Reported / Citable
Background
In 2008, the City of Santa Barbara adopted Ordinance 5471, the Telecommunications and Video Users’ Tax Reduction and Modernization Ordinance, which imposed a 5.75 percent tax on charges for video services. In 2022, the City sent deficiency notices to subsidiaries of the Walt Disney Company — Disney Platform Distribution, BAMTech, and Hulu — for unpaid video users’ taxes from 2018-2020. The total assessed (including penalties and interest) was about $612,000.
The Disney entities appealed administratively to a hearing officer (a retired Court of Appeal Justice), who upheld the assessment. They then filed a writ-of-mandate petition in superior court, contending that (1) the Ordinance’s reference to ‘channels’ as a delivery mechanism excludes internet streaming, (2) the Ordinance violates the federal Internet Tax Freedom Act’s anti-discrimination provisions, (3) the Ordinance violates the First Amendment, (4) the Ordinance violates Article XIII C of the California Constitution, and (5) the City failed to comply with notice requirements of Public Utilities Code section 799. The trial court denied the petition. Disney appealed; numerous amici (California Taxpayers Association, MPA, Streaming Innovation Alliance, Howard Jarvis Taxpayers Association on one side; tax-law professors and the League of California Cities on the other) weighed in.
The Court’s Holding
The Court of Appeal, on rehearing, affirmed. On the threshold textual issue, the court read the Ordinance’s references to ‘video service’ and ‘channels’ in light of the Ordinance’s modernization purpose, which expressly contemplated technology-neutral application as video distribution evolved. Internet-based streaming services are ‘video services’ under the Ordinance because they deliver real-time video to subscribers, regardless of the underlying transmission medium.
The court rejected the federal Internet Tax Freedom Act (ITFA) challenge. ITFA prohibits discrimination against electronic commerce, but the Ordinance taxes video services across delivery technologies in the same way; it does not impose higher rates or unique administrative burdens on internet-delivered video relative to traditional cable or satellite. The First Amendment challenge fared no better: the Ordinance is a generally applicable revenue measure that does not target speech content and is appropriately reviewed under the rational-basis-style framework applicable to neutral revenue measures.
The court also rejected the Article XIII C challenge (which would require voter approval for new taxes), holding that the Ordinance was a permitted modernization of an existing voter-approved tax rather than a ‘new’ tax requiring fresh voter approval. Finally, Public Utilities Code section 799 notice requirements did not invalidate the application of the Ordinance to streaming services.
Key Takeaways
- California cities can apply existing video users’ taxes to internet streaming services when the ordinance was drafted with technology-neutral modernization language.
- The Internet Tax Freedom Act does not bar facially neutral local video-services taxes that apply to streaming services on the same terms as cable or satellite.
- Generally applicable revenue measures applying to video distribution do not violate the First Amendment, even though video distribution is expressive activity.
- Article XIII C of the California Constitution does not require new voter approval when a city modernizes an existing voter-approved tax to reach new technologies in line with the original purpose.
- Streaming companies should expect significant audit and enforcement activity from California cities operating utility users’ tax (UUT) programs.
Why It Matters
The decision is highly significant for California cities and for the streaming-video industry. With many cities and counties operating UUT programs originally designed for telephone, cable, and satellite, the question of whether these taxes reach streaming has been a major source of revenue uncertainty. The Second District’s published opinion — issued on rehearing with extensive briefing from amici on both sides — provides clear authority that technology-neutral modernization language brings streaming within the tax base.
For streaming providers, the practical impact is that their California operations face meaningful state-and-local tax exposure they may have under-accrued for. Companies should review their California UUT positions across cities, evaluate exposure for prior periods, and consider voluntary-disclosure or refund-claim strategies as appropriate. For California municipal tax counsel, the case is a major win that will be cited extensively when defending similar UUT applications statewide.