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1 VICTOR JIH, STATE BAR NO. 186515
RUSSELL L. KOSTELAK, STATE BAR NO. 338449
2 CALEB GRAVES, STATE BAR NO. 338462
CHRISTOPHER HURLEY, STATE BAR NO. 350153
3 WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
4 1900 Avenue of the Stars, 28th Floor
Los Angeles, California 90067-4301
5 Telephone: (424) 446-6900
Email: vjih@wsgr.com
6 rkostelak@wsgr.com
cgraves@wsgr.com
7 churley@wsgr.com
8 Attorneys for Petitioners,
DISNEY PLATFORM DISTRIBUTION, INC.,
9 BAMTECH, LLC and HULU, LLC
10 SUPERIOR COURT OF THE STATE OF CALIFORNIA
11 COUNTY OF SANTA BARBARA, SOUTH COUNTY
12
13 DISNEY PLATFORM DISTRIBUTION, ) CASE NO.:
INC., BAMTech, LLC, and HULU, LLC; )
14 )
Plaintiffs, ) COMPLAINT FOR REFUND OF TAXES
15 ) PAID UNDER PROTEST AND
v. ) DECLARATORY RELIEF
16 ) [REV. & TAX. CODE § 5140 & 42 U.S.C.
CITY OF SANTA BARBARA, a city ) § 1983]
17 chartered under the laws of California, )
)
18 Defendant. )
)
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 Plaintiffs Hulu, LLC, Disney Platform Distribution, Inc., and BAMTech, LLC hereby
2 allege as follows:
3 I. INTRODUCTION
4 1. This Complaint arises out of Santa Barbara’s (“the City’s”) decision to suddenly
5 apply its “Video Users’ Tax” (“VUT”) on cable television to Plaintiffs’ internet streaming services
6 over thirteen years after the adoption of the VUT. Indeed, the City’s novel application of the VUT
7 on Plaintiffs occurred without any notice or the required vote by the City’s residents for new fees
8 and taxes. The City forced Plaintiffs to retroactively pay back taxes that Plaintiffs had no
9 opportunity to collect from subscribers plus penalties and interest.
10 2. The VUT does not apply to internet streaming services. The VUT is expressly
11 limited to services that “provide or sell one or more channels of video programming.” The VUT
12 adopted the industry understanding of “channels” as end-to-end transmission paths between the
13 supplier and subscriber; in other words, the VUT applies to facilities-based service providers. By
14 limiting it in this way, the VUT expressly excluded the provision of video programming over the
15 public internet by services like Plaintiffs’. It is undisputed that Plaintiffs do not operate any end-
16 to-end transmission paths—Plaintiffs merely make content available for subscribers to access
17 using any internet service provider (“ISP”) of their choice along a transmission path that Plaintiffs
18 do not prescribe or control. Lest there be any doubt, City officials repeatedly told voters that the
19 VUT would not apply to internet video streaming when it was submitted to voters in 2008.
20 3. Plaintiffs seek review of the City’s decision to deny Plaintiffs’ request for a refund.
21 The City based this denial on a written decision by a Hearing Officer appointed by the City
22 Administrator that upheld the City’s application of the VUT to Plaintiffs. In reaching that
23 conclusion, the Hearing Officer failed to give effect to the text of the VUT, numerous statements
24 of legislative intent, and the express representations to the voters that the VUT would not apply to
25 internet streaming. Instead of taking into account the City’s 13-year-long position that the VUT
26 did not apply as evidence of its correct interpretation, he excused the sudden about-face as a
27 calculated enforcement strategy—without any testimony, document, or any evidence to support it.
28 The Hearing Officer admitted that the City’s application of the VUT was intended to target
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 television and not other types of internet speech, yet he disregarded any First Amendment
2 concerns and lambasted Plaintiffs for even raising it. There is a duty, however, to construe the
3 VUT in a way that does not target protected activity or discriminate based on content.
4 4. As a result of the Hearing Officer’s ruling, Plaintiffs paid under protest more than
5 $640,000 for back taxes, penalties, and interest, and may bring action pursuant to Revenue and
6 Taxation Code Section 5140. The application of the VUT to Plaintiffs is an “[i]llegally assessed”
7 tax and therefore Plaintiffs are entitled to a refund under Revenue & Taxation Code Section 5096.
8 5. Plaintiffs filed a claim for a refund pursuant to Santa Barbara Municipal Code
9 (“SBMC”) Section 4.26.150, but this was rejected by the City. The City asserted that, pursuant to
10 section 4.26.150 of the SBMC, any challenge to the Hearing Officer’s decision must be brought
11 under section 1094.5 of the Code of Civil Procedure. Accordingly, Plaintiffs have simultaneously
12 filed a petition for administrative mandate pursuant to Section 1094.5.
13 II. JURISDICTION & VENUE
14 6. This Court has jurisdiction under Revenue and Taxation Code Section 5140
15 because the City denied Plaintiffs’ request for a refund.
16 7. The Court has personal jurisdiction over the City. Code Civ. Proc. § 410.10.
17 8. Santa Barbara Superior Court, South County, is the proper venue because that is
18 where the City is located. Id. § 394(a); Santa Barbara Superior Court Local Rule 203.
19 III. PARTIES
20 9. Plaintiffs are internet streamers that offer a mix of video content to millions of
21 subscribers, including in Santa Barbara. Their video content is made available online and can be
22 accessed by subscribers who can choose how they want to connect to the internet and which ISP
23 they want to use at any time. The three services targeted by the City are:
24 a. Hulu, LLC, which first launched its service in 2008. It provides access over the
25 public internet to a number of award-winning movies and shows like “Abbott
26 Elementary,” “Only Murders in the Building,” “The Bear,” and “The Great.”
27 b. ESPN+, which is a service operated by BAMTech, LLC. ESPN+ first launched in
28 2018. It provides subscribers access over the public internet to coverage of every
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 major sport around the world and offers the ability to stream live sporting events,
2 including, for example, NCAA college basketball and NFL games.
3 c. Disney+, which is a service operated by Disney Platform Distribution. Disney+
4 first launched in 2019. It offers access to award-winning movies from classics like
5 Monsters Inc. to more recent shows like “The Falcon and the Winter Soldier.”
6 10. Defendant City of Santa Barbara is a city chartered under Article XI, Section 3 of
7 the California Constitution. The City, through its Tax Administrator and Finance Director Keith
8 DeMartini, is responsible for the assessment of the VUT against Plaintiffs.
9 IV. FACTUAL BACKGROUND
10 A. Santa Barbara Passed the VUT to Modernize its UUT.
11 11. In the 1970s, the Santa Barbara city council imposed a local tax known as the
12 Utility Services Tax, often referred to as the Utility User Tax (“UUT”). See SMBC § 4.24 et seq.
13 This tax, initially set at 3%, fell on certain utility services that relied on infrastructure in Santa
14 Barbara to deliver their services—e.g., telephones, electricity, gas, water, and cable television.
15 The tax was justified by the services’ placement of physical infrastructure in Santa Barbara and
16 half of the revenues generated were used to fund road construction and maintenance. Utility
17 services are responsible for collecting this tax from its customers and remitting payment to the
18 City. The City subsequently doubled the UUT to 6% in 1976 to provide additional funds for
19 public services.
20 12. On February 21, 2008, Don Maynor—hired outside counsel for the City—
21 approached the City Council with an idea: update the UUT so that it can be applied to more cable
22 television services that used new technologies to deliver their programming.
23 13. Mr. Maynor’s idea was not novel. According to him, “more and more cities” had
24 been “adopting a modern communications tax ordinance” to reach these new telecommunication
25 and television services. Mr. Maynor was familiar with these “modern communications tax
26 ordinances,” as he had been touring the state advising cities in California, many of them his
27 clients, to advocate for and pass these updated ordinances.
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 14. Mr. Maynor’s idea became Ordinance No. 5471—the Telecommunications and
2 Video Users’ Tax Reduction and Modernization Ordinance. The Ordinance expanded the scope of
3 the UUT by extending the tax to two new sets of utility services: telecommunications services and
4 video services other than traditional cable television (as it existed in 1970).1
5 15. The Video Users’ Tax is at issue here. SBMC § 4.26.050. The VUT applies a
6 5.75% tax to the use of “video services” in the City. The tax is owed by “every person . . . using
7 video services” and is collected by “video service suppliers.” Specifically:
8 a. “Video services” are defined as “[v]ideo programming and any and all services
9 related to the providing, recording, delivering, use or enjoyment of [the same]
10 (including origination programming and programming using Internet Protocol, e.g.,
11 IP-TV and IP-Video) using one or more channels by a "video service supplier,"
12 regardless of the technology used to deliver, store or provide such services[.]”
13 SMBC § 4.26.020.
14 b. A “video service supplier” is “[a]ny person, company, or service which provides or
15 sells one or more channels of video programming, or provides or sells the
16 capability to receive one or more channels of video programming, including any
17 telecommunications that are ancillary, necessary or common to the provision, use
18 or enjoyment of the video programming, to or from a business or residential
19 address in the City, where some fee is paid, whether directly or included in dues or
20 rental charges for that service, whether or not public rights-of-way are utilized in
21 the delivery of the video programming or telecommunications.” Id.
22 B. City Officials Make Clear That the Ordinance Does Not Apply to Videos
23 Streamed Over the Internet.
24 16. Numerous committee and city council hearings were held before the VUT was
25 approved and enacted by the City Council and submitted to voters for their approval pursuant to
26 Proposition 218 of the California Constitution.
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28 1
The VUT would supplant the UUT tax applicable to cable television service. See SBMC
§ 4.26.220.
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 17. Throughout these hearings, City officials consistently confirmed that the VUT was
2 not intended to apply to internet streaming services. For example, when Mr. Maynor first
3 proposed the new tax on February 21, 2008, Finance Committee Chair Iya Falcone stated that the
4 City needed to be “really very clear with the voters” that “this is not about taxing the Internet.”
5 On April 1, 2008, City Administrator James Armstrong directly asked whether the VUT “only
6 applies to cable television services, not the internet access services.” Ms. Falcone confirmed that
7 “it’s not the internet streaming video downloading the things that you get.” And just one week
8 later, City Finance Director Robert Peirson stated it directly: “I want to stress when we say video,
9 we’re not talking about going to YouTube and watching YouTube videos.” As the debate
10 continued a month later, Mayor Pro Tempore Grant House confirmed that it was imperative that
11 they ensure “it’s clear we’re not taxing the Internet” with the VUT.
12 18. This result was expressed in the VUT through its use of the technical term
13 “channels.” Based on industry usage and FCC law, that term was well-understood to refer to an
14 end-to-end transmission path and to exclude streaming content over the public internet. City
15 officials confirmed at these same hearings that the ordinance would “use terminology that [the
16 phone and video companies] use” and “refer[red] to regulations that [those companies] use.”
17 Indeed, they also contacted AT&T, Verizon, and Cox—video service suppliers that would be
18 subject to the VUT—to get their feedback on the technical language of the VUT. At a May 13,
19 2008 meeting, the City’s Mayor Pro Tempore emphasized the need for the ordinance to be
20 modernized and “technically correct.”
21 19. Given its limited scope, city officials bemoaned all of the efforts that went into
22 amending the VUT. Councilmember Dale Francisco pointed out that the VUT was going to soon
23 become outdated. Because “inevitably . . . internet service at home will be able to provide [] a
24 high-definition video stream,” he recognized that the VUT was ultimately nothing more than a
25 “stopgap measure” that “probably isn’t going to last very long” because the VUT did not apply to
26 video streaming over the internet.
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 C. The VUT is Submitted to Voters with Express Disclaimers About Any
2 Application to Internet Content.
3 20. The City Council passed Ordinance No. 5471 on July 1, 2008. Pursuant to the
4 requirement in Proposition 218 of the California Constitution that new taxes require voter
5 approval, the VUT was presented to Santa Barbara voters as Measure G:
6 “Shall Santa Barbara adopt an ordinance reducing the telecommunications utility users
tax from 6% to 5.75%, to fund police, fire, 911, parks/recreation, gang prevention and
7 after school programs for at-risk youth, senior services, street repairs, public transit, and
other general fund services; exempting low- income seniors; prohibiting a tax rate
8
increase without voter approval; requiring equal treatment of taxpayers regardless of
9 technology, annual audits, public review of expenditures and local control of all
revenue?”
10
11 21. The City authored an “Impartial Analysis” of Measure G that explained to voters
12 that the VUT would expand the scope of the tax by applying “modernized technical definitions”
13 to cover “new telecommunications and video technologies” like “IP-video” offered by AT&T or
14 Verizon. This analysis listed out examples of what Measure G would tax: “paging, text
15 messaging, and private communications services (T-1 line).” But it was also clear—twice—about
16 what kind of video content that would not be encompassed by the modernized technical
17 definitions, i.e., internet-based content. “The new ordinance would not apply to charges for
18 internet services, including digital downloads like music, games, and ringtones.” It went on to
19 state that the VUT “specifically exempts Internet access service charges.” This is right in line
20 with the City Council’s discussion that it was not meant to apply to YouTube videos.
21 22. Measure G was put to the voters on November 4, 2008. On December 10, 2008,
22 the City confirmed that Measure G passed and that the VUT would go into effect on December 19.
23 23. After the VUT went into effect, the City sent notices to entities subject to the new
24 VUT. The City did not send notices to internet streamers.
25 D. For Over 13 Years, the City Never Applied the VUT to Internet Streaming.
26 24. Hulu was launched in 2008, ESPN+ in 2018, and Disney+ in 2019. Thus, Hulu
27 was in existence when the VUT was debated and passed, but ESPN+ and Disney+ did not appear
28 until approximately a decade later.
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 25. Until the City’s 2022 assessment, the City never applied the VUT to internet
2 streaming companies. During the passage and consideration of the VUT, no city official ever
3 discussed Hulu (or its competitor Netflix)—officials focused instead on existing video service
4 providers like AT&T, Verizon, and Cox. After the VUT took effect, no one in the City ever
5 suggested that internet streamers like Hulu were required to comply nor was any notice given to
6 Hulu. This remained true for ESPN+ and Disney+ when they were created a decade later.
7 26. Plaintiffs had no reason to believe that the VUT applied to their services.
8 Accordingly, they never collected this tax from customers and remitted no such tax to the City.
9 E. Without Notice or Warning, Santa Barbara Reverses Course And Applies
10 the VUT to Plaintiffs
11 27. On August 10, 2022, Plaintiffs received deficiency letters from the City’s Tax
12 Administrator based on audits conducted by a third-party company hired by the City, Avenu
13 Insights & Analytics, LLC (“Avenu”). These letters claimed that Plaintiffs failed to collect taxes
14 in accordance with the VUT. They further claimed that Plaintiffs must pay “back” taxes for
15 periods of noncompliance. They concluded that Plaintiffs owed back VUT taxes of over $450,000
16 for the period from 2018-2020. They also assessed interest and penalties of over $160,000.
17 28. This was a surprise to Plaintiffs. They did not know that the City would change
18 course and tax internet streamers under the VUT. They did not know that the City had hired an
19 auditor to assess how much they owed under the VUT. And they were provided no advance
20 warning that these deficiency letters were incoming.
21 29. During the audit, Plaintiffs asked Avenu about its basis and rationale for assessing
22 the tax to internet streamers. Avenu never provided a basis or rationale.
23 F. The City’s Administrative Review Officers Rubber Stamp The City’s
24 Unjustified Tax Treatment of Plaintiffs.
25 30. Plaintiffs challenged the notice of deficiency before the City’s Tax Administrator in
26 accordance with SBMC § 4.26.110. Among other arguments, Plaintiffs asserted that the VUT
27 only applied to facilities-based entities that provide or sell one or more “channels,” defined
28 technically as “end-to-end transmission paths.”
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 31. On January 5, 2023, the City’s Tax Administrator rejected Plaintiffs’ arguments,
2 found in favor of his City, and issued final assessments confirming the notices of deficiency. The
3 Tax Administrator held that Plaintiffs “offer[ed] no evidence” that the word “channel” should be
4 given a technical definition. As a result, he construed the VUT to apply to all providers of video
5 programming. He rejected arguments that this expansive application runs afoul of the First
6 Amendment. According to the Tax Administrator, the VUT was merely an extension of the
7 current utility tax on cable television, and cable taxes have withstood constitutional challenges,
8 citing Sacramento Cable Television v. City of Sacramento, 234 Cal. App. 3d 232 (1991).
9 32. Plaintiffs appealed the Tax Administrator’s decision pursuant to SBMC §
10 4.26.170(B). The City Administrator appointed Respondent, the Honorable Justice James
11 Lambden (Ret.) of ADR Services, Inc., to preside as the Hearing Officer over the appeal.
12 33. Given the Tax Administrator’s ruling, Plaintiffs gathered for the record multiple
13 sources of evidence making clear that the City intended for “channel” to have a technical meaning
14 and thus exclude internet streamers from the scope of the VUT. Plaintiffs submitted nine
15 statements from City officials stating that the VUT did not apply to internet video streaming, three
16 statements from City officials explaining how the VUT avoided taxing the internet by using
17 technical definitions, such as “channel,” and the guidance provided to voters reaffirming that the
18 VUT did not apply to internet content. And, on the First Amendment front, Plaintiffs pointed out
19 that the justification for extending the UUT on cable television in Sacramento Cable was that
20 cable shared certain characteristics with utilities: “structures located in or on public easements
21 created expressly for utility access.” This justification cannot extend to internet streamers who do
22 not have such facilities. Plaintiffs also argued that the City never provided notice or got the
23 required approval from voters before imposing the VUT, in violation of the Public Utilities Code
24 and California Constitution respectively.
25 34. The Hearing Officer selected by the City rejected Plaintiffs’ arguments in full and
26 affirmed the Tax Administrator’s decision. Specifically, the Hearing Officer erroneously held that
27 the VUT applies to internet streamers like Plaintiffs as a matter of law. He held that the VUT
28 applied to all entities that provide or sell video programming, when the text clearly limits the
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 application of the VUT is limited to entities that provide or sell “one or more channels” of video
2 programming. The Hearing Officer’s interpretation nullifies the “one or more channels” phrase in
3 the VUT. The only way to give this phrase any effect is to adopt the “technical” meaning of
4 “channel”: an end-to-end transmission path. Removing this limitation from the VUT uproots the
5 ordinance from its facilities-based underpinnings that keep First Amendment concerns at bay.
6 35. The Hearing Officer ignored the evidence in the record that contradicted this result.
7 He ignored that the VUT defined “channel” in a technical sense. He ignored statements by City
8 officials and to voters that the VUT was a technical ordinance that would adopt technical
9 definitions used in the video industry and the regulations that governed that industry. He ignored
10 explicit statements on the record in public hearings and in ballot summaries making clear that the
11 VUT did not cover the internet and internet video streaming. The Hearing Officer also accepted
12 arguments offered by the City that lacked any evidentiary support in the record. He accepted the
13 City’s assertion that it always intended for the VUT to apply to internet streaming, despite no such
14 documents or testimony reflecting that. And, he accepted the City’s assertion that the failure to
15 tax internet streaming for over thirteen years was merely an enforcement decision, despite no
16 evidence that such a decision was ever made.
17 G. Plaintiffs Pay VUT Back Taxes Under Protest And the City Rejects
18 Plaintiffs’ Request for a Refund.
19 36. As a result of the Hearing Officer’s decision, Plaintiffs paid under protest the
20 assessed VUT tax of $642,257, including interest and penalties, on February 22, 2024. Plaintiffs
21 simultaneously submitted a request for a refund pursuant to SBMC Section 4.26.150.
22 37. The City, through its Tax Administrator and Finance Director Keith DeMartini,
23 denied Plaintiffs’ request in full on March 19, 2024. See Exhibits 1–3 (3/19/24 Tax Refund
24 Denial Letters), attached hereto. The City based its decision on the Hearing Officer’s
25 Administrative Appeals Decision to uphold the application of the VUT to Plaintiffs.
26 38. Intervention by this Court is necessary to remedy the harm Plaintiffs have suffered
27 from the City’s illegal tax and the City’s erroneous decision to deny Plaintiffs’ requested refund.
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 FIRST CAUSE OF ACTION
2 Recovery of Taxes Paid Under Protest After
3 Rejection of Claim for a Refund (Rev. & Tax. Code § 5140)
4 39. Plaintiffs incorporate by reference paragraphs 1 through 38 of this Complaint.
5 40. The VUT was “[i]llegally assessed or levied” on Plaintiffs, entitling Plaintiffs to a
6 refund under California Revenue & Taxation Code Section 5096.
7 41. The VUT does not apply to Plaintiffs and the City should not have assessed the tax
8 on Plaintiffs. It only applies to entities that “provide or sell one or more channels of video
9 programming.” “Channel” is defined technically in the VUT as an end-to-end transmission path,
10 and it is undisputed that Plaintiffs do not provide or sell such transmission paths.
11 42. The City violates Proposition 218 of the California Constitution by imposing the
12 VUT on Plaintiffs without getting a majority approval from voters.
13 43. The City violates Section 799 of the Public Utilities Code by levying this new tax
14 on Plaintiffs without providing the requisite advance notice.
15 44. Petitioners paid under protest the assessed amount of $642,257. This total included
16 back taxes allegedly owed from 2018-2020, as well as assessed interest and penalties.
17 45. The City refused Plaintiffs’ claim for a refund of the amounts paid under protest on
18 March 19, 2024. See Exs. 1-3.
19 46. Plaintiffs have timely filed this complaint within six months of the City’s denial for
20 a request for a refund pursuant to California Revenue & Taxation Code Section 5140.
21 47. Plaintiffs have exhausted all available administrative remedies as outlined in Santa
22 Barbara Municipal Code Sections 4.26.110 and 4.26.170.
23 SECOND CAUSE OF ACTION
24 Declaratory Relief for Violation of Free Speech and Free Press Rights
25 Under the First Amendment of the U.S. Constitution (42 U.S.C. § 1983)
26 48. Plaintiffs incorporate by reference paragraphs 1 to 47 of this Complaint.
27 49. Plaintiffs’ video content, and the distribution of that content, is protected by the
28 free speech and free press clauses of the First Amendment.
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 50. By applying the VUT to internet streamers like Plaintiffs, the City violates
2 Plaintiffs’ free speech and free press rights by targeting protected speech for taxation and by
3 discriminating based on the content of that speech.
4 51. First, the City targets Plaintiffs’ protected speech for taxation without any
5 justification unrelated to the speech itself. The City readily admits that it seeks to tax Plaintiffs’
6 content under the VUT because that content is “television.” In other words, the City is
7 instituting a tax based on the type of speech transmitted over the internet.
8 52. Second, the City discriminates based on content by taxing internet video content
9 but not other internet content that is distributed over the internet to consumers in the same
10 manner. There is no rational justification for taxing internet video content but not, say, internet
11 music content apart from the type of content that is being distributed.
12 53. These violations trigger strict scrutiny review, which the City cannot withstand.
13 The VUT does not serve a compelling state interest; it simply raises revenue for government
14 services and city streets. And the VUT is not narrowly tailored; it could always achieve its
15 objective by taxing all entities that provide content over the internet, not just video content.
16 54. This Court should issue a declaration confirming that the City’s application of the
17 VUT to Plaintiffs violates the First Amendment of the U.S. Constitution.
18 THIRD CAUSE OF ACTION
19 Declaratory Relief for Violation of the Internet Tax Freedom Act (42 U.S.C. § 1983)
20 55. Plaintiffs incorporate by reference paragraphs 1 to 54 of this Complaint.
21 56. The City violates the Internet Tax Freedom Act (“ITFA”), 47 U.S.C. § 151 note, by
22 imposing a discriminatory tax on internet video streaming (i.e., electronic commerce) but not
23 similar video offerings provided through other means.
24 57. Plaintiffs’ internet content constitutes electronic commerce subject to the ITFA.
25 58. The City’s attempt to tax Plaintiffs’ electronic commerce through the VUT is
26 discriminatory because the City does not impose a tax on transactions where: (i) video content is
27 provided by a satellite provider or broadcast television; (ii) video content is provided by video
28
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
1 content owners to satellite providers or broadcast television in exchange for a license fee; or (iii)
2 video content is downloaded by customers for purchase or rental or sold in physical form.
3 59. This disparate treatment between otherwise identical video content directly violates
4 the ITFA’s anti-discrimination mandate.
5 60. The Court should issue a declaration confirming that the City’s application of the
6 VUT to Plaintiff’s violates the ITFA.
7 PRAYER FOR RELIEF
8 WHEREFORE, Plaintiffs request as follows:
9 A. Judgment against Defendant City of Santa Barbara for the refund paid in the
10 principal amount of $642,257 plus interest from the date of payment as computed
11 according to law;
12 B. A declaration that the application of the VUT to Plaintiffs violates the First
13 Amendment of the United States Constitution and/or the Internet Tax Freedom Act;
14 C. Costs of this suit; and
15 D. All other relief that may be appropriate.
16 DATED April 24, 2024
17 Respectfully submitted,
18
By: /s/ Victor Jih
19 Victor Jih
20 Wilson Sonsini Goodrich & Rosati
Professional Corporation
21
Attorneys for Plaintiffs DISNEY
22 PLATFORM DISTRIBUTION, INC.,
BAMTech, LLCs, and HULU, LLC
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COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF
EXHIBIT 1
March 19, 2024
Via E-Mail and US Mail
Disney Financial Services, LLC
PO Box 170010
Celebration, FL 34747
Attn: Lee Young
Re: Refund Request | Disney Platform Distribution, Inc.
Mr. Young,
This letter is in response to your February 22, 2022, letter requesting a refund
of amounts paid by Disney Platform Distribution, Inc. to the City of Santa
Barbara pursuant to the Final Assessment issued to Disney on January 5, 2023.
Your letter requests a refund under section 4.26.150 of the Santa Barbara
Municipal Code. Section 4.26.150 does not authorize a refund of amounts paid
pursuant to a final assessment issued by the City’s Tax Administrator unless
that final assessment has been overturned, in whole or in part, by a court. Per
section 4.26.170(D) of the Santa Barbara Municipal Code, any challenge to the
Final Assessment should be brought under section 1094.5 of the Code of Civil
Procedure and in accordance with section 1094.6 of the Code of Civil Procedure
– i.e., within 90 days of the date that Justice Lambden issued his decision
resolving Disney’s administrative appeal and affirming the Final Assessment.
Sincerely,
Keith DeMartini
Finance Director
City of Santa Barbara
cc: Steve Boulanger, Marc Simonetti, Saad Admani,
Victor Jih, Russell Kostelak (email only)
EXHIBIT 2
March 19, 2024
Via E-Mail and US Mail
Disney Financial Services, LLC
PO Box 170010
Celebration, FL 34747
Attn: Lee Young
Re: Refund Request | Hulu, LLC
Mr. Young,
This letter is in response to your February 22, 2024, letter requesting a refund
of amounts paid by Hulu, LLC to the City of Santa Barbara pursuant to the
Final Assessment issued to Hulu on January 5, 2023.
Your letter requests a refund under section 4.26.150 of the Santa Barbara
Municipal Code. Section 4.26.150 does not authorize a refund of amounts paid
pursuant to a final assessment issued by the City’s Tax Administrator unless
that final assessment has been overturned, in whole or in part, by a court. Per
section 4.26.170(D) of the Santa Barbara Municipal Code, any challenge to the
Final Assessment should be brought under section 1094.5 of the Code of Civil
Procedure and in accordance with section 1094.6 of the Code of Civil Procedure
– i.e., within 90 days of the date that Justice Lambden issued his decision
resolving Hulu’s administrative appeal and affirming the Final Assessment.
Sincerely,
Keith DeMartini
Finance Director
City of Santa Barbara
cc: Steve Boulanger, Marc Simonetti, Saad Admani,
Victor Jih, Russell Kostelak (email only)
EXHIBIT 3
March 19, 2024
Via E-Mail and US Mail
Disney Financial Services, LLC
PO Box 170010
Celebration, FL 34747
Attn: Lee Young
Re: Refund Request | BAMTech, LLC
Mr. Young,
This letter is in response to your February 22, 2024, letter requesting a refund
of amounts paid by BAMTech, LLC to the City of Santa Barbara pursuant to
the Final Assessment issued to BAMTech on January 5, 2023.
Your letter requests a refund under section 4.26.150 of the Santa Barbara
Municipal Code. Section 4.26.150 does not authorize a refund of amounts paid
pursuant to a final assessment issued by the City’s Tax Administrator unless
that final assessment has been overturned, in whole or in part, by a court. Per
section 4.26.170(D) of the Santa Barbara Municipal Code, any challenge to the
Final Assessment should be brought under section 1094.5 of the Code of Civil
Procedure and in accordance with section 1094.6 of the Code of Civil Procedure
– i.e., within 90 days of the date that Justice Lambden issued his decision
resolving BAMTech’s administrative appeal and affirming the Final Assessment.
Sincerely,
Keith DeMartini
Finance Director
City of Santa Barbara
cc: Steve Boulanger, Marc Simonetti, Saad Admani,
Victor Jih, Russell Kostelak (email only)
Preview
1 VICTOR JIH, STATE BAR NO. 186515 RUSSELL L. KOSTELAK, STATE BAR NO. 338449 2 CALEB GRAVES, STATE BAR NO. 338462 CHRISTOPHER HURLEY, STATE BAR NO. 350153 3 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 4 1900 Avenue of the Stars, 28th Floor Los Angeles, California 90067-4301 5 Telephone: (424) 446-6900 Email: vjih@wsgr.com 6 rkostelak@wsgr.com cgraves@wsgr.com 7 churley@wsgr.com 8 Attorneys for Petitioners, DISNEY PLATFORM DISTRIBUTION, INC., 9 BAMTECH, LLC and HULU, LLC 10 SUPERIOR COURT OF THE STATE OF CALIFORNIA 11 COUNTY OF SANTA BARBARA, SOUTH COUNTY 12 13 DISNEY PLATFORM DISTRIBUTION, ) CASE NO.: INC., BAMTech, LLC, and HULU, LLC; ) 14 ) Plaintiffs, ) COMPLAINT FOR REFUND OF TAXES 15 ) PAID UNDER PROTEST AND v. ) DECLARATORY RELIEF 16 ) [REV. & TAX. CODE § 5140 & 42 U.S.C. CITY OF SANTA BARBARA, a city ) § 1983] 17 chartered under the laws of California, ) ) 18 Defendant. ) ) 19 20 21 22 23 24 25 26 27 28 COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 Plaintiffs Hulu, LLC, Disney Platform Distribution, Inc., and BAMTech, LLC hereby 2 allege as follows: 3 I. INTRODUCTION 4 1. This Complaint arises out of Santa Barbara’s (“the City’s”) decision to suddenly 5 apply its “Video Users’ Tax” (“VUT”) on cable television to Plaintiffs’ internet streaming services 6 over thirteen years after the adoption of the VUT. Indeed, the City’s novel application of the VUT 7 on Plaintiffs occurred without any notice or the required vote by the City’s residents for new fees 8 and taxes. The City forced Plaintiffs to retroactively pay back taxes that Plaintiffs had no 9 opportunity to collect from subscribers plus penalties and interest. 10 2. The VUT does not apply to internet streaming services. The VUT is expressly 11 limited to services that “provide or sell one or more channels of video programming.” The VUT 12 adopted the industry understanding of “channels” as end-to-end transmission paths between the 13 supplier and subscriber; in other words, the VUT applies to facilities-based service providers. By 14 limiting it in this way, the VUT expressly excluded the provision of video programming over the 15 public internet by services like Plaintiffs’. It is undisputed that Plaintiffs do not operate any end- 16 to-end transmission paths—Plaintiffs merely make content available for subscribers to access 17 using any internet service provider (“ISP”) of their choice along a transmission path that Plaintiffs 18 do not prescribe or control. Lest there be any doubt, City officials repeatedly told voters that the 19 VUT would not apply to internet video streaming when it was submitted to voters in 2008. 20 3. Plaintiffs seek review of the City’s decision to deny Plaintiffs’ request for a refund. 21 The City based this denial on a written decision by a Hearing Officer appointed by the City 22 Administrator that upheld the City’s application of the VUT to Plaintiffs. In reaching that 23 conclusion, the Hearing Officer failed to give effect to the text of the VUT, numerous statements 24 of legislative intent, and the express representations to the voters that the VUT would not apply to 25 internet streaming. Instead of taking into account the City’s 13-year-long position that the VUT 26 did not apply as evidence of its correct interpretation, he excused the sudden about-face as a 27 calculated enforcement strategy—without any testimony, document, or any evidence to support it. 28 The Hearing Officer admitted that the City’s application of the VUT was intended to target -1- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 television and not other types of internet speech, yet he disregarded any First Amendment 2 concerns and lambasted Plaintiffs for even raising it. There is a duty, however, to construe the 3 VUT in a way that does not target protected activity or discriminate based on content. 4 4. As a result of the Hearing Officer’s ruling, Plaintiffs paid under protest more than 5 $640,000 for back taxes, penalties, and interest, and may bring action pursuant to Revenue and 6 Taxation Code Section 5140. The application of the VUT to Plaintiffs is an “[i]llegally assessed” 7 tax and therefore Plaintiffs are entitled to a refund under Revenue & Taxation Code Section 5096. 8 5. Plaintiffs filed a claim for a refund pursuant to Santa Barbara Municipal Code 9 (“SBMC”) Section 4.26.150, but this was rejected by the City. The City asserted that, pursuant to 10 section 4.26.150 of the SBMC, any challenge to the Hearing Officer’s decision must be brought 11 under section 1094.5 of the Code of Civil Procedure. Accordingly, Plaintiffs have simultaneously 12 filed a petition for administrative mandate pursuant to Section 1094.5. 13 II. JURISDICTION & VENUE 14 6. This Court has jurisdiction under Revenue and Taxation Code Section 5140 15 because the City denied Plaintiffs’ request for a refund. 16 7. The Court has personal jurisdiction over the City. Code Civ. Proc. § 410.10. 17 8. Santa Barbara Superior Court, South County, is the proper venue because that is 18 where the City is located. Id. § 394(a); Santa Barbara Superior Court Local Rule 203. 19 III. PARTIES 20 9. Plaintiffs are internet streamers that offer a mix of video content to millions of 21 subscribers, including in Santa Barbara. Their video content is made available online and can be 22 accessed by subscribers who can choose how they want to connect to the internet and which ISP 23 they want to use at any time. The three services targeted by the City are: 24 a. Hulu, LLC, which first launched its service in 2008. It provides access over the 25 public internet to a number of award-winning movies and shows like “Abbott 26 Elementary,” “Only Murders in the Building,” “The Bear,” and “The Great.” 27 b. ESPN+, which is a service operated by BAMTech, LLC. ESPN+ first launched in 28 2018. It provides subscribers access over the public internet to coverage of every -2- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 major sport around the world and offers the ability to stream live sporting events, 2 including, for example, NCAA college basketball and NFL games. 3 c. Disney+, which is a service operated by Disney Platform Distribution. Disney+ 4 first launched in 2019. It offers access to award-winning movies from classics like 5 Monsters Inc. to more recent shows like “The Falcon and the Winter Soldier.” 6 10. Defendant City of Santa Barbara is a city chartered under Article XI, Section 3 of 7 the California Constitution. The City, through its Tax Administrator and Finance Director Keith 8 DeMartini, is responsible for the assessment of the VUT against Plaintiffs. 9 IV. FACTUAL BACKGROUND 10 A. Santa Barbara Passed the VUT to Modernize its UUT. 11 11. In the 1970s, the Santa Barbara city council imposed a local tax known as the 12 Utility Services Tax, often referred to as the Utility User Tax (“UUT”). See SMBC § 4.24 et seq. 13 This tax, initially set at 3%, fell on certain utility services that relied on infrastructure in Santa 14 Barbara to deliver their services—e.g., telephones, electricity, gas, water, and cable television. 15 The tax was justified by the services’ placement of physical infrastructure in Santa Barbara and 16 half of the revenues generated were used to fund road construction and maintenance. Utility 17 services are responsible for collecting this tax from its customers and remitting payment to the 18 City. The City subsequently doubled the UUT to 6% in 1976 to provide additional funds for 19 public services. 20 12. On February 21, 2008, Don Maynor—hired outside counsel for the City— 21 approached the City Council with an idea: update the UUT so that it can be applied to more cable 22 television services that used new technologies to deliver their programming. 23 13. Mr. Maynor’s idea was not novel. According to him, “more and more cities” had 24 been “adopting a modern communications tax ordinance” to reach these new telecommunication 25 and television services. Mr. Maynor was familiar with these “modern communications tax 26 ordinances,” as he had been touring the state advising cities in California, many of them his 27 clients, to advocate for and pass these updated ordinances. 28 -3- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 14. Mr. Maynor’s idea became Ordinance No. 5471—the Telecommunications and 2 Video Users’ Tax Reduction and Modernization Ordinance. The Ordinance expanded the scope of 3 the UUT by extending the tax to two new sets of utility services: telecommunications services and 4 video services other than traditional cable television (as it existed in 1970).1 5 15. The Video Users’ Tax is at issue here. SBMC § 4.26.050. The VUT applies a 6 5.75% tax to the use of “video services” in the City. The tax is owed by “every person . . . using 7 video services” and is collected by “video service suppliers.” Specifically: 8 a. “Video services” are defined as “[v]ideo programming and any and all services 9 related to the providing, recording, delivering, use or enjoyment of [the same] 10 (including origination programming and programming using Internet Protocol, e.g., 11 IP-TV and IP-Video) using one or more channels by a "video service supplier," 12 regardless of the technology used to deliver, store or provide such services[.]” 13 SMBC § 4.26.020. 14 b. A “video service supplier” is “[a]ny person, company, or service which provides or 15 sells one or more channels of video programming, or provides or sells the 16 capability to receive one or more channels of video programming, including any 17 telecommunications that are ancillary, necessary or common to the provision, use 18 or enjoyment of the video programming, to or from a business or residential 19 address in the City, where some fee is paid, whether directly or included in dues or 20 rental charges for that service, whether or not public rights-of-way are utilized in 21 the delivery of the video programming or telecommunications.” Id. 22 B. City Officials Make Clear That the Ordinance Does Not Apply to Videos 23 Streamed Over the Internet. 24 16. Numerous committee and city council hearings were held before the VUT was 25 approved and enacted by the City Council and submitted to voters for their approval pursuant to 26 Proposition 218 of the California Constitution. 27 28 1 The VUT would supplant the UUT tax applicable to cable television service. See SBMC § 4.26.220. -4- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 17. Throughout these hearings, City officials consistently confirmed that the VUT was 2 not intended to apply to internet streaming services. For example, when Mr. Maynor first 3 proposed the new tax on February 21, 2008, Finance Committee Chair Iya Falcone stated that the 4 City needed to be “really very clear with the voters” that “this is not about taxing the Internet.” 5 On April 1, 2008, City Administrator James Armstrong directly asked whether the VUT “only 6 applies to cable television services, not the internet access services.” Ms. Falcone confirmed that 7 “it’s not the internet streaming video downloading the things that you get.” And just one week 8 later, City Finance Director Robert Peirson stated it directly: “I want to stress when we say video, 9 we’re not talking about going to YouTube and watching YouTube videos.” As the debate 10 continued a month later, Mayor Pro Tempore Grant House confirmed that it was imperative that 11 they ensure “it’s clear we’re not taxing the Internet” with the VUT. 12 18. This result was expressed in the VUT through its use of the technical term 13 “channels.” Based on industry usage and FCC law, that term was well-understood to refer to an 14 end-to-end transmission path and to exclude streaming content over the public internet. City 15 officials confirmed at these same hearings that the ordinance would “use terminology that [the 16 phone and video companies] use” and “refer[red] to regulations that [those companies] use.” 17 Indeed, they also contacted AT&T, Verizon, and Cox—video service suppliers that would be 18 subject to the VUT—to get their feedback on the technical language of the VUT. At a May 13, 19 2008 meeting, the City’s Mayor Pro Tempore emphasized the need for the ordinance to be 20 modernized and “technically correct.” 21 19. Given its limited scope, city officials bemoaned all of the efforts that went into 22 amending the VUT. Councilmember Dale Francisco pointed out that the VUT was going to soon 23 become outdated. Because “inevitably . . . internet service at home will be able to provide [] a 24 high-definition video stream,” he recognized that the VUT was ultimately nothing more than a 25 “stopgap measure” that “probably isn’t going to last very long” because the VUT did not apply to 26 video streaming over the internet. 27 28 -5- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 C. The VUT is Submitted to Voters with Express Disclaimers About Any 2 Application to Internet Content. 3 20. The City Council passed Ordinance No. 5471 on July 1, 2008. Pursuant to the 4 requirement in Proposition 218 of the California Constitution that new taxes require voter 5 approval, the VUT was presented to Santa Barbara voters as Measure G: 6 “Shall Santa Barbara adopt an ordinance reducing the telecommunications utility users tax from 6% to 5.75%, to fund police, fire, 911, parks/recreation, gang prevention and 7 after school programs for at-risk youth, senior services, street repairs, public transit, and other general fund services; exempting low- income seniors; prohibiting a tax rate 8 increase without voter approval; requiring equal treatment of taxpayers regardless of 9 technology, annual audits, public review of expenditures and local control of all revenue?” 10 11 21. The City authored an “Impartial Analysis” of Measure G that explained to voters 12 that the VUT would expand the scope of the tax by applying “modernized technical definitions” 13 to cover “new telecommunications and video technologies” like “IP-video” offered by AT&T or 14 Verizon. This analysis listed out examples of what Measure G would tax: “paging, text 15 messaging, and private communications services (T-1 line).” But it was also clear—twice—about 16 what kind of video content that would not be encompassed by the modernized technical 17 definitions, i.e., internet-based content. “The new ordinance would not apply to charges for 18 internet services, including digital downloads like music, games, and ringtones.” It went on to 19 state that the VUT “specifically exempts Internet access service charges.” This is right in line 20 with the City Council’s discussion that it was not meant to apply to YouTube videos. 21 22. Measure G was put to the voters on November 4, 2008. On December 10, 2008, 22 the City confirmed that Measure G passed and that the VUT would go into effect on December 19. 23 23. After the VUT went into effect, the City sent notices to entities subject to the new 24 VUT. The City did not send notices to internet streamers. 25 D. For Over 13 Years, the City Never Applied the VUT to Internet Streaming. 26 24. Hulu was launched in 2008, ESPN+ in 2018, and Disney+ in 2019. Thus, Hulu 27 was in existence when the VUT was debated and passed, but ESPN+ and Disney+ did not appear 28 until approximately a decade later. -6- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 25. Until the City’s 2022 assessment, the City never applied the VUT to internet 2 streaming companies. During the passage and consideration of the VUT, no city official ever 3 discussed Hulu (or its competitor Netflix)—officials focused instead on existing video service 4 providers like AT&T, Verizon, and Cox. After the VUT took effect, no one in the City ever 5 suggested that internet streamers like Hulu were required to comply nor was any notice given to 6 Hulu. This remained true for ESPN+ and Disney+ when they were created a decade later. 7 26. Plaintiffs had no reason to believe that the VUT applied to their services. 8 Accordingly, they never collected this tax from customers and remitted no such tax to the City. 9 E. Without Notice or Warning, Santa Barbara Reverses Course And Applies 10 the VUT to Plaintiffs 11 27. On August 10, 2022, Plaintiffs received deficiency letters from the City’s Tax 12 Administrator based on audits conducted by a third-party company hired by the City, Avenu 13 Insights & Analytics, LLC (“Avenu”). These letters claimed that Plaintiffs failed to collect taxes 14 in accordance with the VUT. They further claimed that Plaintiffs must pay “back” taxes for 15 periods of noncompliance. They concluded that Plaintiffs owed back VUT taxes of over $450,000 16 for the period from 2018-2020. They also assessed interest and penalties of over $160,000. 17 28. This was a surprise to Plaintiffs. They did not know that the City would change 18 course and tax internet streamers under the VUT. They did not know that the City had hired an 19 auditor to assess how much they owed under the VUT. And they were provided no advance 20 warning that these deficiency letters were incoming. 21 29. During the audit, Plaintiffs asked Avenu about its basis and rationale for assessing 22 the tax to internet streamers. Avenu never provided a basis or rationale. 23 F. The City’s Administrative Review Officers Rubber Stamp The City’s 24 Unjustified Tax Treatment of Plaintiffs. 25 30. Plaintiffs challenged the notice of deficiency before the City’s Tax Administrator in 26 accordance with SBMC § 4.26.110. Among other arguments, Plaintiffs asserted that the VUT 27 only applied to facilities-based entities that provide or sell one or more “channels,” defined 28 technically as “end-to-end transmission paths.” -7- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 31. On January 5, 2023, the City’s Tax Administrator rejected Plaintiffs’ arguments, 2 found in favor of his City, and issued final assessments confirming the notices of deficiency. The 3 Tax Administrator held that Plaintiffs “offer[ed] no evidence” that the word “channel” should be 4 given a technical definition. As a result, he construed the VUT to apply to all providers of video 5 programming. He rejected arguments that this expansive application runs afoul of the First 6 Amendment. According to the Tax Administrator, the VUT was merely an extension of the 7 current utility tax on cable television, and cable taxes have withstood constitutional challenges, 8 citing Sacramento Cable Television v. City of Sacramento, 234 Cal. App. 3d 232 (1991). 9 32. Plaintiffs appealed the Tax Administrator’s decision pursuant to SBMC § 10 4.26.170(B). The City Administrator appointed Respondent, the Honorable Justice James 11 Lambden (Ret.) of ADR Services, Inc., to preside as the Hearing Officer over the appeal. 12 33. Given the Tax Administrator’s ruling, Plaintiffs gathered for the record multiple 13 sources of evidence making clear that the City intended for “channel” to have a technical meaning 14 and thus exclude internet streamers from the scope of the VUT. Plaintiffs submitted nine 15 statements from City officials stating that the VUT did not apply to internet video streaming, three 16 statements from City officials explaining how the VUT avoided taxing the internet by using 17 technical definitions, such as “channel,” and the guidance provided to voters reaffirming that the 18 VUT did not apply to internet content. And, on the First Amendment front, Plaintiffs pointed out 19 that the justification for extending the UUT on cable television in Sacramento Cable was that 20 cable shared certain characteristics with utilities: “structures located in or on public easements 21 created expressly for utility access.” This justification cannot extend to internet streamers who do 22 not have such facilities. Plaintiffs also argued that the City never provided notice or got the 23 required approval from voters before imposing the VUT, in violation of the Public Utilities Code 24 and California Constitution respectively. 25 34. The Hearing Officer selected by the City rejected Plaintiffs’ arguments in full and 26 affirmed the Tax Administrator’s decision. Specifically, the Hearing Officer erroneously held that 27 the VUT applies to internet streamers like Plaintiffs as a matter of law. He held that the VUT 28 applied to all entities that provide or sell video programming, when the text clearly limits the -8- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 application of the VUT is limited to entities that provide or sell “one or more channels” of video 2 programming. The Hearing Officer’s interpretation nullifies the “one or more channels” phrase in 3 the VUT. The only way to give this phrase any effect is to adopt the “technical” meaning of 4 “channel”: an end-to-end transmission path. Removing this limitation from the VUT uproots the 5 ordinance from its facilities-based underpinnings that keep First Amendment concerns at bay. 6 35. The Hearing Officer ignored the evidence in the record that contradicted this result. 7 He ignored that the VUT defined “channel” in a technical sense. He ignored statements by City 8 officials and to voters that the VUT was a technical ordinance that would adopt technical 9 definitions used in the video industry and the regulations that governed that industry. He ignored 10 explicit statements on the record in public hearings and in ballot summaries making clear that the 11 VUT did not cover the internet and internet video streaming. The Hearing Officer also accepted 12 arguments offered by the City that lacked any evidentiary support in the record. He accepted the 13 City’s assertion that it always intended for the VUT to apply to internet streaming, despite no such 14 documents or testimony reflecting that. And, he accepted the City’s assertion that the failure to 15 tax internet streaming for over thirteen years was merely an enforcement decision, despite no 16 evidence that such a decision was ever made. 17 G. Plaintiffs Pay VUT Back Taxes Under Protest And the City Rejects 18 Plaintiffs’ Request for a Refund. 19 36. As a result of the Hearing Officer’s decision, Plaintiffs paid under protest the 20 assessed VUT tax of $642,257, including interest and penalties, on February 22, 2024. Plaintiffs 21 simultaneously submitted a request for a refund pursuant to SBMC Section 4.26.150. 22 37. The City, through its Tax Administrator and Finance Director Keith DeMartini, 23 denied Plaintiffs’ request in full on March 19, 2024. See Exhibits 1–3 (3/19/24 Tax Refund 24 Denial Letters), attached hereto. The City based its decision on the Hearing Officer’s 25 Administrative Appeals Decision to uphold the application of the VUT to Plaintiffs. 26 38. Intervention by this Court is necessary to remedy the harm Plaintiffs have suffered 27 from the City’s illegal tax and the City’s erroneous decision to deny Plaintiffs’ requested refund. 28 -9- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 FIRST CAUSE OF ACTION 2 Recovery of Taxes Paid Under Protest After 3 Rejection of Claim for a Refund (Rev. & Tax. Code § 5140) 4 39. Plaintiffs incorporate by reference paragraphs 1 through 38 of this Complaint. 5 40. The VUT was “[i]llegally assessed or levied” on Plaintiffs, entitling Plaintiffs to a 6 refund under California Revenue & Taxation Code Section 5096. 7 41. The VUT does not apply to Plaintiffs and the City should not have assessed the tax 8 on Plaintiffs. It only applies to entities that “provide or sell one or more channels of video 9 programming.” “Channel” is defined technically in the VUT as an end-to-end transmission path, 10 and it is undisputed that Plaintiffs do not provide or sell such transmission paths. 11 42. The City violates Proposition 218 of the California Constitution by imposing the 12 VUT on Plaintiffs without getting a majority approval from voters. 13 43. The City violates Section 799 of the Public Utilities Code by levying this new tax 14 on Plaintiffs without providing the requisite advance notice. 15 44. Petitioners paid under protest the assessed amount of $642,257. This total included 16 back taxes allegedly owed from 2018-2020, as well as assessed interest and penalties. 17 45. The City refused Plaintiffs’ claim for a refund of the amounts paid under protest on 18 March 19, 2024. See Exs. 1-3. 19 46. Plaintiffs have timely filed this complaint within six months of the City’s denial for 20 a request for a refund pursuant to California Revenue & Taxation Code Section 5140. 21 47. Plaintiffs have exhausted all available administrative remedies as outlined in Santa 22 Barbara Municipal Code Sections 4.26.110 and 4.26.170. 23 SECOND CAUSE OF ACTION 24 Declaratory Relief for Violation of Free Speech and Free Press Rights 25 Under the First Amendment of the U.S. Constitution (42 U.S.C. § 1983) 26 48. Plaintiffs incorporate by reference paragraphs 1 to 47 of this Complaint. 27 49. Plaintiffs’ video content, and the distribution of that content, is protected by the 28 free speech and free press clauses of the First Amendment. -10- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 50. By applying the VUT to internet streamers like Plaintiffs, the City violates 2 Plaintiffs’ free speech and free press rights by targeting protected speech for taxation and by 3 discriminating based on the content of that speech. 4 51. First, the City targets Plaintiffs’ protected speech for taxation without any 5 justification unrelated to the speech itself. The City readily admits that it seeks to tax Plaintiffs’ 6 content under the VUT because that content is “television.” In other words, the City is 7 instituting a tax based on the type of speech transmitted over the internet. 8 52. Second, the City discriminates based on content by taxing internet video content 9 but not other internet content that is distributed over the internet to consumers in the same 10 manner. There is no rational justification for taxing internet video content but not, say, internet 11 music content apart from the type of content that is being distributed. 12 53. These violations trigger strict scrutiny review, which the City cannot withstand. 13 The VUT does not serve a compelling state interest; it simply raises revenue for government 14 services and city streets. And the VUT is not narrowly tailored; it could always achieve its 15 objective by taxing all entities that provide content over the internet, not just video content. 16 54. This Court should issue a declaration confirming that the City’s application of the 17 VUT to Plaintiffs violates the First Amendment of the U.S. Constitution. 18 THIRD CAUSE OF ACTION 19 Declaratory Relief for Violation of the Internet Tax Freedom Act (42 U.S.C. § 1983) 20 55. Plaintiffs incorporate by reference paragraphs 1 to 54 of this Complaint. 21 56. The City violates the Internet Tax Freedom Act (“ITFA”), 47 U.S.C. § 151 note, by 22 imposing a discriminatory tax on internet video streaming (i.e., electronic commerce) but not 23 similar video offerings provided through other means. 24 57. Plaintiffs’ internet content constitutes electronic commerce subject to the ITFA. 25 58. The City’s attempt to tax Plaintiffs’ electronic commerce through the VUT is 26 discriminatory because the City does not impose a tax on transactions where: (i) video content is 27 provided by a satellite provider or broadcast television; (ii) video content is provided by video 28 -11- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF 1 content owners to satellite providers or broadcast television in exchange for a license fee; or (iii) 2 video content is downloaded by customers for purchase or rental or sold in physical form. 3 59. This disparate treatment between otherwise identical video content directly violates 4 the ITFA’s anti-discrimination mandate. 5 60. The Court should issue a declaration confirming that the City’s application of the 6 VUT to Plaintiff’s violates the ITFA. 7 PRAYER FOR RELIEF 8 WHEREFORE, Plaintiffs request as follows: 9 A. Judgment against Defendant City of Santa Barbara for the refund paid in the 10 principal amount of $642,257 plus interest from the date of payment as computed 11 according to law; 12 B. A declaration that the application of the VUT to Plaintiffs violates the First 13 Amendment of the United States Constitution and/or the Internet Tax Freedom Act; 14 C. Costs of this suit; and 15 D. All other relief that may be appropriate. 16 DATED April 24, 2024 17 Respectfully submitted, 18 By: /s/ Victor Jih 19 Victor Jih 20 Wilson Sonsini Goodrich & Rosati Professional Corporation 21 Attorneys for Plaintiffs DISNEY 22 PLATFORM DISTRIBUTION, INC., BAMTech, LLCs, and HULU, LLC 23 24 25 26 27 28 -12- COMPLAINT FOR REFUND OF TAXES PAID UNDER PROTEST & DECLARATORY RELIEF EXHIBIT 1 March 19, 2024 Via E-Mail and US Mail Disney Financial Services, LLC PO Box 170010 Celebration, FL 34747 Attn: Lee Young Re: Refund Request | Disney Platform Distribution, Inc. Mr. Young, This letter is in response to your February 22, 2022, letter requesting a refund of amounts paid by Disney Platform Distribution, Inc. to the City of Santa Barbara pursuant to the Final Assessment issued to Disney on January 5, 2023. Your letter requests a refund under section 4.26.150 of the Santa Barbara Municipal Code. Section 4.26.150 does not authorize a refund of amounts paid pursuant to a final assessment issued by the City’s Tax Administrator unless that final assessment has been overturned, in whole or in part, by a court. Per section 4.26.170(D) of the Santa Barbara Municipal Code, any challenge to the Final Assessment should be brought under section 1094.5 of the Code of Civil Procedure and in accordance with section 1094.6 of the Code of Civil Procedure – i.e., within 90 days of the date that Justice Lambden issued his decision resolving Disney’s administrative appeal and affirming the Final Assessment. Sincerely, Keith DeMartini Finance Director City of Santa Barbara cc: Steve Boulanger, Marc Simonetti, Saad Admani, Victor Jih, Russell Kostelak (email only) EXHIBIT 2 March 19, 2024 Via E-Mail and US Mail Disney Financial Services, LLC PO Box 170010 Celebration, FL 34747 Attn: Lee Young Re: Refund Request | Hulu, LLC Mr. Young, This letter is in response to your February 22, 2024, letter requesting a refund of amounts paid by Hulu, LLC to the City of Santa Barbara pursuant to the Final Assessment issued to Hulu on January 5, 2023. Your letter requests a refund under section 4.26.150 of the Santa Barbara Municipal Code. Section 4.26.150 does not authorize a refund of amounts paid pursuant to a final assessment issued by the City’s Tax Administrator unless that final assessment has been overturned, in whole or in part, by a court. Per section 4.26.170(D) of the Santa Barbara Municipal Code, any challenge to the Final Assessment should be brought under section 1094.5 of the Code of Civil Procedure and in accordance with section 1094.6 of the Code of Civil Procedure – i.e., within 90 days of the date that Justice Lambden issued his decision resolving Hulu’s administrative appeal and affirming the Final Assessment. Sincerely, Keith DeMartini Finance Director City of Santa Barbara cc: Steve Boulanger, Marc Simonetti, Saad Admani, Victor Jih, Russell Kostelak (email only) EXHIBIT 3 March 19, 2024 Via E-Mail and US Mail Disney Financial Services, LLC PO Box 170010 Celebration, FL 34747 Attn: Lee Young Re: Refund Request | BAMTech, LLC Mr. Young, This letter is in response to your February 22, 2024, letter requesting a refund of amounts paid by BAMTech, LLC to the City of Santa Barbara pursuant to the Final Assessment issued to BAMTech on January 5, 2023. Your letter requests a refund under section 4.26.150 of the Santa Barbara Municipal Code. Section 4.26.150 does not authorize a refund of amounts paid pursuant to a final assessment issued by the City’s Tax Administrator unless that final assessment has been overturned, in whole or in part, by a court. Per section 4.26.170(D) of the Santa Barbara Municipal Code, any challenge to the Final Assessment should be brought under section 1094.5 of the Code of Civil Procedure and in accordance with section 1094.6 of the Code of Civil Procedure – i.e., within 90 days of the date that Justice Lambden issued his decision resolving BAMTech’s administrative appeal and affirming the Final Assessment. Sincerely, Keith DeMartini Finance Director City of Santa Barbara cc: Steve Boulanger, Marc Simonetti, Saad Admani, Victor Jih, Russell Kostelak (email only)