In Kentucky CATV Association, Inc. v. City of Florence, et al., No. 2015-SC-000178-DG (Ky. June 15, 2017), the Kentucky Supreme Court, affirming the Court of Appeals, held that the Multichannel Video Programming and Communications Services Tax (“Telecom Tax”) provision prohibiting any political subdivision of the state from collecting franchise fees or taxes on multichannel video programming (“MVP”) and communications services providers was unconstitutional as applied to Kentucky cities.  The following summarizes the Court’s opinion.

The Telecom Tax (KRS 136.600 et seq.) imposes a tax on the gross revenues of MVP and communications service providers, which provide cable, satellite broadcast, wireless cable, and internet protocol television, and is made up of a variety of taxes. All taxes collected are deposited into the General Fund. KRS 136.660(1)(a)-(c) prohibits cities from collecting any taxes on any franchises subject to the Telecom Tax.

Section 163 of the Kentucky Constitution provides that utilities cannot be permitted within a city or town without their legislative bodies’ consent. Section 164 of the Kentucky Constitution allows cities, counties, towns, and other municipalities to grant franchises. Municipalities traditionally collected franchise fees to compensate them for allowing utilities to use municipal rights-of-way. So, cable companies would obtain the municipality’s permission to use roads and other rights-of-way, and the municipality would grant it a permit that would be subject to franchise fees.

Though the Telecom Tax statutes prohibit municipalities from collecting such fees, the statutes also provided for a portion of the funds collected from the tax to be disbursed to municipalities to compensate them for their loss of revenue. The amount represented only 83% of the revenue the municipalities collected prior to the enactment of the Telecom Tax. A number of cities (“Cities”) filed for declaratory relief in circuit court in 2011, arguing that the Telecom Tax violated their right to grant franchises and collect franchise fees under Sections 163 and 164. The Finance and Administration Cabinet (“Cabinet”) and the Kentucky CATV Association (“CATV”) denied the allegations, and the circuit court agreed with them. The Cities appealed, and the Court of Appeals vacated the circuit court judgment and remanded. The Cabinet and CATV appealed to the Kentucky Supreme Court, arguing that Sections 163 and 164 did not specifically address the collection of franchise fees and that Section 181 allowed the legislature to withdraw any delegation of authority to collect such fees.

The Supreme Court held Sections 163 and 164 of the Kentucky Constitution were intended to grant municipalities the power to grant franchises and collect fees in exchange for that permission. The constitutional history of those sections revealed that the framers were concerned with protecting the public from city councils who would grant rights for their own personal benefit instead of collecting fees to compensate the public for the use of their rights and privileges. Likewise, they were intended to protect cities from a General Assembly who might give away their rights without compensating the cities. The Court ultimately held that the ability to collect the fee was a crucial part of being able to grant the franchise, which Section 163 and Section 164 plainly allow.

With regard to Section 181, the Court held that it did not apply to the franchise fee provided for in Section 163 and Section 164. Section 181 enumerates certain powers that may only be delegated to them by the General Assembly, including the power to collect a license fee on a franchise. The Court held that CATV had collapsed franchise fees and license fees into one entity, and that while the power to collect a license fee on a franchise was one that could only be delegated by the state legislature, the power to collect a franchise fee was explicitly guaranteed by Section 164 and thus delegation could not be withdrawn.

Finally, the Court held that the Telecom Tax as a whole was not unconstitutional, but instead, the provision prohibiting cities from collecting a franchise fee could be severed from the rest of the statutes. The Court held that the rest of the statutes pertaining to the Telecom Tax could be executed faithfully without the prohibition provision.

Though this case deals specifically with one provision of the Telecom Tax, it also appears to generally strengthen Section 163 and Section 164 of the Kentucky Constitution and can be read to allow municipalities to issue permits in exchange for a franchise fee. Affected service providers should note that municipalities may attempt to subject them to additional fees in the near future. These service providers should review the ordinances of localities in which they have (or may be required to have) a permit to access a right-of-way and proactively develop a go-forward strategy.

Questions remain though: What about the money that municipalities have already received from the state? What can or will the General Assembly do now?