March 27, 1986

Mr. Robert Sambroak, Jr. 
Jackson County State's Attorney 
Kadoka, South Dakota 57543

OFFICIAL OPINION NO. 86-08

Cable television franchise tax by municipality

Dear Mr. Sambroak:

You have requested my official opinion on the following factual situation:

FACTS: 

The City of Kadoka has entered into a franchise agreement and passed the appropriate franchise ordinance with a cable t.v. company so that cable t.v. service can be provided to City residents.  The original franchise ordinance passed by the City does not provide for the regulation of rates by the City nor the imposition of any kind of franchise tax.  Recently, the City Council granted the cable t.v. franchise a rate increase and was considering a franchise tax based on the gross profits of the cable t.v. operator, but tabled the imposition of the tax because the cable t.v. operator indicated that they would pass on that tax to the customer.

Concerning this, you have asked the following question:

QUESTION: 

Should the City Council decide to impose a franchise tax on a cable t.v. operator, can they at the same time, in that ordinance, prohibit the franchise operator to pass on the tax to the consumer as an added cost?

As you have noted, South Dakota law grants municipalities the authority to regulate and tax Community Antenna Television service systems (CATV).  By SDCL 9-35-22 municipalities by appropriate ordinance may levy an annual occupational tax against persons now operating and maintaining any CATV system within its boundaries.

In 1984 the Congress adopted Public Law 98-549, known as the Cable Communications Policy Act of 1984.  The purpose of this enactment, now codified in 47 U.S.C. is to establish a national policy that clarifies the current system of local, state and federal regulation of cable television.  As noted in the legislative history, U.S. Code Congressional Administrative News 10A, December, 1984, the National Policy continues reliance on the local franchising processes, the primary means of cable television regulation while defining and limiting the authority that a franchising authority may exercise through the franchise process. Franchise fees are addressed in Section 622 of Public Law 98-549. The law permits the imposition of a fee or tax of no more than five percent of the cable operator's gross revenues derived in any twelve-month period from the operation of the cable system.  The prior maximum as set by the Federal Communications Commission (FCC) was established at three percent.  This statute, however, grants authority to collect franchise fees up to five percent without any FCC waiver and prohibits the franchising authority from requiring fees in excess of five percent.

Section 622(c) provides that 'a cable operator may pass through to subscribers the amount of any increase in a franchise fee, unless the franchising authority demonstrates that the rate structure specified in the franchise reflects all costs of franchise fees and so notifies the cable operator in writing.'  Franchise fee is defined in subsection 622(g) to include  any tax, fee or assessment imposed on a cable operator or subscriber solely because of their status as such.  Also, franchise fee is defined so as not to include any bonds, security funds or any other incidental requirements or costs necessary to enforcement of the franchise.  Such charges or requirements may be imposed by the franchising authority in the franchise ordinance or the request for proposals.  A tax of general applicability is not a franchise fee and is not subject to the five percent limitation.  This would include such payments as a general sales tax, an entertainment tax imposed on other entertainment businesses as well as the cable operator and utility taxes or utility user taxes which, while they may differentiate the rates charged to different types of utilities, cannot unduly discriminate against the cable operator so as to effectively constitute a tax directed at the cable system.

In answer to your question, it is my opinion that the only way the municipality could prohibit a pass-through of the franchise fee would be to demonstrate that the rate structure specified in the franchise reflects all the costs of franchise fees and notify the cable operator in writing.

Respectfully submitted,

Mark V. Meierhenry
Attorney General