Brown: There's a disturbing tax case from deep in the heart of Texas
that deserves our attention, involving discrimination against news
distribution in electronic form.
Green: Tax questions sound pretty dull, Brown. Even with the rather
sexy discrimination-in-cyberspace angle. But let me tell you about
the Communications Decency Act of 1995, which is currently pending
in Congress.
White: Hold on, Green. I'm familiar with the new bill, but I think
you'll find the tax controversy intriguing. Isn't this the case in which
the Texas Court of Appeals upheld a tax assessed on Reuters
"electronic newspaper," while regular "newsprint" newspapers in
Texas aren't taxed?
Brown: Just so. Reuters provides a news service under annual
contract to its subscribers in Texas, with some of the news targeted
to specific topics of subscriber interest. Bills are sent monthly or
quarterly.
Green: My New York Times home subscription works just about the
same way, Brown.
Brown: Reuters was assessed some $318,000 by the Texas tax
collector, and filed a lawsuit to object. You see, under Texas law there
is an "information service" tax, but "newspapers" are exempt from
the tax. A newspaper is (under Texas law) something that's printed
on newsprint, that sells for an average of 75 cents or less, and that
disseminates news of a general character and of general interest at
short intervals, such as daily.
White: The Reuters service would fail to qualify on the "newsprint"
criterion alone, wouldn't it? As well as perhaps the price criterion?
Green: Naturally, but I think Brown's point is that the criteria
themselves may be improper and that Texas shouldn't be allowed to
discriminate among media suppliers based on these criteria.
Brown: Indeed. At least, that was Reuters' view. It argued that the
Texas classification created a distinction--newspapers v. other
media--that seriously impacted Reuters' rights under the First
Amendment. Therefore, under standard First Amendment principles,
the State of Texas should be required to provide a "compelling state
interest" which would support the State's making and enforcing the
distinction.
White: Did Reuters demonstrate that it had actually suffered any
harm due to the classification?
Brown: No, and this was part of their problem. Reuters really needed
to show that the tax structure actually affected its ability to present
its views--its core First Amendment rights--and that therefore the
validity of the state-created distinction merited "strict scrutiny"
under the First Amendment.
However, the Court characterized the exemption as going to the
"format" of the information, rather than to its content. It also noted
that the exemption did not target a small group of speakers who had
difficulty getting their message across. Indeed, under Texas law the
tax applies to cable, to telecommunications services and to other
information services.
White: So the law is really a discrete discrimination in favor of
newspapers, rather than a more general discrimination against
electronic media?
Green: That's one way to look at it, White, although I think Reuters'
lawyers would prefer a different characterization.
White: No doubt.
Brown: In any case, the Court declined to apply a "strict scrutiny"
analysis and held that the State only needed to show a "rational
basis" for making the distinction. The State's attorneys offered two
justifications. First, newspapers are cheap and readily accessible, and
the State has an interest in encouraging the reading of newspapers to
advance literacy. Computer monitors are more elitist (at least in
Texas). Therefore, the State can favor newspapers over electronic
media to advance the interest in literacy.
Green: Oh, brother. Is that really the best they could do?
Brown: Not quite, but close. The State also argued that it would be
difficult to collect the tax on newspapers because of the way they are
distributed: by home delivery, vending machine, and so on. So, they
argued, the State could solve the supposed problem in collecting a
newspaper tax, by exempting the "administratively difficult" case of
newspapers from tax all together.
White: That's like saying that the Government only should build
roads over wide open spaces rather than through the mountains,
because it's easier. If our great grandparents had adopted that
philosophy, they never would have gotten as far west as Texas in the
first place.
Brown: That historical speculation would perhaps appeal to Reuters,
which is now some $300,000 poorer (plus fees paid to its lawyers) as
a result of this experience.
Green: What about the fact that Reuters is now, to some extent,
competitively disadvantaged relative to the newspapers, since
Reuters is subject to a tax that the newspaper escapes? Is that not a
valid argument?
Brown: To some extent. But the Court didn't require the Texas
legislature to be perfectly fair, or even to be wise. In the Court's
view, it's up to the voters to see that the legislature is fair and wise,
and in a democracy you tend to get pretty much what you deserve.
The Court only required the legislature to be rational, and that's a
pretty easy standard to meet. Witness the Texas Court's willingness
to accept the justifications put forth for the newspaper exemption.
White: And remember, Green, that the newspaper only gets the tax
break by being cheap. If their average price increases over 75 cents
per copy, then the exemption might be lost. Reuters isn't subjected to
any such price restraint. So that's fair.
Green: But Reuters might elect to cut its prices if by doing so it could
reduce the taxes paid on the information service. Wouldn't society be
better served by such a tax-funded subsidy?
Brown: Green, sometimes you come out with the wildest questions! I
don't know if society would be better off or not, but I do think I
know that this is not a proper decision for the courts to make. They
have a hard enough job just figuring out what the law is and whether
it's valid as enacted; let's not make them responsible for curing all of
society's ills.
White: You know, in the Texas case the point seems to be that
distributing the news via newsprint is different than distributing it
via electronic media, and that because of this difference, the State
can tax the one and exempt the other.
Green: White, you're a good friend to set me up like that. As you
know, in the meantime and back inside the beltway, our elected
representatives in Washington are considering a bill to extend some
of the restrictions in the Communications Act of 1934 from
"telephones" to "telecommunications devices" on the theory that the
new devices are fundamentally the same as telephones.
Brown: Is this the bill that would attack interstate electronic
pornography?
White: Perhaps. The best (or most amusing) thing about this bill is its
title, though. That is, its tacit assumption that the Congress should be
(or is capable of) making judgments about decency in the first place.
Green: Maybe we can reconvene to discuss this next time. I feel that
we're out of bandwidth for this meeting of the salon.
Brown: We'll give you a rain check, Green. Try to maintain a
modicum of decency in the meantime.
<i>This column only provides generalized and anecdotal discussion of
legal issues, and should not in any way be construed as legal advice.
Legal problems are inherently complex and require specific attention
to and analysis of the particular facts. Never rely on a general article
for guidance in a particular case.</i>
Edmund B. (Peter) Burke is an attorney in the Corporate &
Technology Practice Group at Powell, Goldstein, Frazer & Murphy, a
law firm with offices in Atlanta and Washington, D.C.
� 1995 Educom.