------------------------------------------------------------------------
                       STATE TRIAL COURT DECISION

    In Ohio Judge Daniel Hogan of the Franklin County Court of Common 
Pleas in Columbus ruled Nov. 7 that the state's four-year-old 5% sales 
tax on satellite television is unconstitutional for it does not apply 
to cable. The ruling was not unexpected; in October 2005 the judge 
issued a summary judgment on some of the issues in the case, finding 
before trial that there were enough facts to invalidate the tax. Ohio's 
Department of Taxation has indicated it will appeal the judge's 
decision, and ask the court to allow the tax to be collected as the 
appeal is pending.
    Conclusion. To a considerable degree, the state efforts at which 
H.R. 3679 addresses were intended to promote a greater degree of parity 
between the total taxation (including franchise fees) of cable services 
vs. satellite video service providers. FTA believes such decisions 
should be within the authority of states and localities as long as 
constitutional standards of non-discrimination are not violated. By 
dealing only with state level taxation, H.R. 3679 could prohibit the 
methods of achieving parity between state and local taxes on satellite 
and cable video service providers and lead to a higher local and state 
tax burden on cable companies than satellite companies.

                                

       Letter from Chris Murray, Senior Counsel, Consumers Union



                                

  Letter from Niel Ritchie, Executive Director, League of Rural Voters



                                

Letter from Mark C. Ellison, Senior Vice President, Business Affairs & 
  General Counsel, the National Rural Telecommunications Cooperative 
                                 (NRTC)



                                

 Response to Post-Hearing Questions submitted to Mike Palkovic by the 
Honorable Linda T. Sanchez, a Representative in Congress from the State 
     of California, and Chairwoman, Subcommittee on Commercial and 
                           Administrative Law



















                                

Response to Post-Hearing Questions submitted to Howard Symons, Esq., by 
 the Honorable Linda T. Sanchez, a Representative in Congress from the 
  State of California, and Chairwoman, Subcommittee on Commercial and 
                           Administrative Law





                                

 Response to Post-Hearing Questions submitted to Kristina Rasmussen by 
 the Honorable Linda T. Sanchez, a Representative in Congress from the 
  State of California, and Chairwoman, Subcommittee on Commercial and 
                           Administrative Law



                                

   Response to Post-Hearing Questions submitted to David Quam by the 
Honorable Linda T. Sanchez, a Representative in Congress from the State 
     of California, and Chairwoman, Subcommittee on Commercial and 
                           Administrative Law



                                 
