TEXARKANA, Texas (Legal Newsline) - Cities that signed up with private lawyers who said they could collect a rich new source of tax revenue from streaming video services like Netflix and Hulu are on a losing streak as courts dismissed their arguments in three states over several days.
Federal courts in Texas dismissed streaming video lawsuits in Texas and Arkansas and a state court in California rejected a city’s legal arguments there, in every case finding that state laws requiring cable television companies to obtain a franchise to string their wires in public rights-of-way didn’t apply to video delivered over the public Internet.
The dismissals come less than a month after a federal judge in Nevada rejected the City of Reno’s lawsuit seeking to impose a 5% tax on streaming video, saying state law doesn’t authorize the charge and Reno lacked standing to sue in the first place. Taken together, the dismissals could spell trouble for private lawyers who developed the legal theories behind these cases and hoped to collect a share of the tax revenue they produced as fees.
In the California decision, the Superior Court for Los Angeles County rejected the City of Lancaster’s claims that the state’s Digital Infrastructure and Video Competition Act of 2006, or DIVCA, gave it the right to collect the 5% tax on gross revenues it applied to traditional cable television providers. Like the other cities that have filed these suits, Lancaster viewed the expansion of franchise fees as a way to recoup tax revenue it has lost as consumers “cut the cord” and drop traditional cable.
The law defines a DIVCA “franchise” as authorizing construction and operation of a video delivery system in public rights-of-way, the court ruled. It doesn’t apply to companies like Netflix and Hulu, which stream their signals over wires owned by an internet service provider, or ISP. In support, the court cited a 1998 decision in which the Federal Communications Commission found that just because a company delivered its signal over wires located on public rights of way didn’t make it a “cable system” under the federal Telecommunications Act.
“Neither Netflix nor Hulu constructed or asked for the construction of the ISP networks delivering its service to subscribers,” the court ruled. “Netflix and Hulu do not control where the ISPs’ network cables lines go or how its signal travels over the ISPs’ network.”
If the plaintiffs were right and every company providing video services needed a franchise, the court went on, then “numerous franchise holders could `use’ a single public right-of-way,” each one paying a 5% franchise fee.
“Such an interpretation would result in a financial windfall for local entities that the Legislature did not intend,” the court concluded.
California’s law is more restrictive than a law in Missouri that defined video programming as anything flowing over “wireline facilities” regardless of technology or whether it was on demand or purchased per channel.
In Texas, separate federal courts issued orders dismissing an attempted class action by the City of New Boston and a lawsuit by Ashdown, Ark. based on similar theories. New Boston’s chief administrator acknowledged in a deposition that she didn’t consult with any other officials before agreeing to allow private lawyers to use her city as the representative of every municipality in Texas, and she didn’t care that if successful, the litigation would impose higher taxes on city residents.
In his Sept. 30 decision, U.S. District Judge Robert W. Schroeder found that Texas law only allows cities to collect video taxes from franchise holders and only the state could issue a franchise.
“The statute did not reserve to individual municipalities any authority to declare a provider a holder of a state-issued certificate of franchise authority,” the judge ruled.