Tax Policy for Communications Services Really is Interesting -- No Really!
When I tell people that in law school, tax law proved surprisingly interesting, they usually write me off as hopelessly nerdy or just plain clueless. In fact, one particular class in corporate tax was perhaps one of the most interesting (and it REALLY was) of the entire three-year law school experience. Rather than being black and white as I'd assumed, tax law involves not only math issues, but copious quantities of reasoning, persuasion and context. With this in mind, a recent decision in an ongoing Florida case caught my attention.
The most recent decision in the case, Florida Department of Revenue, et al. v. DirecTV, Inc. et al, was issued in mid-April. It addressed the question of whether the Florida Department of Revenue acted improperly in assessing tax rates of differing amounts for satellite and cable services. The court's decision, which reversed a lower court's determination from 2016, determined that by charging different rates of sales tax for similar services relying on different underlying technologies, the Florida Department of Revenue acted properly and within the law. However, the reasoning behind the decision had nothing to do with the technologies themselves, but the legal theories underlying each side's position. And the bottom line remains that the State of Florida, through the application of its sales tax, is subjecting one provider of a competitive service to a higher tax rate than another.
This issue has been limited to the Florida courts since it was first raised in 2005, when DirecTV and Echostar filed suit at the trial court level looking for a determination that the state's sales tax application to their services was unconstitutional. They also looked for a refund for past sales tax fees that each company had remitted to the state's sales tax authorities. Citing language from the case, "when it was officially enacted in 2001, Florida's Communications Services Tax (CST) imposed a 6.8% tax rate on cable service and a 10.8% tax rate on satellite service." Currently, cable service is taxed at 4.92% and satellite at 9.07%.
The satellite company has repeatedly argued that this difference in tax rate created unconstitutional discrimination in both effect and purpose. Part of the argument they made is that because the cable companies rely more heavily on in-state resources (physical plant) than do the satellite providers, the tax structure gave an advantage to the service provider that had greater in-state contact. But the Florida court's opinion suggests that neither is truly an in-state interest because neither content nor overall business management are headquartered in Florida. As such, the argument that the variance in tax rates creates discrimination between in-state and out of state-based businesses fell. Additionally (and this may be the kind of stuff that only lawyers care about), it was unclear to the court that when the statute was written, it was created with the intent to discriminate -- that is, to discriminate with a purpose.
If you're interested in the tax law issues raised by this case, feel free to reach out to me. But the reason this case is relevant beyond the Sunshine State is that taxing schemes can have a significant effect on overall costs. And the larger the customer, the more a seemingly small percentage can make a difference over the long haul to an entity acquiring those services. As such, it makes sense, when making a decision where the product is "substantially similar" to another, but which may be delivered in a different format utilizing a different technology, it behooves the acquirer to push the vendor on tax consequences, and then present the findings internally to its own tax department where the experts can parse the subtleties.
How taxes are applied is NOT the snore-athon that most people think. As has been is often the case, at least in my world, it pays to ask the right questions and be willing to sweat the small stuff. It can make a significant difference to the bottom line.