Indiana: Seventh Circuit Upholds Remand of Franchise Fee Dispute to State Court

Listen to a brief overview of state tax developments this week, including Indiana, or read full Indiana development below.

Detailed Indiana Development

Recently, the United States Court of Appeals for the Seventh Circuit agreed with a lower court that a lawsuit filed by several Indiana municipalities seeking to require streaming platforms to pay franchise fees should be remanded to state court.  Under Indiana law, video service providers, including traditional cable companies, are required to pay quarterly franchise fees to municipalities within the provider’s service area. The cities at issue sought a declaration that the streaming companies offered "video services" and should have applied for franchise agreements and paid fees accordingly. After being filed in state court, the case was removed to federal court on the basis that the district court had jurisdiction over the lawsuit under both the traditional diversity jurisdiction statute and under the Class Action Fairness Act. The cities did not dispute that the federal court had jurisdiction over the matter, but argued that the comity abstention doctrine applied to remove the case back to state court.

The judicially-created comity abstention doctrine, articulated most recently by the U.S. Supreme Court in Levin v. Commerce Energy, Inc., counsels lower federal courts to resist engagement in certain cases falling within their jurisdiction that present challenges to "state taxation of commercial activity.” The basis for abstention is that revenue collection is a core function of state governments. The doctrine is somewhat similar to the Tax Injunction Act (TIA), which provides that a district court "shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." The TIA ensures that challenges to state taxes are litigated, if at all, in the state courts, but does not bar federal adjudication of collection suits initiated by states or municipalities. In the case at hand, because the cities initiated the collection suit, the TIA did not defeat federal jurisdiction. After the district court invoked the comity abstention doctrine to remand the case back to state court, the streaming companies appealed.

The Seventh Circuit noted that in the Levin case the U.S. Supreme Court set forth three factors to consider when determining whether a federal court should abstain from exercising its jurisdiction over a particular matter. The Levin factors require analyzing whether the subject of an action is one over which a state enjoys "wide regulatory latitude," whether a party is seeking federal aid to improve its competitive position, and whether a state court is better positioned to resolve the dispute due to familiarity with "state legislative preferences" and because the TIA poses no constraint. The Seventh Circuit concluded that the district court properly determined that comity abstention applied. First, Indiana and its municipal governments have broad authority over utility and right-of-way regulation. Secondly, the streaming platforms, in the court’s view, removed the case to gain a competitive advantage over traditional cable companies. Finally, the court concluded that the Indiana courts are well positioned to address remedial questions that might arise in the context of adjudicating both the cities' state law claims and the streaming platforms' defenses, including those defenses rooted in federal law, such as that the Internet Tax Freedom Act prohibits the imposition of the fees. After rejecting the streaming companies’ arguments in opposition to abstention, the court observed that the Supreme Court is sure to say more about the limits of comity abstention in years to come. “Today, though, informed in part by substantial issues of waiver, we are satisfied that the district court did not abuse its discretion by granting the cities' motion to remand to Indiana state court.”  Please contact Sarah McGahan with questions on City of Fishers, Ind. v. DIRECTV.


This Week's Developments

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Featured Speaker

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US