By Tram Le
With emergence of streaming services, states see more money to collect and are going after big pockets and huge companies that have done well during the pandemic.
The Dallas City Council voted to pursue legal action against streaming service providers Netflix, Hulu and Disney to collect the city’s franchise fee of 5% based on gross revenue The franchise fee was unlikely to be framed with digital streaming service providers in mind. Yet, Dallas has dug through existing law to find a way to capture revenue from digital streaming.
Municipalities generally have authority to impose taxes or assess fees where it is not specifically prohibited or preempted by state or federal laws. Under Texas’ Public Utility Regulatory Act (The Act), cities are granted the authority to assess franchise fees on cable and other video services for the use of a right-of-way in the city in the delivery of services to customers.
It’s the type of state revenue grab businesses across the U.S. can expect in the wake of the COVID-19 pandemic emergency that has depleted state budgets. In Dallas, the city will be pursuing under suit monetary damages and other legal recovery fees in addition to the franchise fee itself.
The Act has been effective since September 2005, which creates exposure dating back over 15 years. Should the city of Dallas prevail, streaming services like Netflix and Hulu could be required to comb through receipts dating back to effective date of the statute to calculate taxes, penalties, and interest due.
Under the Texas Constitution, cities are prohibited from giving away or allowing use of city property. Therefore, cities have overcome this prohibition through granting a franchise to utility companies and assessing a fee for the use of public right of way to deliver services to customers. As such, cable television and other video service provides are charged franchise fees for the use of a public rights of way when a video service provider makes use of wirelines located and crossing partially and or fully into public domain. The law was likely geared toward capturing revenue from telecommunications companies using public lands to distribute product.
These types of tax or fee are often overlooked because it is specific to certain industries, and in this case, utility companies in Texas. The franchise fee is a 5% fee on gross revenue on certain utility companies, including cable providers and video service providers. The Texas state statute carved out a commercial mobile service definition to make the fee applicable to cable and video service providers.
Now, with emergence of streaming services, states see more money to collect and are going after big pockets and huge companies that have done well during the pandemic.
Companies that have never applied for the state issued certificate to operate as a utility and provide services in the state are now exposed and possibly dating back to over 15 years.
Streaming in the courts
The gray area here is whether Netflix, Hulu and similar streaming services are subject to the 15+ year old franchise fees. The City of Dallas is using the law to extend such fees to digital streaming services.
One question before the courts is whether Netflix and the like are delivering their services through wireline located in part or whole through a public right away and whether there are exceptions to coverage that apply in individual cases.
If streaming services are considered video services provided by a commercial mobile service provider as defined under federal law, then they may not be subject to the franchise fee under The Act.
The definition of mobile services is complicated and subject to differing interpretations:
(1) the term “commercial mobile service” means any mobile service (as defined in section 153 of this title) that is provided for profit and makes interconnected service available (A) to the public or (B) to such classes of eligible users as to be effectively available to a substantial portion of the public, as specified by regulation by the Commission;
(2) the term “interconnected service” means service that is interconnected with the public switched network (as such terms are defined by regulation by the Commission) or service for which a request for interconnection is pending pursuant to subsection (c)(1)(B); and
(3) the term “private mobile service” means any mobile service (as defined in section 153 of this title) that is not a commercial mobile service or the functional equivalent of a commercial mobile service, as specified by regulation by the Commission.
Without question, the city of Dallas is using existing authority to impose franchise fees on providers of digital streaming services. Will the wireline facility criteria stand up in court? What is considered a use of a public right of way? What type of wireline—cable or fiberoptic? What about satellite connections?
Many state and local governments are going through these mental gymnastics as they consider the best way to generate revenue and impose tax or fees on digital streaming services. But new laws take time and money to draft and are not guaranteed to pass.
Jurisdictions now recognize they can increase revenue without passing new laws by digging into laws already on the books to identify (unintended) loopholes capable of capturing a broader tax base or imposing fees on certain industries.
 Texas Utilities Code, Title 2., Sub. C, Sec. 66
 Texas Const. Art. III, Sec. 52
 47 U.S.C. Section 332(d)