Regulation - What is it Good For? The Industry

A New Push to Tax Broadband?

In August, four cities in Indiana – Indianapolis, Evansville, Valparaiso, and Fishers – sued Netflix, Hulu, DirectTV, and Dish Networks claiming that the online video services offered by these companies should have to pay the same franchise fees that cable companies pay for using local rights-of-ways.

I’ve been covering in this blog how cord-cutting has been accelerating, especially this year, and cities are seeing a huge drop in cable franchise fees. These fees are generally levied against the fees charged for traditional cable TV service and are ostensibly to compensate the cities for using the public rights-of-way to deliver TV service.

These fees are a significant source of tax revenues for many communities, and that’s not hard to understand when you realize that the fees range from 3% to 6% that’s added to the cost of every traditional cable TV bill. Most big cable companies say that average cable bills are trending towards $100 per month.

Cities have gotten spoiled by these fees because for the last decade the amount of franchise fees collected has skyrocketed. For over a decade cable companies raised cable rates by 9% or more per year, and those rate increases automatically meant franchise tax revenue increases for cities. While franchise fees might have been relatively small when first imposed, the tax revenues have gotten gigantic as the average cable TV bill approaches $100 per month just for cable.

In a recent blog, I talked about how homes are doing more than just cord-cutting. A survey by Roku showed 25% of TV subscribers are now cord-shavers who have trimmed the size of their cable bill by downgrading packages or dropping extras like movie channels. Cord-shaving also trims franchise tax collection and franchise revenues at cities have to be in a free fall.

Taxes that are imposed unevenly usually eventually are challenged. The cable industry has complained about franchise fees for years, but never seriously tried to eliminate the fees. However, big cable companies are recently yelling foul about competing with online video services that don’t have to collect the franchise fees.

The franchise fees have always been hard to justify from a fairness perspective. If a telephone company or a fiber provider uses the same rights-of-way but doesn’t carry cable TV, then their customers are not charged this same expensive tax. Cities could have more fairly charged a franchise fee on some other basis, such as per mile of cable installed in their cities.  But cities latched onto a cable tax at a time when cable TV was a growing industry.

These Indiana cities are treading into dangerous legal waters because if the courts decide that Netflix doesn’t have to charge the franchise fee, that might provide a legal basis for the cable companies to claim that they also shouldn’t pay.

It would be a disturbing ruling if the online video companies end up having to pay a franchise fee. If Netflix has to pay to use the rights-of-way to reach homes, then why wouldn’t this apply to every other online subscription like newspapers, sports boards, etc. There is nothing particularly different about Netflix’s video signals compared to the numerous other sources of video on the web. Bits from online video data areidentical to every other bit of data delivered across ISP networks.  From a functional perspective, if the cities win this lawsuit, they will be imposing a tax on some, but not all bits passed between an ISP and a customer. That’s a line that I hope we don’t cross.

It’s not hard to understand why cities are unhappy about a drop in cable franchise tax revenues. But any tax that is specific to a given technology is going to change over time. Traditional cable TV as we’ve known it is fading away and could even completely disappear over the next decade. A tax on cable might seem as strange in a decade as a tax in the pass on the proverbial buggy whips.

3 replies on “A New Push to Tax Broadband?”

I disagree that right of way franchise fees should be characterized as a tax and further recommend for your next blog an examination of the uneven treatment of cable versus other services by federal law and the FCC.

A local sales tax on a video service, such as Netflix or satellite, would be the same as a sales tax on purchasing an service, such as season tickets to the theatre, or similar to CDs, videos. Every video service should pay for the right to sell services to the community – that’s what funds the roads, police, etc that make people want to live in areas where these OTT services can be delivered – OTT, Cable and Satellite should be taxed equally. These taxes could also be used for digital equity and literacy programs.

Companies that use the roads to deliver service should pay right way franchise fees. So cable might pay a sales tax and franchise fee, whereas satellite pays a sales tax but no franchise fee (because they pay for satellites). It’s federal and state laws that make if difficult for local governments to treat different services the same for free and tax purposes. It’s federal law that prohibits a sales tax on Internet service providers who leave huge parts of America behind. It’s the FCC that is trying to limit local government to recovering its costs only for small cell use of public rights of way, and then stick it to local governments to subsidize the cost to bring broadband to underserved and rural communities. Urban density lowers deployment costs.

Not taxing streaming services equally with other entertainment, not requiring right of fees from all right of users that do not have a requirement to serve all homes and businesses, not requiring broadband service providers to serve entire communities and entire states, pretending that the Internet and fiber are nascent industries that need to be protected from paying to reach customers in communities created by tax revenues — that’s the real buggy whip.

I think it is important to remember that cable franchise fees are simply “pass through” fees that cable operators add on to their invoices to their customers, almost always as a seperate line item near the bottom of their monthly bill, and then collect these fees “on behalf of” the city/franchising authority, and remit the fees to the city/franchising authority. Therefore, the franchise fees have exactly zero impact on the cable operstors profitability in that the cable operator is not paying them out of their “revenue” and they are not impacting the cable operators margins, cash flow, or operating expenses, They’re just tacking it on to their cable programming related revenue and collecting/remitting it to the city/franchise authority. The cable subscribers (residents of the city) are thus the only person/entity that is financially impacted by these franchise fees, not the cable operaotrs. Given that cable operators are almost always the monopoly (or, in rare cases, the duopoly) provider of residential broadband to the vast majority of American households, it strains credibility for the cable operators to claim that these franchise fees are somehow making them “less competitive” than over-the-top service providers or satellite based cable program servcie providers.

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