Virginia Not Alone in Eyeing DBS Tax

DBS operators, beware: The state of Virginia wants to nail your customers with a 5 percent sales tax.

"We understand that state legislators in Virginia are considering imposing a 5 percent sales tax on a number of telecommunications services, including DBS and cable," Bear Stearns Equity Research wrote in a Jan. 25 report. Virginia’s House of Delegates passed the measure Jan. 23, and it has been forwarded to the full State House for a vote. "Under the proposed bill, cable operators would no longer have to pay local franchise fees," Bear Stearns said. "Instead, the tax on cable services would go into a fund that would then be distributed among the local municipal authorities."

Since the current franchise fees work out to about 5 percent of cable TV revenues – to offset cable TV’s use of municipal facilities – the new sales tax would be revenue- neutral for cable TV companies. But it will hurt DBS subscribers, who will be required to pay an extra 5 percent on their DBS bills to cover this new charge. "If the proposed measure is passed, in our view it would be discriminatory to DBS since DBS subscribers would bear the same tax burden as cable, but not even use the local facilities as cable does," Bear Stearns said.

A number of other states have also considered or are contemplating similar proposals, Bear Stearns said. Variouis proposals have been float in Arkansas, California, Nevada, North Carolina, Texas and Washington. DirecTV Inc. and EchoStar Communications Corp. are fighting such measures. In May, the company jointly filed lawsuits in Florida and Kentucky challenging the constitutionality of taxes levied against their services, claiming that provisions of tax laws enacted by the two states would impose discriminatory taxes against satellite.

"While it is difficult to handicap whether the [Virginia] bill will be passed, and if so in what form, sales tax is an issue that comes up every now and then for DBS in various states that may be looking at the potential source of revenues as a way of easing the budget constraints," Bear Sterns said.

The analyst did project what potential impact the tax burdens might have on the companies in terms of either financial performance or potential subscriber loss. DirecTV’s stock closed at $13.48 Feb. 2 and has been floating between $13.17 and $17.69 for the past year. Echostar’s shares closed at $27.35 Feb. 2 and have a 52 week low of $24.44 and a high of $32.33.

TI Tech May Put XM on iPods

Texas Instruments says their TMS320DA295 reference design is the first hard disk drive (HDD)-based architecture capable of supporting XM’s Connect and Play technology for MP3 players. The idea is to turn MP3 players into XM satellite radios, opening up a new market segment for the largest U.S. DARS provider. These units would also be able to time-shift XM content.

"We think that this could potentially be a big development for XM and satellite radio (should Sirius enabled docking stations in this vein follow), as satellite radio would become more accessible and ubiquitous going forward," adds Bear Stearns. "This could also pave the way for a back door approach of interoperability with iPods."

Beta versions of the design are available starting at $20,000.