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Verizon, Cable Cry Foul Over Satellite’s ‘Free Ride’

Only satellite companies are exempt from the hodgepodge of taxes and fees that apply to all other NJ communications providers.

Verizon New Jersey and its competitors in the cable industry might be fighting tooth and nail for consumer business, but there is at least one thing they agree on: satellite companies like DirecTV and Dish Network, they assert, are getting a free ride under the state’s regulations on communications services. The satellite companies -- unlike Verizon and cable -- do not have to pay franchise fees to municipal or state governments.

Lawmakers are looking into this issue, as well as the equity of the patchwork of taxes and fees applied to all types of communications services offered in New Jersey. The fact that satellite companies not only don’t have to pay franchise fees, but also remain unregulated by the state, is one of Verizon’s and the cable operators’ biggest complaints about the current system.

“To ensure a fair and robust marketplace, companies that are providing the same service, in direct competition with one another, should be treated equally,” Verizon New Jersey president Dennis Bone testified before the Assembly Telecommunications and Utilities Committee earlier this year.

The New Jersey Cable Telecommunications Association (NJCTA) told Gov. Christie’s Red Tape Review Group earlier this year that when cable companies are regulated by the state, as they are now, and satellite companies aren’t, it “distorts the market in favor of one type of provider over another.”

Complex Considerations

But the issue is not a simple one. Fees and taxes for video services are treated differently from services that also offer voice. Cable companies operating in New Jersey have to pay a franchise fee, typically ranging from 2 percent to 4 percent of their video revenue, to the municipalities where they operate. Verizon, which was granted the first statewide franchise, pays a fee of 4 percent of its video revenue, which is distributed to the towns where it has rolled out its FiOS service.

In addition to various state taxes and fees, Verizon is also required to pay a local Business Personal Property Tax (BPPT) to municipalities where it houses its local exchange equipment, which only Verizon and several other local carriers pay.

As the services offered by providers merge into bundled packages, which can offer voice, wireless, data and TV, these various taxes and fees become harder to justify.

“I think it’s indisputable that there’s an unlevel playing field between satellite providers and cable providers in regard to the franchise fee or the personal property taxes,” said Sen. Raymond Lesniak (D-Union), chairman of the Senate Economic Growth Committee.

The Satellite Position

The satellite companies disagree. DirecTV maintains that it is in a very different position than Verizon and cable companies, and should not be obligated to fork over a franchise fee to New Jersey.

“They utilize the public right of way to make a profit,” DirecTV spokesman Damon Stewart said. “They rip up the streets. They get monopolies. And in many situations, franchise fees are exclusive fees to provide Internet, video and telephone services, and again, at a great profit. If you look at their SEC filings, millions and millions of dollars.”

Stewart added that franchises are a valuable asset to a cable or phone company, allowing them to offer television service in a prescribed area. For example, Comcast can’t offer video service in a town where Time Warner has a franchise.

“Only in the context of talking to the politicians do they call for a level playing field,” Stewart said. “At the FCC [Federal Communications Commission], they call [a franchise] a very important asset.

Stewart compared Verizon and cable companies complaining about DirecTV to “the railroad saying the airlines ought to pay more because the railroads have to pay for right of ways.”

He added, “If I wanted to place my business in the middle of a state park, and put a zoo there or something, I wouldn’t expect to get that for free. I would pay money to use the public land. We send satellites into space… We don’t complain about what we have to pay to launch a satellite.”

Study Commission Recommendations

In an effort to harmonize this patchwork of municipal and state levies, former Governor Jon Corzine’s administration created a commission to study the matter in 2009. The commission, which was chaired by former Democratic state chairman Tom Byrne, released recommendations shortly after last November’s general election of Gov. Chris Christie and has yet to be addressed by the new administration or the legislature.

“It seemed like an issue that the Corzine people wanted to address after the election,” said Byrne, who is president of Byrne Asset Management of Princeton. “But I suspect it just got lost given all that had to be done in order to effect an orderly transition. I’m sure the issue will resurface eventually, but I cannot predict when.”

Simplifying Franchise Fees

The commission issued a number of recommendations, including calling for the elimination of the BPPT tax on local phone providers, such as Verizon. It suggested that franchise fees be simplified by the imposition of an annual $8-per-subscriber franchise fee that any video provider using the public’s right-of-way pay.

In another recommendation, the report said that the state sales tax should be imposed on revenue from the sale of premium subscription video services.

Assemblyman Upendra Chivukula (D-Somerset), chairman of the Assembly Telecommunications and Utilities Committee, acknowledged that there is disparity in what the state charges telecom providers. Chivukula says that one idea he has is to make any alternations or changes to franchise fees part of Gov. Christie’s so-called toolkit. In imposing a 2 percent cap on future property tax increases, the legislature and administration are supposed to give towns a toolkit to help cope with the new state mandate. Chivukula says he thinks he can come up with a toolkit in the telecom area.

Linda Moss is a veteran business reporter and freelance journalist who has worked for Crain's New York Business and Multichannel News, a cable trade publication.

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