Satellite Television Industry Questions Constitutionality Of Proposed Satellite-Only Sales Tax In Ohio

Analysis By Law Firms Indicates Proposed Tax Provision Likely Wouldn't Hold Up In State Or Federal Court

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Columbus, Ohio May 29, 2003 The Ohio House of Representatives' proposal to amend the Ohio Revised Code in order to impose an excise (sales) tax just on the state's 678,000* satellite TV customers - and not on those who use cable TV - is unconstitutional under both the U.S. and Ohio Constitutions and otherwise unlawful, according to two respected law firms who have analyzed the proposed legislation for DIRECTV, Inc., and EchoStar Communications Corporation's DISH Network, the nation's largest providers of subscription satellite television services. DIRECTV is a unit of Hughes Electronics Corporation.

Two white papers, submitted yesterday to the Ohio Senate Taxation Committee following testimony last week to committee members by Michael W. Palkovic, senior vice president and chief financial officer at DIRECTV, and Michael McDonnell, senior vice president and chief financial officer at EchoStar, found that a satellite-only tax would likely not survive a legal challenge.

"There's absolutely no doubt that any sales tax that applies only to satellite TV customers in Ohio and not the state's cable customers is bad public policy brought on by the cable industry lobby," said Palkovic. "But more significantly, the Ohio and U.S. Constitutions would specifically prohibit such an unfair and unbalanced law."

The intent of the proposed law is purely to benefit its sponsors, the cable operators, who hope to leverage a tax just on satellite television subscribers to gain an unfair and unconstitutional competitive advantage.

Original Proposal To Tax Both Cable and Satellite

In February, Ohio Governor Bob Taft's proposed budget would have added a five percent state sales tax to both the cable and satellite services in a plan to raise nearly $170 million in new revenues. But last minute lobbying by Ohio's powerful cable operators prompted the House of Representatives to remove the tax on cable TV, leaving the added sales tax burden to fall only on Ohios estimated 678,000* satellite television subscribers and exempting the approximately 2.8 million* households that have cable TV. The measure, HB-95, is now in the Ohio Senate awaiting action.

"Passage of this proposal is patently unfair as well as unconstitutional, and will not result in increased revenues for the State, but rather in lengthy and costly litigation that would ultimately overturn this type of inequitable law," Palkovic said.

Two law firms, Steptoe & Johnson in Washington, D.C., and Calfee, Halter & Griswold in Cleveland, Ohio, each were retained to analyze the constitutionality of Ohio's proposed legislation. Steptoe & Johnson examined U.S. Constitutional issues while Calfee, Halter & Griswold analyzed legality under the Ohio Constitution.

"The proposed satellite-only tax raises serious questions of uniform application of the Ohio Revise Code and fundamental fairness to industries that provide identical services," said Palkovic. Applying a discriminatory tax to the sales of companies that compete directly against each other to provide essentially the same product to the same customer deprives the taxed companies of their constitutional rights of equal protection guaranteed under the Ohio Constitution.

Additionally, because the proposed legislation would give a direct commercial advantage to local cable services while discriminating against out-of-state businesses, it would violate the Commerce Clause of the U.S. Constitution.

The two white papers were submitted to the Ohio Senate Taxation Committee Tuesday to refute the Ohio cable TV industry's belief that a satellite-only tax fairly balances out franchise fees that Adelphia, Cox, Time Warner and other cable TV providers pay Ohio cities in exchange for right of way and other privileges.

Key to this argument is the cable lobby's definition of a franchise fee as a tax. "Federal and state courts have ruled that franchise fees are not taxes but are rental payments that cities charge cable providers for access to homes and businesses and for use of publicly funded infrastructure to support their service," said McDonnell. "As satellite providers, DIRECTV and DISH Network provide their digital signals from 22,300 miles above the earth, and are not dependent on and do not use publicly funded infrastructure to reach subscribers."

Satellite television providers also point out that, unlike cable customers, satellite customers already pay state sales taxes on the purchase of satellite dishes and receivers required to receive programming. In addition, if approved, a satellite-only tax would unfairly burden those residents living in rural Ohio communities not serviced by cable.

Hughes Electronics Corporation, a unit of General Motors Corporation, is a world-leading provider of digital television entertainment, broadband satellite networks and services, and global video and data broadcasting. The earnings of HUGHES are used to calculate the earnings attributable to the General Motors Class H common stock (NYSE:GMH).

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