A California Court of Appeal (Second Appellate District, Division Six) has issued a published decision affirming the city of Santa Barbara’s application of its Telecommunications and Video Users’ Tax to internet video streaming services (Disney Platform Distribution, Inc. et al. v. City of Santa Barbara, Case No. B342211).
The court’s opinion is notable for several reasons:
- Streaming falls within “video services.” The court held that Santa Barbara’s voter-approved 2008 ordinance applies to streaming services because its definitions are written to be technology-neutral, covering video services delivered “using one or more channels” regardless of delivery method.
- “Channel” is given its ordinary meaning. The court rejected the argument that “channel” must be interpreted using the technical “transmission path” definition from the federal Cable Act, instead concluding that voters would have understood the term in its ordinary, colloquial sense as a programming source.
- Constitutional challenges rejected. The court rejected a challenge under the First Amendment, concluding that the video users’ tax is content-neutral and applies without regard to the message, subject matter, or viewpoint of the video programming. The court further held that Santa Barbara’s enforcement of the tax against streaming providers did not violate the California Constitution, because it did not constitute the enactment of a new tax or a revision to the tax’s methodology requiring additional voter approval under Proposition 218, but rather the enforcement of an existing voter-approved tax consistent with the scope approved by the electorate.
- Internet Tax Freedom Act challenge rejected. With respect to the Internet Tax Freedom Act, the court focused on the statute’s “similarity” requirement, concluding that a streaming subscription constitutes a service, not tangible personal property, and is therefore not “similar” to the purchase or rental of a DVD from a brick-and-mortar retailer. Further, because DVDs are tangible goods subject to sales and use tax, the court reasoned that the absence of a video users tax on DVDs does not constitute discrimination against electronic commerce.
The court further held that Santa Barbara’s enforcement of the ordinance against streaming providers did not amount to the enactment of a new tax or a change in tax methodology requiring additional voter approval or advance notice to service suppliers.
The judgment affirms the trial court’s ruling in favor of the city. The streaming providers may seek rehearing or petition for review by the California Supreme Court, though such review is discretionary. Absent further review or a stay, the decision will become binding precedent statewide.
Link to Practical Impact for Businesses Practical Impact for Businesses
Cities with “modernized” UUT/VUT ordinances that include broad, technology-neutral definitions referencing IP-video and similar services may cite this decision.
While the decision resolves the threshold applicability question under Santa Barbara’s ordinance, procedural requirements remain relevant. Local jurisdictions must still follow their own deficiency and assessment processes, including the manner in which asserted liabilities are calculated and noticed, and those mechanics may affect timing and exposure.