Disney Platform Distribution Inc et al vs Keith DeMartini et al

Case Number

24CV02313

Case Type

Hearing Date / Time

Fri, 10/25/2024 - 10:00

Nature of Proceedings

Writ of Mandate

Tentative Ruling

For the reasons set forth herein, the petition of Disney Platform Distribution, Inc., BAMTech, LLC, and Hulu, LLC, for issuance of a writ of mandate is denied.

Background:

(1)       Background Facts

The principal underlying facts in this matter are essentially undisputed, although, as discussed below, the application of the law to those facts is highly disputed.

Petitioners BAMTech, LLC (BAMTech), Disney Platform Distribution, Inc. (DPD), and Hulu, LLC (Hulu) (collectively, petitioners or the Disney Companies) are subsidiaries of The Walt Disney Company. (Administrative Record, vol. 5, at p. 1717.) (Note: For convenience of writing, further citations to volumes and pages of the Administrative Record will be in the form “AR [volume], p. [page no.].” The court notes that volume 1 is has the erroneous caption of volume 7, but the correct volume number in the footer.) The petitioners offer subscription-based video streaming offerings. (AR 5, p. 1718.) BAMTech operates ESPN+, which is focused on “live sporting events, on demand sports content, and original programming” for a fee. (AR 5, p. 1718; AR 6, pp. 2362-2381.) DPD, which operates Disney+, and Hulu, which operates Hulu TV, offer “branded programming, episodic shows, feature length films, original movies and series, and libraries consisting of film, television, and special programming,” also for a fee. (AR 5, p. 1718; AR 6, pp. 2346-2361, 2382-2397.) Hulu also offers traditional linear TV channels like NBC, ABC, and Fox. (AR 6, pp. 2349-2357.)

Petitioners provide their video streaming services to subscribers over the internet. (AR 5, pp. 1719-1721, 1761-1767.) Hulu began streaming video over the internet in 2008, and started charging subscribers in 2010. (AR 1, p. 509.) ESPN+ and Disney+ came later, entering the internet-streaming market in 2018 and 2019, respectively. (AR 1, pp. 533-539, 541-546.)

Petitioners host their content on Disney servers. (AR 5, p. 1719.) These servers are geographically dispersed, commonly referred to as “content delivery networks” (CDNs), which accelerate the delivery of video content to customers via the internet. (Ibid.) Customers access the video streaming offerings through their independently procured internet service provider (ISP). (Ibid.) Video content is made available to customers by request and only once a customer establishes access to the internet through a third-party’s existing ISP infrastructure. (Ibid.) Thus, petitioners are not “facilities-based” service providers in that they do not themselves own all of the infrastructure that is used to deliver videos. (AR 5, pp. 1764-1765.)

(2)       History of Video Users’ Tax and Collection

Since the 1970s, respondent and real party in interest City of Santa Barbara (City) has imposed a utility services tax on the use, in Santa Barbara, of electricity, gas, water, garbage collection services, specified telephone services, and cable television services. (AR 6, pp. 1966-1967.)

In 2008, the City introduced a new ordinance, the Telecommunications and Video Users’ Tax Reduction and Modernization Ordinance (Modernization Ordinance). (AR 1, pp. 160-183; AR 2 1116-1145.) Of significance to this proceeding, the Modernization Ordinance included a video users’ tax (VUT). (AR 1, at pp. 1977-1978.) (The relevant text of the Modernization Ordinance is discussed below in the context of this analysis.) The Modernization Ordinance was submitted to, and approved by, voters on November 4, 2008. (AR 6, pp. 2008-2021.) The Modernization Ordinance took effect on December 19, 2008. (AR 6, p. 2007.)

On December 22, 2008, the City sent a notice informing all service suppliers for which it then had contact information that they would have until March 1, 2009, or April 1, 2009, to begin collecting the tax under the Modernization Ordinance, including the VUT). (AR 1, 553-562.) As discussed below, petitioners assert they were not given legally required notices.

In 2021, at the direction of the City’s Tax Administrator, Avenu Insights & Analytics, LLC (Avenu) initiated an audit of the petitioners. (AR 7, pp. 2411-2426.) The audit identified that the petitioners had not collected any VUT from their subscribers. (AR 5, pp. 1659-1664.) After hearings contesting deficiency determinations, the City issued final assessments against each of the petitioners, finding them liable for failing to collect the VUT and imposing interest and penalties. (AR 1, p. 4.) The final assessments collectively total $599,467, consisting of $422,419 in taxes, $63,362 in penalties, and $113,686 in interest. (AR 1, p. 5.)

(3)       Procedural History

Petitioners timely administratively appealed the final assessments for failure to collect the VUT. (AR 1, p. 5.) The administrative appeal was heard on May 15, 2023, before the Hon. James Lambden (ret.) as Hearing Officer. (AR 1, p. 3.)

On January 25, 2024, Justice Lambden issued and gave notice of his Administrative Appeal Decision affirming in all respects the City’s final assessment. (AR 1, pp. 2-20.)

On April 24, 2024, petitioners filed their verified petition for writ of administrative mandate in this proceeding. As originally filed, petitioners named Keith DeMartini, in his capacity as the Tax Administrator and Finance Director of City, and Justice Lambden, in his capacity as Hearing Officer, as respondents, and named the City as the real party in interest. On June 4, pursuant to stipulation of the parties and order of the court, DeMartini and Lambden were dismissed as respondents with the City serving as the named respondent in this proceeding. (As a confusing consequence, some pleadings and the court’s docket correctly continue the caption with DeMartini and Lambden as respondents in the caption but some pleadings replace the respondent in the caption with the City.)

On June 11, 2024, the City filed its answer to the petition, admitting and denying allegations thereof and asserting three affirmative defenses.

Petitioners concurrently filed a related complaint, Disney Platform Distribution, Inc., et al., v. City of Santa Barbara, case No. 23CV02314, for refund of taxes paid under protest and for declaratory relief. On June 24, 2024, petitioners, as plaintiffs in the related case, requested, and the court entered, dismissal of the related case without prejudice. Thus, only this petition remains pending.

The parties have filed their respective memoranda in support, in opposition, and in reply to the petition. The administrative record consists of seven volumes filed with the court and one volume of confidential materials filed under seal. The petitioners argue that the Administrative Appeal Decision should be reversed because: (1) the VUT does not apply to petitioners’ streaming services; (2) application of the VUT to petitioners’ streaming services would violate the First Amendment of the United States Constitution; (3) the City did not get voter approval applying the VUT to petitioners as required under article XIIIC of the California Constitution (Proposition 218); (4) the City did not provide notice required by Public Utilities Code section 799; and (5) application of the VUT to petitioners’ internet streaming services violates the federal Internet Tax Freedom Act (ITFA). (Note: The ITFA is not separately codified. It was originally enacted as division C, title IX of the Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999, Pub.L. No. 105-277, §§ 1100-1104 (Oct. 21, 1998) 112 Stat. 2681, and was subsequently extended. The text of the ITFA is found in the statutory notes following 47 U.S.C. § 151.) City argues that the Administrative Appeal Decision is correct and that the petition should be denied for the same reasons.

Analysis:

Petitioners bring this petition for administrative writ of mandate pursuant to Code of Civil Procedure section 1094.5 and 1094.6. (Petition, at p. 2.) “Judicial review of any decision of a local agency …, or of any commission, board, officer or agent thereof, may be had pursuant to Section 1094.5 of this code ….” (Code Civ. Proc., § 1094.6, subd. (a).)

(1)       Standards of Review

“Where the writ is issued for the purpose of inquiring into the validity of any final administrative order or decision made as the result of a proceeding in which by law a hearing is required to be given, evidence is required to be taken, and discretion in the determination of facts is vested in the inferior tribunal, corporation, board, or officer, the case shall be heard by the court sitting without a jury. (Code Civ. Proc., § 1094.5, subd. (a).)

“The inquiry in such a case shall extend to the questions whether the respondent has proceeded without, or in excess of, jurisdiction; whether there was a fair trial; and whether there was any prejudicial abuse of discretion. Abuse of discretion is established if the respondent has not proceeded in the manner required by law, the order or decision is not supported by the findings, or the findings are not supported by the evidence.” (Code Civ. Proc., § 1094.5, subd. (b).)

“Where it is claimed that the findings are not supported by the evidence, in cases in which the court is authorized by law to exercise its independent judgment on the evidence, abuse of discretion is established if the court determines that the findings are not supported by the weight of the evidence. In all other cases, abuse of discretion is established if the court determines that the findings are not supported by substantial evidence in the light of the whole record.” (Code Civ. Proc., § 1094.5, subd. (c).)

“On ‘ “purely legal” ’ questions, we exercise independent judgment and a decision ‘must “be reversed if based on erroneous conclusions of law.” ’ [Citation.]” (Family Health Centers of San Diego v. State Dept. of Health Care Services (2023) 15 Cal.5th 1, 10.) “The interpretation of a statute presents a question of law.” (MCI Communications Services, Inc. v. California Dept. of Tax & Fee Administration (2018) 28 Cal.App.5th 635, 643.)

The court has considered all of the evidence and arguments presented by the parties in reach this ruling, whether or not specific items are discussed herein.

(2)       Application of Video Users’ Tax to Petitioners’ Services

The central dispute between the parties is whether the VUT applies to petitioners’ video streaming services. The resolution of this dispute turns on the interpretation of the text of the VUT.

            (A)       Text of VUT

Following its approval by voters, the text of the VUT is stated in chapter 4.26 of the City’s Municipal Code. (AR 6, pp. 1972-1986.)

“A. Establishment of Video Users’ Tax. There is hereby imposed a tax upon every person in the City using video services. The tax imposed by this section shall be at the rate of five and three/quarters percent (5.75 %) of the charges made for such services and shall be collected from the service user by the video service supplier or its billing agent. There is a rebuttable presumption that video services, which are billed to a billing or service address in the City, are used, in whole or in part, within the City’s boundaries, and such services are subject to taxation under this chapter. If the billing address of the service user is different from the service address, the service address of the service user shall be used for purposes of imposing the tax.”

(Santa Barbara Municipal Code [SBMC], § 4.26.050, subd. (A), bolding omitted.)

“B. Video Charges. As used in this section, the term ‘charges’ shall include but is not limited to, charges for the following:

            “1.       Regulatory fees and surcharges, franchise fees, and access fees (e.g., ‘PEG’ fees);

            “2.       Initial installation of equipment necessary for provision and receipt of video services;

            “3.       Late fees, collection fees, bad debt recoveries, and return check fees;

            “4.       Activation fees, reactivation fees, and reconnection fees;

            “5.       Video programming and video services:

            “6.       Ancillary video services (e.g., electronic program guide services, recording functions, search functions, or other interactive services or communications that are ancillary, necessary or common to the use or enjoyment of video services;

            “7.       Equipment leases (e.g., remote, recording or search devices, converters, remote devices); and,

            “8.       Service calls, service protection plans, name changes, changes of services, and special services.” (SBMC, § 4.26.050, subd. (B), bolding omitted.)

“C. Charges Further Defined. As used in this section, the term ‘charges’ shall include the value of any other services, credits, property of every kind or nature, or other consideration provided by the service user in exchange for the video services.” (SBMC, § 4.26.050, subd. (C), bolding omitted.)

The VUT defines terms as follows:

“Video Programming. Those programming services commonly provided to subscribers by a ‘video service supplier,’ including, but not limited to, basic services, premium services, audio services, video games, pay-per-view services, video on demand, origination programming, or any other similar services, regardless of the content of such video programming, or the technology used to deliver such services, and regardless of the manner or basis on which such services are calculated or billed.” (SBMC, § 4.26.020.)

“Video Services. Video programming and any and all services related to the providing, recording, delivering, use or enjoyment of ‘video programming’ (including origination programming and programming using Internet Protocol, e.g., IP-TV and IP-Video) using one or more channels by a ‘video service supplier,’ regardless of the technology used to deliver, store or provide such services, and regardless of the manner or basis on which such services are calculated or billed, and includes ancillary video services, data services, ‘telecommunication services,’ or interactive communication services that are functionally integrated with ‘video services.’ ” (SBMC, § 4.26.020.)

“Video Service Supplier. Any person, company, or service which provides or sells one or more channels of video programming, or provides or sells the capability to receive one or more channels of video programming, including any telecommunications that are ancillary, necessary or common to the provision, use or enjoyment of the video programming, to or from a business or residential address in the City, where some fee is paid, whether directly or included in dues or rental charges for that service, whether or not public rights-of-way are utilized in the delivery of the video programming or telecommunications. A “video service supplier” includes, but is not limited to, multichannel video programming distributors [as defined in 47 U.S.C.A. Section 522(13)]; open video systems (OVS) suppliers; and suppliers of cable television; master antenna television; satellite master antenna television; multi-channel multipoint distribution services (MMDS); video services using internet protocol (e.g., IP-TV and IP-Video, which provide, among other things, broadcasting and video on demand), direct broadcast satellite to the extent federal law permits taxation of its video services, now or in the future; and other suppliers of video services or (including two-way communications), whatever their technology.” (SBMC, § 4.26.020.)

            (B)       Textual Dispute

Petitioners argue that the VUT does not apply to their streaming services because the definition of “video service supplier” is one who “provides or sells … one or more channels of video programming.” The “one or more channels” language is repeated in the definition of “video services.” According to petitioners, “one or more channels” is a limitation on the scope of the VUT. Petitioners define “one or more channels” as an end-to-end transmission path. (Motion, at p. 15.) Because petitioners do not provide or sell an end-to-end transmission path, petitioners are not “video service suppliers” and do not provide “video services” within the meaning of the VUT.

The City argues that the text of the VUT applies to the provision of video services over the internet, both because providing services over the internet is expressly indicated and because the general definition of “video services” and video service supplier” include services provided regardless of the technology used. The City construes the “one or more channels” language as a collection of video programming. (Opposition, at pp. 18-19.)

The Administrative Appeal Decision agreed with the City’s construction of the VUT. Petitioners argue that this construction of the VUT is erroneous.

            (C)       Interpretation Principles for Ordinances

“ ‘The rules of statutory construction applicable to statutes are also applicable to municipal ordinances.’ [Citation.] Our primary task is to determine the lawmakers’ intent, ‘ “ ‘first look[ing] to the plain meaning of the statutory language, then to its legislative history and finally to the reasonableness of a proposed construction.’ ” ’ [Citations.]” (Tran v. County of Los Angeles (2022) 74 Cal.App.5th 154, 162.)

“We start with the text of the ordinance, and read that text ‘ “ ‘in the context of the statute ... as a whole.’ ” ’ [Citations.] If the text does not provide a clear answer, we may also look to other ‘ “extrinsic sources” ’ such as the ordinance’s legislative history. [Citation.]” (Issakhani v. Shadow Glen Homeowners Assn., Inc. (2021) 63 Cal.App.5th 917, 931–932.)

“ ‘ “In construing any statute, we first look to its language. [Citation.] ‘Words used in a statute ... should be given the meaning they bear in ordinary use. [Citations.] If the language is clear and unambiguous there is no need for construction, nor is it necessary to resort to indicia of the intent of the Legislature ....’ [Citation.] ‘If the language permits more than one reasonable interpretation, however, the court looks “to a variety of extrinsic aids, including the ostensible objects to be achieved, the evils to be remedied, the legislative history, public policy, contemporaneous administrative construction, and the statutory scheme of which the statute is a part.” [Citation.]’ [Citation.]” [Citation.] Also, a statute “ ‘must be given a reasonable and common sense interpretation consistent with the apparent purpose and intention of the lawmakers, practical rather than technical in nature, which upon application will result in wise policy rather than mischief or absurdity.’ ” ’ [Citation.]” (Rasooly v. City of Oakley (2018) 29 Cal.App.5th 348, 355.)

“Narratives of discussions and events leading to adoption of a resolution are extrinsic materials that may properly be considered; however we must disregard a legislator’s statement of opinion, understanding, or interpretation of the resolution at issue.” (Baldwin v. City of Los Angeles (1999) 70 Cal.App.4th 819, 838.)

            (D)       Denotative Meaning of “One or More Channels”

Petitioners urge a backwards look at the meaning of “channel” as applicable to video transmissions. As argued in the Administrative Appeal hearing, petitioners started with a meaning of “channel” based on the meaning codified in the federal Cable Communications Policy Act of 1984 (AR 1, p. 5):

“[T]he term ‘cable channel’ or ‘channel’ means a portion of the electromagnetic frequency spectrum which is used in a cable system and which is capable of delivering a television channel (as television channel is defined by the Commission by regulation) ….” (47 U.S.C. § 522(4).)

“[T]he term ‘cable system’ means a facility, consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment that is designed to provide cable service which includes video programming and which is provided to multiple subscribers within a community ….” (47 U.S.C. § 522(7).)

The City urge a forward look at the meaning of “channel” to include sources of video transmissions, including streaming video, that was in its infancy at the time of the adoption of the Modernization Ordinance. Today, “channel” includes among its meanings: “9a. Electronics. A specified frequency band for the transmission and reception of electromagnetic signals, as for television signals. b. A continuous program of audio or video content distributed by a television, radio, or Internet broadcaster. c. A company or other entity presenting such content.” (American Heritage Dict. (5th ed. 2016) p. 310, bolding omitted.) This is the usage employed by petitioners themselves to describe their video services to the public. (E.g., AR 6, p. 2352 [“Watch Live and On-Demand TV from 85+ top channels including sports and news. Stream full seasons of exclusive series, hit movies, current episodes, premium Hulu Originals, and more on Hulu, along with endless entertainment on Disney+ and live sports on ESPN+.” (Bold in original.)].)

There is therefore some potential ambiguity in the phrase “one or more channels.”

A review of how the meaning of “channel” has changed over time provides some insight into the most reasonable construction of the VUT.

In 1950, before television was ubiquitous, the relevant dictionary meaning of “channel” was: “Radio. A narrow band of frequencies of sufficient width for a single radio communication.” (Webster’s 2d New International Dictionary (1950) p. 449.) By 1986, the same dictionary in a later edition defined channel either as: “a band of frequencies of sufficient width for a single radio or television communication being as little as a few cycles per second wide for telegraphy or as great as several megacycles wide for television.” (Webster’s 3d New International Dictionary (1986) p. 374.) The Addenda to the same dictionary includes the additional meaning: “a path along which information passes or an area (as of magnetic tape) on which it is stored. (Id. at p. 64a.)

The Oxford English Dictionary (OED) (2d ed. 1989) included the definition of “channel” as “[a] band of frequencies of sufficient width for the transmission of a radio or television signal; spec. a television service using such a band.” (<https://www.oed.com/oedv2/00036635&gt; [as of Oct. 15, 2024].) The current online edition of the OED provides both American and English use defining “channel” since 2006 as “[a]n account on a video sharing or streaming website, used to host content from a particular user, group, or organization.” (OED Online, “channel,” (n. 1), sense IV.17.b <https://www.oed.com/dictionary/channel_n1?tab=meaning_and_use#9809962> [as of Oct. 15, 2024].)

This word history conforms to a common-sense semantic expansion of “channel” in its telecommunications context. When communications were limited to radio, a “channel” was the radio frequencies. That term expanded into television frequencies. In both instances, it referred both to the physical frequencies and to the service using those frequencies, i.e., a radio or television station. By the time cable became the mechanism for transmission, the definition in the Cable Communications Policy Act of 1984 applies specifically to the frequencies used in the cable system to deliver the television channel. As the internet became the mechanism for delivery of video content, the term further expanded to accommodate that delivery mechanism but retained its core concept of a collection of audio or visual content transmitted to a recipient.

These dictionary definition meanings are independent of the means of transmission. Nonetheless, petitioners argue that the appropriate meaning of “channel” is the technical “end-to-end transmission path.” (Motion, at pp. 17-19.) In support of this, petitioners point to situations in which technical meanings have been used in construing statutes over ordinary meanings, including In the Matter of Sky Angel U.S., LLC (2010) 25 F.C.C. Rcd. 3879 (Sky Angel).

In Sky Angel, a petition was filed with the Federal Communications Commission (FCC) for a temporary standstill of (i.e., preliminary injunction enjoining) the affiliation agreement between Sky Angel and Discovery Communications pending the resolution of Sky Angel’s program access complaint. (Sky Angel, supra, 25 F.C.C. Rcd. at p. 3879.) Sky Angel provided a subscription-based service of approximately eighty channels of video and audio programming using Internet Protocol Television (IP-TV) technology. (Ibid.) Sky Angel’s subscribers received programming through a set-top box that has a broadband Internet input and video outputs that connect directly to a television set. (Ibid.) The authority for the proceeding in which this injunction was sought is the Communications Act of 1934: “Any multichannel video programming distributor [(MVPD)] aggrieved by conduct that it alleges constitutes a violation of subsection (b), or the regulations of the Commission under subsection (c), may commence an adjudicatory proceeding at the Commission.” (47 U.S.C. § 548(d); Sky Angel, supra, 25 F.C.C. Rcd. at p. 3882 & fn. 35.) In finding that Sky River had not met its burden for the standstill order, the FCC stated:

“While Sky Angel asserts that it is an MVPD, it has failed to analyze whether and how it meets the key elements of the definition of the term ‘MVPD.’ The Act defines a ‘multichannel video programming distributor’ as:

            “[A] person such as, but not limited to, a cable operator, a multichannel multipoint distribution service, a direct broadcast satellite service, or a television receive-only satellite program distributor, who makes available for purchase, by subscribers or customers, multiple channels of video programming.

“Sky Angel makes no attempt to describe whether and how it offers multiple ‘channels’ of video programming. [Fn. 38.] While Sky Angel appears to interpret the term ‘channel’ in a non-technical sense to mean a stream of video programming, it fails to address the definitions of that term in the Act and the Commission’s rules, which appear to include a transmission path as a necessary element of a ‘channel.’ [Fn. 40.] Moreover, the entities in the illustrative list in the Act’s definition of an MVPD all provide transmission paths for the delivery of video programming. The evidence put forth at this stage of the proceeding indicates that Sky Angel does not provide its subscribers with a transmission path; rather, it is the subscriber’s Internet service provider that provides the transmission path. Because Sky Angel has not shown that it is likely to be able to demonstrate that it is an MVPD entitled to seek relief under the program access statute and rules, we cannot conclude that Sky Angel has met its burden of demonstrating a likelihood of success on the merits of its complaint.” (Sky Angel, supra, 25 F.C.C. Rcd. at pp. 3882–3883, fns. omitted.)

Footnotes 38 and 40 both cite specifically to the definitions, quoted above, in the Communications Act of 1934 as amended by the Cable Communications Policy Act of 1984 (the 1984 Act) (47 U.S.C. § 522). These definitions are, as indicated clearly in the quotations, specific to cable television systems. “Channel” in those Acts is synonymous with “cable channel,” which is defined by its use in a “cable system.” Given the physical nature of a cable system, especially as it existed in 1984, it is not surprising that a “cable system” is defined in physical terms requiring the end-to-end transmission. Sky Angel is applying that statutory definition (as also repeated in other, similar regulations) to the proceeding before it. Consequently, Sky Angel in 2010 does nothing more than identify that the 1984 definition remains applicable to proceedings applying the 1984 Act.

The underlying interpretive principle is: “Words and phrases are construed according to the context and the approved usage of the language; but technical words and phrases, and such others as may have acquired a peculiar and appropriate meaning in law, or are defined in the succeeding section, are to be construed according to such peculiar and appropriate meaning or definition.” (Civ. Code, § 13; accord, Heritage Residential Care, Inc. v. Division of Labor Standards Enforcement (2011) 192 Cal.App.4th 75, 83; Handlery v. Franchise Tax Board (1972) 26 Cal.App.3d 970, 981.)

Petitioners argue that because “channel” has a technical meaning in the telecommunications context, i.e., the 1984 Act’s statutory definition, the technical meaning is presumed, citing Eel River Disposal & Resource Recovery, Inc. v. County of Humboldt (2013) 221 Cal.App.4th 209, 233 (Eel River). In Eel River, the court noted the general rule that technical terms are presumed to have their technical meaning, and found that “competitive bidding” had a longstanding meaning in the context of government procurement and public contract law. (Ibid.) The difficulty here is that it is by no means apparent that the technical meaning of “channel” in the context of cable systems under the 1984 Act is the meaning intended by the City in enacting the Modernization Ordinance. “However, even assuming this to be true, such words need not be limited to their technical meaning and effect if the context indicates that such a construction would frustrate the intention of the drafters.” (Fireman’s Fund Ins. Co. v. Security Pacific Nat. Bank (1978) 85 Cal.App.3d 797, 827–828.) Thus, an examination of both intrinsic and extrinsic context is useful to construe “one or more channels” within the meaning of the VUT.

            (E)       Intrinsic Context of “One or More Channels”

Petitioners argue that the greater text of the Modernization Ordinance provides context supporting their technical construction of “one or more channels.” Petitioners point to the Modernization Ordinance definition of “Private Telecommunication Service”:

“A telecommunication service that entitles the customer to exclusive or priority use of a telecommunications channel or group of channels between or among termination points, regardless of the manner in which such channel or channels are connected, and includes switching capacity, extension lines, stations, and any other associated services that are provided in connection with the use of such channel or channels. A telecommunications channel is a physical or virtual path of telecommunications over which signals are transmitted between or among customer channel termination points (i.e., the location where the customer either inputs or receives the telecommunications).” (SBMC, § 4.26.020.)

Petitioners argue that under this definition, “telecommunications channel” is used in its technical sense as a transmission path. Petitioners conclude that “ ‘[w]e must construe identical words in different parts of the same act or in different statutes relating to the same subject matter as having the same meaning.’ [Citation.]” (Knapp v. Ginsberg (2021) 67 Cal.App.5th 504, 533.) The difficulty with this argument, of course, is that the terms are not identical and the subject matter varies. As a matter of language, “channel” is not defined generally for both telecommunications and video services. “Telecommunications channel” is defined because the definition of “private telecommunication service” uses that specific term. There is no definition of “video channel” or similar term in the Modernization Ordinance in the video context. The broader term, “channel,” is not defined in the Modernization Ordinance. Given the distinction argued by petitioners and the more commonly understood definition of “channel” in the video context, rather than supporting a technical definition, the absence of specific definition in the VUT where a specific definition is provided in the telecommunications context supports the application of the commonly understood definition. (See Reilly v. Marin Housing Authority (2020) 10 Cal.5th 583, 591 [“ ‘[T]he presumption that “identical words used in different parts of the same act are intended to have the same meaning ... readily yields whenever there is such variation in the connection in which the words are used as reasonably to warrant the conclusion that they were employed in different parts of the act with different intent.” ’ [Citation.]”]; Briggs v. Eden Council for Hope & Opportunity (1999) 19 Cal.4th 1106, 1117 [“Where different words or phrases are used in the same connection in different parts of a statute, it is presumed the Legislature intended a different meaning.”].)
 

Petitioners further, and more broadly, argue that the City’s proffered definition of “channel” as a programming source renders the “one or more channels” language superfluous. “[W]e consider portions of a statute in the context of the entire statute and the statutory scheme of which it is a part, giving significance to every word, phrase, sentence, and part of an act in pursuance of the legislative purpose.” (Smith v. LoanMe, Inc. (2021) 11 Cal.5th 183, 190, internal quotation marks and citations omitted.) Petitioners reason that because every provider of video services uses one or more programming sources, if “channel” means “programming source,” the phrase “one or more channels” adds no meaning. Petitioners thus conclude that the only way to give “one or more channels” meaning is to construe “channel” as a “transmission path.”

Petitioners’ argument gets caught up in a characterization of a definition of “programming source” that is too broad. If one understands the “programming source” definition of “channel” as a shorthand description of the modern OED definition, quoted above, that has been used since 2006, the term “one or more channels” has a delimiting function to exclude types of video services consistent with the purpose of the VUT and with the extrinsic evidence discussed below.

The intended scope of the VUT may be inferred, in part, from its definitions of “video programming,” “video services,” and “video service supplier.” “Video services” expressly includes “programming using Internet Protocol, e.g., IP-TV and IP-Video.” “Video Service Supplier” expressly includes “video services using internet protocol (e.g., IP-TV and IP-Video).” The definition of “video programming” include video services “regardless of … the technology used to deliver such services.” “Video services” similarly is expansive as “regardless of the technology used to deliver, store or provide such services.” “Video service supplier” includes the catch-all of “other suppliers of video services …, whatever their technology.” These provisions demonstrate an intention not only to cover the provision of video services available in 2008, but to cover the provision of video services comparably available through emerging technologies.

It is important to note that the intended scope of the VUT is only inferred in part from these definitions. These provisions do not conclusively exclude petitioners’ narrower definition of “channel” and their argued limitation in “one or more channels.” These provisions do, however, suggest that the intended scope of the VUT is not limited by then-common technological means of providing video services, such as end-to-end transmission systems.

            (F)       Extrinsic Evidence of Context

The parties point to various different types of extrinsic evidence to support their respective construction of the “one or more channels” language.

When the Modernization Ordinance was submitted to the voters as Measure G in 2008, the ballot materials included the following from the “Impartial Analysis of Measure G”:

“Since 1970, the city of Santa Barbara has imposed a local tax known as the ‘Utility Users Tax’ (or ‘UUT’) on the use of telephones and Cable TV video services. The amount of Santa Barbara’s UUT is currently six percent (6%) of a customer’s monthly bill for these types of services.

“If approved by the voters, Measure G would enact a City ordinance which amends the City’s 1970’s era UUT ordinance with a modern ‘telecommunication and video services’ ordinance. The new ordinance would also reduce the rate of the UUT on these services from 6% to 5.75%. The modernized technical definitions in the Measure G ordinance would apply to all types of telecommunication regardless of whether the communication is intrastate, interstate, or international and regardless of the technology used to provide such communications. New telecommunication services would include paging, text messaging, and private communication services (T-1 line). The new ordinance would not apply to charges for internet services, including digital downloads like music, games, and ringtones.

“Santa Barbara’s existing UUT ordinance, like many similar municipal UUT ordinances throughout California, was written before the introduction of the new telecommunications and video technologies, such as cellular phones, private network communications, voice-over-internet telephone services (VoIP), and IP-video. Santa Barbara’s existing ordinance was also written before changes occurred to federal law such as the Mobile [T]elecommunications Sourcing Act of 2000 and a change in Internal Revenue Service regulations concerning how the Federal Excise Tax (the ‘FET’) applies to long-distance phone service charges. UUT ordinances enacted by other California cities which contain provisions referring to the FET (similar to that in Santa Barbara’s current UUT ordinance) have faced legal challenges to the manner in which they collect their UUT. If approved by the voters, Measure G ordinance would allow Santa Barbara's UUT ordinance to be revised and updated in order to avoid having Santa Barbara face similar legal challenges.” (AR 2, pp. 1089-1090.)

The argument in favor of Measure G included the following: “Measure G is not a new tax. For almost 40 years, the current tax has helped ensure that our police and firefighters are there when we need them, and funded road repairs, youth and senior programs and other vital community services. However, the existing ordinance was enacted before the introduction of many modern telecommunication technologies. Yes on G simply replaces the existing ordinance with one that is consistent with new federal and state law, and modernizes definitions to close loopholes and ensure equal treatment for all taxpayers. Without Yes on G the City may have no choice but to cut services.” (AR 2, p. 1090.)

In addition to ballot material, the parties point to various aspects of the process in which the Modernization Ordinance was adopted.

At the February 21, 2008, special meeting of the City Council, City Finance Director Robert Peirson made the following comments, among others:

“Even were there no potential legal threats to our telecommunications UUT, because of the explosive change in technology over the last five to ten years, and because our ordinance was drafted back in the 70s and simply could not foresee some of the technological advances that we’re enjoying these days, that technology is essentially bypassing our ordinance. And it means more and more of the technology is not taxable. And that’s really not equitable, that people who can afford the modern technology would escape the tax and the people who maybe can’t afford all of that modern technology would be stuck paying on a smaller and smaller base, be stuck paying that tax. So there’s really a tax equity issue, both from a taxpayer standpoint, and as importantly in my opinion, the importance of treating all of the players in the technology field the same. I mean, if we’re having TV services that are being provided to most, frankly, of our residents by Cox Communications, and that’s subject to the tax, why should somebody someday when Verizon shows up in town with their FiOS system which, FiOS system, which is what they call it, which is basically TV over a broadband fiberoptic connection. They call it IPTV for Internet Protocol TV. Why should that not be taxable when the Cox cable package is? So to be fair to Cox, it’s fair to have a level playing field that anybody providing television service is, you know, going to be treated the same, so that there’s not a competitive disadvantage over one form of technology to another.” (AR 1, pp. 170-171.)

At the April 1, 2008, meeting of the City Council Finance Committee, Finance Director Peirson made the following comments, among others:

“Now, you may ask why is cable TV in that with the telephone, because we’re looking at a telecommunications utility users tax update. And the reason for that is that cable TV is essentially a video service, and under the proposed model ordinance that will go to the ordinance committee next week, we – the model ordinance proposes to capture, if you will, the utility tax on video services, which includes cable TV, within this new model ordinance, whereas currently we have a separate code section within the utility tax chapter on cable TV. And so, where right now we have two sections in the utility users tax chapter, one on telephone, and one on cable TV, the new model ordinance is a telecommunications ordinance and would combine both the cable TV video service and the telephone as a telecommunications service.

“The reason for this is that, whereas in the past and really in Santa Barbara still today, cable TV is essentially the only available video service outside of what’s called direct broadcast satellite, which is Direct TV or Dish Network, right now Cox Communications and their cable service is really the only service available to the citizens of Santa Barbara outside of satellite. In the future you can expect that there will be further competition within the video service marketplace. As an example of that is Verizon Communications is currently, as nearby as Ventura and Thousand Oaks, is currently offering digital, what we would normally call cable TV. It’s video service, it’s television. It’s just provided through a different technology, but it is video service. And so, by moving the cable TV portion into the telecommunications piece, we are able to broaden the definition to video services to position us to be technology neutral so that we would be treating each type of television service the same, whether it’s provided through a coaxial cable by Cox Communication or through a fiber-optic link provided by Verizon Communications.

And you – you’ll recall from the work session that to us, staff, and I think to you as the council, one of the most important aspects of a new telecommunications utility tax ordinance is equity in terms of treating similar services provided by different technologies the same. So it doesn’t matter whether you get your phone service through voice over internet protocol like Netsc – like Netscape, I was gonna say – but, well, Skype is – is one of them, but Vonage, thank you Rudy, or whether you continue to receive your telephone service through Verizon Communications, telephone is telephone, and I think in staff’s opinion, and I think that council expressed that they agree, that that service, that voice service ought to be treated the same regardless of the technology used to deliver it. So, we moved the cable TV piece into the telecommunications ordinance, and then we’re prepared to handle new technologies as they arise. So that’s why we’ve added the cable TV piece in there.” (AR 1, pp. 188-189.)

At the conclusion of that meeting, there was a brief exchange between City Administrator James Armstrong and Councilmember Iya G. Falcone:

Armstrong: “I want to just to clarify one thing that Councilmember Falcone said, and just – and I think I understand it, but, on our cable TV UUT, that only applies to cable television services, not the internet access services.”

Falcone: “I understand that. It’s cable through, in this area, Cox, in other areas, Comcast, in other areas, different ... yeah. But it’s not the internet streaming videos, downloading things that you get.”

Armstrong: “Or even your, just, monthly internet access charge, that’s not subject to the tax.”

Falcone: “Right. Cause Congress precludes us, that’s right?” (AR 1, p. 206.)

At the April 8, 2008, meeting of the City Council Ordinance Committee, City Attorney Stephen P. Wiley made the following comments, among others:

“And I should explain, the existing city ordinance, and that’s actually the second page of the existing ordinance, has a cable television tax. There is imposed a tax upon every person in the City using cable television services. The tax imposed by this section shall be at the rate of 6% of the charge made for such service. The standard 6% of the city tax. But again, people are receiving what are essentially television services, video services, and they’re not getting it by way of cable. So again, to – to make this a level playing field, a major part of this new model ordinance is to bring in video services.

“And that’s probably a good segue way into some changed pages, and I don’t know Bob, if you want to explain these any more, but it’s my understanding that Don Maynor, the attorney who we have worked with for a number of years on issues like this, who is – has been the paint – the main person in drafting this model ordinance, has suggested some changes with respect to video services to make it clear that the ordinance – the tax – applies as well to recording services and to payments made for DVRs – for example, or for TiVos. And that’s, that’s what these changed pages are all about. I’ve tried to show the changes. The wording changes are fairly minor, but again the – the intent here is to make it very clear in the model ordinance that recording or recording devices, television video recording devices, would be covered by this tax as well.” (AR 1, pp. 209-210.)

“As I say this, this is an ordinance that Don Maynor, our special counsel, has worked with a lot over the years. One of the things he did, in particular, was to try to work with the phone companies that are extant in California and to make sure that the collection practices and the definitions and the audit processes are all things that they are comfortable with, because the approach here is not to make their life difficult. You know, the phone companies, this is a consumer tax. It’s paid by the consumer, but it’s collected by the phone company or the video company, if you will, if we – in that sense. But we don’t – we want to use terminology that they use, we want to refer to regulations that they refer to, and we even want – and part of the model ordinance creates a section where the Finance Director, the City Finance Director, can create administrative rulings for interpreting the application of the ordinance. And these will be act – you know, public administrative documents that everyone could refer to, the sort of – the finer points of any – any interpretation of this ordinance or any conflict in wording. Not, not substantive changes, but just the standard administrative rulings could be developed by the Finance Director. That’s the sort of thing that is a result of collaboration with at least the phone companies by Don Maynor.” (AR 1, p. 211.)

At that same meeting, City Finance Director Robert Peirson made the following comments, among others:

“Mr. Chair, Councilmember Francisco. No, this ordinance would not apply to internet access of any kind, whether it be dial up or DSL or cable, because at the present time doing so – the number one reason is because it’s precluded by federal law. There is a internet tax moratorium that the federal government has imposed, and has been in place now, I’m not sure, six or seven years at least, and as I recall the most recent renewal of that at the federal level reimposed or maintains that moratorium for at least another five or six years, I think it was seven years at the time it was adopted, there are probably six years left on that. And so, this ordinance does not intend to tax internet access.” (AR 1, p. 215.)

At that meeting, Councilmember Dale Francisco’s commented: “Then, my next question is about Section R in the proposed ordinance on page three, at the bottom of the page, ‘Telecommunication Services.’ It seems to me that that first sentence, ‘transmission conveyance or routing of voice, data, audio, video or any other information or signals to a point or between or among points, whatever the technology used,’ it seems to me that that definition covers internet service. And so, if we don’t mean to do that, it seems to me that language needs to change.” (AR 1, pp. 215-216.)

Finance Director Pierson responded:

“I would respectfully disagree that that language is worded to tax the – the internet access. I think what it is intended to do, and I think, the way I read it at least is, that it would tax the services provided over that internet access. There is a distinction to be made between the cost of internet access, which is what you would pay to a dial up internet service provider, DSL or cable modem provider, or any service provided over that pipe. And there are services – and this is, I think, the point Mr. Wiley was trying to make, is that what – what the model ordinance – the overarching goal of it in terms of making it technology neutral is to say that if you’re receiving telephone service, it really doesn’t matter whether you’re receiving it over a twisted pair of copper wires, whether you’re receiving it through the internet, or whether you’re receiving it through fiber optic provided through – by the local cable company. A telephone service is a telephone service and, so, what we’re what we are not taxing is the access to the pipe, but what we do propose to tax is the serv – are the services provided over that pipe, whether it be voice communication, or video services in the form of internet protocol television, which comes over that same pipe that might provide your internet access, and I would use – I could use either the telephone company’s or the cable system, as the example. You have one pipe coming into the home ... [¶] … [¶] and it provides you cable TV, it provides your telephone service, and it provides your internet access. And we already, even though that access is provided through the single pipe, we already tax the telephone/television service, the video service, and we tax telephone service. And so, the way I read this, and I certainly would defer to the attorneys on this specifically, but I can tell you the intent of this is not to tax the access itself, but the services provided over the conduit – the pipe.” (AR 1, p. 216.)

In response to a comment by Councilmember Grant House (“Okay, video, phone – Okay, video, phone, and what – the ones that are listed here, whatever those are.”), Finance Director Pierson responded:

“Right, and I want to stress when we say ‘video,’ we are not talking about going to YouTube and watching YouTube videos. We’re talking about subscribing to what, and again, I’m going to use sort of layperson language, subscribing to television service, where you can sit at your TV, and you can flip with the clicker, the remote control, and you can watch TV on your TV.” (AR 1, p. 218.)

In response to another comment by Councilmember House (“Because people will see it as a tax on my computer use. That seems like, you know, you’re moving into some territory. So, it’s not. It’s a tax on specific – certain specific services that are provided over that mode.”), Finance Director Pierson responded:

“Right. And at its simplest, it’s easiest for me, at least, to keep it and think of it simply in terms of the traditional names that we know. In other words, we’re going to tax the telephone service, because we already do. We’re going to tax TV service, because we already do. What we’re trying to say in this ordinance is we don’t care whether you get your TV service through fiber optic provided by Cox Communications, or through an internet protocol service provided by Verizon Communications, or, you know, however you get your television service. TV service is TV service. And the same is true of telephone service.” (AR 1, p. 219.)

At that same hearing, Vice President of Public Affairs for Cox Communications David Edelman commented, among other things: “It’s some of those other services and for example, if I’m watching Desperate Housewives on the internet, again, as I read this and as I’ve heard it explained somewhat, that is a chargeable service because you’re watching ‘television’ over the internet. And again, it’s, yeah, it’s – there’s a language issue here and you know, I don’t know if that’s really been a problem in other cities, but again, as we’re talking about that, to be clear with everyone that if we’re not charging internet access, you can watch Desperate Housewives over the internet because there’ll be no way of tracking that. There’ll be no way of figuring that out from a realistic point of view. So ....” (AR 1, p. 223.)

In immediate response to this comment, Councilmember Das Williams responded: “Basically, if you don’t charge for it, it’s not taxed. So that’s ....” To this Edelman stated: “Well, someone, but not me, but someone.” Councilmember Williams replied: “But that’s the point. If you, as the utility, don’t charge for it, it’s, it’s definitely not taxed, but I also do support the idea we should put in specific language saying that this is not an attempt to, to tax internet usage.” (AR 1, p. 224.)

Later at that meeting, Councilmember Francisco stated: “Well, anyway. I think that – I think the point about the level playing field that, is it Mr. Edelman? That Mr. Edelman raised is a good one. And it occurs to me that this ordinance probably isn’t going to last very long. One of the things that inevitably is going to happen is that internet service at home will be able to provide, for instance, a high-definition video stream. This is really sort of a stopgap – anyway.” (AR 1, pp. 229-230.)

At the May 13, 2008, meeting of the City Council Ordinance Committee, City Attorney Wiley stated: “I have this general understanding that the concept of video services, we’re having – the whole industry, if you will, public entities, and UUT – we’re having a little bit of a hard time getting our hands around that – the concept. And that is not so much the case with telecommunications, that we’re – so.” (AR 1, p. 245.)

Councilmember House responded:

“Okay, I raised that, it’s just something I noticed.

“And let’s see – and I can understand, and I think we all get the gist of Mr. Edelman’s remarks here about the way that that phrase on page – the top of page seven there is – and to be sure that really gets technically correct and it reads right for everyone, you know, Cox and everybody, so it’s clear that we’re not taxing the internet. It just really clarifies that.” (AR 1, pp. 245-246.)

City Attorney Wiley followed up: “Let me just say, generally, this is [unintelligible] – a very fundamental issue in this ordinance, because for lack of a better term, when it comes to technology shift, the evolving technology continues to evolve. This ordinance tries to build some real flexibility by telling everyone what we intend to tax. We intend to tax what we used to call telephone service even if it isn’t technically telephone, that provides that same sort of service, we intend to tax it. And we intend to tax video even though it wouldn’t be considered traditional cable, things like that.” (AR 1, p. 247.)

The June 24, 2008, City Council agenda report for Modernization Ordinance includes the following statements:

“Santa Barbara is similar to more than 100 California cities which fund local programs and services with a UUT. Typically, a UUT is levied on each user of a utility (e.g. telephone, electricity, gas, water, or video services) within an agency’s boundaries. Most UUT ordinances in California date from a model ordinance developed by the League of California Cities in the 1970s after negotiations with the major utilities intended to standardize collection and to ease the administrative burden for utility companies. Since that time however, communication technology has changed dramatically with the demise of telegrams and the rise of cell phones, internet communications, satellite communication, and other communication media, as well as the advent of fixed-fee calling plans and other marketing trends that simplify billing and reduce costs. Meanwhile, UUT ordinances have not kept pace with rapidly evolving technology because modernization of tax ordinances has been made more difficult by the voter-approval requirements of Propositions 13 (1978) and 218 (1996). This growing gap between 1970s ordinances and a rapidly changing marketplace has fueled a number of legal and practical challenges to utility users taxes on telephony. Consequently, over the last two years more than twenty California cities with a telecommunications UUT have sought and received voter approval of a modern telecommunications UUT. … Voter approval is now required by Proposition 218 [[Art.] XIII(C) and (D) of the state constitution as approved by the voters in 1996.” (City Council Agenda Report, June 24, 2008, AR 6, pp. 2027-2028.)

“Technological Change: It is also likely that older technologies (e. g., landlines) will continue to be replaced by newer technologies. Indeed, some predict that web-based communications, like voice-over-the-internet protocol (VoIP) telephony as offered, for example, by Vonage, will take over a significant portion of the market in the next decade, perhaps even overtaking cellular telephony. Therefore, as technology continues to evolve, local agencies can expect continuing challenges to UUT ordinances dating from the League’s 1970s now outdated model ordinance. Such challenges could have adverse consequences because failure to tax newer technologies would result in a substantial reduction in revenue for local services and create an inequitable situation where those who can afford to adopt newer technologies are not taxed while only those who cannot continue to be taxed. Similarly, the convergence of voice, data, video, and other services also poses challenges for the application of older UUT to new service plans offered by so-called ‘triple play’ providers. These technological issues can be addressed by voter approval of an updated UUT ordinance as well.

“Santa Barbara’s current UUT ordinance also taxes only ‘cable TV’ service, with this portion of the UUT collected for the City by our local cable franchisee from its customer base. This provision, however, has become somewhat outdated as state law was changed in 2007 so that cable companies and IP-TV companies (AT&T and Verizon) can now receive state-issued franchises and need not obtain a local  franchise. In this regard, it is also important to note that, under federal law, direct broadcast satellite video services (DirectTV and Dish Network) are exempt from local utility taxes. As a result, it is apparent that the City should update its UUT provisions for cable TV and convert it into a video UUT tax so that the tax applies to the broader and newer technological concept of ‘video services’ and without regard to the existence of a local franchise. Again, such a change would be merely a technological clarification and, more importantly, would create a level playing field for all ‘video’ customers and providers.” (City Council Agenda Report, June 24, 2008, AR 6, p. 2029.)

“The Council expressed an interest in placing a revised UUT ordinance as a ballot measure before the voters in November, 2008 to update the City’s telecommunications UUT ordinance. Doing so would protect against potential legal and regulatory risks to this critical revenue source as well as updating the ordinance’s 1970’s language to reflect rapidly changing telecommunications technology.” (City Council Agenda Report, June 24, 2008, AR 6, p. 2030.)

“As a result of the work session, the Council directed the Ordinance Committee to review a modern draft telecommunications UUT ‘model ordinance.’ The Council also directed the Finance Committee to review the financial impacts of both the potential loss of this critical revenue source as well as of modernizing the ordinance language to ensure the tax is technology-neutral, is positioned to keep pace with rapidly changing technology and recognizes the market’s shift to fixed-fee calling plans and other marketing trends that simplify billing and reduce costs.” (City Council Agenda Report, June 24, 2008, AR 6, p. 2030.)

“The Ordinance Committee conducted a detailed review of the ordinance language and requested one substantive modification; that the draft ordinance be amended to make it expressly clear that the City does not propose to levy the UUT on telecommunication services that are dedicated to, or used exclusively for, internet access. Although federal law already currently precludes the City from taxing Internet access, the Committee wanted to specifically and clearly exclude Internet access from the tax even if, in the future, federal law changes to allow such a tax.” (City Council Agenda Report, June 24, 2008, AR 6, p. 2030.)

The parties characterize these, and other, comments in the record differently. Petitioners point to specific comments such as “this is not about taxing the internet,” “we’re not talking about going to YouTube and watching YouTube videos,” and “not the internet streaming videos downloading things that you get.” From these comments, petitioners argue that the City was not intending the VUT to extend to internet streaming, such as the services provided by petitioners. Petitioners instead assert that this evidence supports the comment by Councilmember Francisco that the Modernization Ordinance would quickly become moot in light of the rapid rise of streaming services. The City argues that these comments are taken out of context or otherwise provide little insight into the construction of the VUT.

This legislative history of the Modernization Ordinance is clear on general principles. The discussions quoted above, as well as others in the record, demonstrate an intent to expand the scope of video services subject to tax consistent with the principle that the tax base, as far as legally permissible and practicable, should be neutral as to the technology used to transmit and receive video. A theme throughout these legislative discussions is the concern that the then-existing tax ordinance was too narrow and inequitable because it applied to an old technology. As new technology provided alternatives to receive essentially the same service as traditional cable television, fewer remaining consumers of the old technology were paying the tax while those with corresponding service using (and able to afford) new technology did not. Broadening the tax base was intended to create a more level playing field.

Another general principle is that the City made a careful distinction between telecommunications and video services, on the one hand, and internet services, on the other. Time and again, City officials emphasized that internet services were not subject to tax. The context of these comments, together with the express language of the Modernization Ordinance, makes clear that the internet services not subject to the Modernization Ordinance are those services providing access to the internet. To the extent they come within the VUT’s definitions, services provided by means of the internet are subject to the VUT. Put another way, statements to the effect that the City is not “taxing the internet” address a different issue than whether or not streaming services such as those provided by petitioners are within the VUT’s definitions of “video services” or “video service provider.”

Similarly, comments regarding downloading video must be understood in the context in which they were made. The video downloads subject to these comments were in the nature of internet videos as they existed in 2008. As the quoted material, above, indicates, the context of those discussions was that consumers downloading videos from a free internet service would not be taxed under the VUT. The comments draw two distinctions. The first distinction is that “video services” covered by the VUT are those that are services comparable to then-common cable television services, as compared with video then available on free websites like YouTube. This distinction touches on the “account” concept present in the current definition of “channel,” where taxable video services involve a transactional relationship between the content provider and the viewer that is more involved than merely downloading freely available video content. The second distinction is the financial consideration provided for the video service. As more explicitly discussed in the context of free Skype internet phone service, the service itself may closely correspond to the traditional telephone service and hence be a taxable service, but as a free service to which the tax is computed as a percentage of the price, no tax would ever be due. (AR 1, p. 232.) Video provided for free through the internet is more easily discussed as ancillary to the receipt of generic “internet service,” which the City emphasized was outside the scope of the VUT, than a “video service” comparable to traditional cable television services.

The comment of Councilmember Francisco suggesting that the Modernization Ordinance would be a stopgap because high-definition video streaming would become available (AR 1, pp. 229-230) may well have affected Francisco’s thinking about the scope of the Modernization Ordinance, but the record of the legislative history reflects this only as a stray comment and not as a statement of the intended scope of the Modernization Ordinance from the City’s perspective. (See Ross v. RagingWire Telecommunications, Inc. (2008) 42 Cal.4th 920, 931 [“ ‘ “In construing a statute we do not consider the motives or understandings of individual legislators who cast their votes in favor of it.” ’ ”].) Instead, the great weight of the legislative history evidence demonstrates that the City was aware of the potential for technology to change the manner by which video content was transmitted that would quickly obsolete rigid definitions moored to existing technology and perpetuate the type of inequality seen in the then-current cable television tax scheme. The Modernization Ordinance was drafted with the intent to include new technologies flexibly within its framework.

            (G)       Enforcement History

Petitioners also point to the enforcement history of the VUT, and specifically to the lack of enforcement as to internet streaming services, as indicating that the City understood the VUT did not apply to internet streaming services. An agency’s decision not to enforce a law in a particular way may, in appropriate circumstances, provide evidence of the legislative intent relevant to the scope of the statute. (Tahoe Regional Planning Agency v. King (1991) 233 Cal.App.3d 1365, 1407–1408 [“activity” in definition of “off-premise” signs construed as “commercial activity” based on legislative history consistent with enforcement history].) At the same time, “ ‘[m]ere failure to act ... does not constitute an administrative construction.’ ” (Siskiyou County Farm Bureau v. Department of Fish & Wildlife (2015) 237 Cal.App.4th 411, 443 (Siskiyou Farm Bureau), quoting In re Madison’s Estate (1945) 26 Cal.2d 453, 463 (Madison’s Estate).)

Madison’s Estate provides some guidance here. Madison’s Estate involves the tax treatment at the time of creation of trusts as the tax law existed in 1935. (Madison’s Estate, supra, 26 Cal.2d at p. 455.) In Madison’s Estate, the controller sought to collect an inheritance tax upon certain transfers into trust on the grounds that they were intended to take effect in possession or enjoyment at the donor’s death and that they were made in contemplation of the donor’s death as provided under the Inheritance Tax Act of 1935. (Id. at p. 456.) The trial court entered judgment in favor of the taxpayer and the controller appealed. (Ibid.) On appeal in the Supreme Court, the court first noted that the issue to be decided was whether the transfer was covered by the statute, an issue of law to be determined by the court. (Ibid.) The court also noted that, at that time, courts of other jurisdictions were divided on the issue of taxability of trusts under similar statutes. (Id. at p. 458.)

Apart from arguing from decisions of other jurisdictions, the taxpayer in Madison’s Estate argued that the controller’s admitted failure in 1923 to tax similar trusts “amounted to an administrative construction of the statute, and that this construction was adopted by the Legislature in 1935 when it reenacted the statute, and now precludes taxation in this case.” (Madison’s Estate, supra, 26 Cal.2d at p. 463.) The Madison’s Estate court rejected that argument: “Mere failure to act, however, does not constitute an administrative construction. [Citations.] Moreover, an erroneous administrative construction does not govern the interpretation of a statute, even though the statute is subsequently reenacted without change.” (Ibid.)

In this context it is worthwhile to note that Modernization Ordinance specifically provides for formal administrative guidance:

“The Tax Administrator shall have the power and duty, and is hereby directed, to enforce each and all of the provisions of this Chapter.” (SBMC, § 4.26.130, subd. (A).) “The Tax Administrator may adopt administrative rules and regulations consistent with provisions of this Chapter for the purpose of interpreting, clarifying, carrying out and enforcing the payment, collection and remittance of the taxes herein imposed.” (SBMC, § 4.26.130, subd. (B).) “The Tax Administrator may issue and disseminate to video service suppliers, which are subject to the tax collection requirements of this Chapter, an administrative ruling identifying those video services, or charges therefor, that are subject to or not subject to the tax of subsection (a) above.” (SBMC, § 4.26.030, subd. (D).)

The Administrative Appeal Decision addresses this issue only in the context of Proposition 218, discussed below. (AR 1, p. 9.)

In reply, petitioners argue that justifications for non-enforcement are only credited if supported by evidence, citing Siskiyou Farm Bureau, supra, 237 Cal.App.4th at p. 443. (Reply, at p. 12.) Siskiyou Farm Bureau does not support such a broad statement. In Siskiyou Farm Bureau, the issue was the interpretation of Fish and Game Code section 1602. (Siskiyou Farm Bureau, at p. 420.) The trial court found section 1602 to be ambiguous and then resolved the perceived ambiguity in favor of the plaintiff Farm Bureau and against the Department of Fish and Wildlife. (Ibid.) The Siskiyou Farm Bureau court reached a different conclusion and reversed. (Ibid.) In addressing the plaintiff’s argument that non-enforcement of the statute in the manner consistent with the Farm Bureau’s interpretation and inconsistent with the Department’s interpretation (as factually found by the trial court), the Siskiyou Farm Bureau court stated:

“We accept the Farm Bureau’s general point that contemporaneous administrative interpretation of a statute is entitled to deference, but this deference arises (if at all) only when a statute is ambiguous, and is stronger where the agency has adopted a formal regulation interpreting a statute falling within its area of responsibility. [Citation.] Although we find no linguistic ambiguity, and the Farm Bureau has not pointed to any formal regulatory interpretation, we briefly address the Farm Bureau’s claims on this point.” (Siskiyou Farm Bureau, supra, 237 Cal.App.4th at p. 441.)

 

“Finally, and more generally, the Farm Bureau asserts the Department has abruptly changed its policy regarding [Fish and Game Code] section 1602, by seeking to enforce it in a way it has never done before. This was the subject of conflicting evidence in the trial court. For purposes of this appeal, we construe that evidence in the light favorable to the trial court’s ruling, which rejected the Department’s evidence that it had tried to enforce the broad view of section 1602 before. But past non-enforcement does not necessarily reflect a formal administrative interpretation precluding enforcement, but could instead reflect the exercise of prosecutorial discretion or limited resources, as the Department argued in the trial court, in addition to arguing it had exercised discretion to enforce the statute broadly. One relevant executive report states the Department ‘generally uses these powers ... where streambed alteration is involved, often with respect to very minor streams.’ [Citation; fn.] This suggests that its powers are greater and it does not always use such powers only when streambed alteration has occurred.

“More importantly, taking it as true—as the trial court found—that the Department has not previously enforced section 1602 absent streambed alteration, that is an insufficient basis on which to find the statute precludes it from doing so. In the face of extreme drought and piscatorial peril, the Department now wishes to employ the full measure of the law, to substantial dewatering of streams absent physical alteration to the streambeds. Its previous lack of enforcement does not rewrite the statute. (See Bank of Italy v. Johnson (1926) 200 Cal. 1, 15, 251 P. 784 [agency head ‘may not by the adoption of any rule of policy or procedure so circumscribe or curtail the exercise of his discretion under the statute as to prevent the free and untrammeled exercise thereof in every case, for an attempt to do so would be for him to arrogate to himself a legislative function’].) ‘Mere failure to act ... does not constitute an administrative construction.’ [Citation.]” (Siskiyou Farm Bureau, supra, 237 Cal.App.4th at p. 443.)

Contrary to petitioners’ suggestion, Siskiyou Farm Bureau did not state that reasons for lack of enforcement can only be credited based upon evidence of such reasons but, despite trial court factual findings to the contrary, found that lack of contemporaneous enforcement is not a basis to find that subsequent enforcement is otherwise permitted when consistent with the law as written. The situation here is a matter of inference. The only evidentiary fact relating to enforcement is the undisputed fact that the City did not enforce the VUT against streaming video providers such as petitioners until comparatively recently. Petitioners seek to draw an inference from that fact to the effect that the lack of enforcement was because the City interpreted the Modernization Ordinance to exclude services provided by petitioners.

The most to be said about the lack of enforcement is that it is a factor to consider in interpreting the Modernization Ordinance. Among the matters to be considered with this factor is timing. In the Administrative Appeal, the City argued that in 2008, online video services, and specifically petitioners’ online video services, were in their infancy. (AR 1, pp. 116-117 & evidence cited.) One inference from this evidence is that lack of enforcement cannot reasonably reflect contemporaneous interpretation of the Modernization Ordinance. As petitioners argue here, this may explain the lack of enforcement in the early years, but not the lack of enforcement in later years. (Motion, at p. 23.) Necessarily then, the lack of enforcement in later years reflects something different than legislative intent in 2008.

            (H)      Interpretation of “One or More Channels”

The above discussion of the denotative meaning of “one or more channels” resolves the potential ambiguity in the VUT’s use of the term “one or more channels.” As the legislative history makes clear, an important feature of the Modernization Ordinance was to expand the scope of video services subject to the tax to include all video services comparable, from the consumer’s point of view, to traditional cable television, regardless of the technology used to transmit the video services to the consumer, whether then existing or later developed. This intent to include transmission by future technology is inconsistent with petitioners’ construction of the VUT, which construction ties the tax base to a single type of transmission method, i.e., an end-to-end system. Indeed, petitioners’ construction retains the technological obsolescence problem that the City specifically sought to remove.

The legislative history also makes clear that in enacting the Modernization Ordinance, the City wanted to include services comparable then-common cable television services, such as pay-television subscription services (e.g., HBO on cable) or pay-per-view, but to exclude ordinary internet video downloading, like watching YouTube in 2008. The inclusion of the delimiting term, “using one or more channels” in the definition of “video services” does exactly that. The OED definition of “channel,” bringing in the concept of consumer “account,” provides the needed transactional relationship to distinguish what is to be included and what is to be excluded from taxation under the VUT. This understanding of “using one or more channels” is consistent with petitioners’ own usage of the term “channel” and with the City’s purpose of making the VUT apply, as much as possible, without regard to the technology employed now or in the future. This construction harmonizes each element of the VUT with its language, purpose, and legislative history.

The prior lack of enforcement of the VUT as against plaintiffs or streaming services generally does not affect this analysis. The above analysis ultimately resolves the issue by determining that the VUT is not ambiguous in the manner argued by petitioners because the petitioners’ proffered construction is not reasonable under the circumstances. Following the reasoning in Siskiyou Farm Bureau, supra, the prior lack of enforcement against streaming services does not preclude the present, correct application of the VUT. Alternatively, even if the VUT is viewed as ambiguous in such manner, the lack of enforcement is not persuasive as a matter of extrinsic evidence. (Note: Because the Administrative Appeal Decision found in favor of the City’s interpretation, it implicitly found unpersuasive petitioners’ arguments as to inferences to be drawn from the lack of enforcement. Regardless of the standard of review applicable to such implicit finding, this court, even exercising independent review, agrees that the prior lack of enforcement is not persuasive as to the statutory scope of the VUT when weighed against the legislative history and other aspects of the above analysis.)

Accordingly, for all of the reasons set forth above, the Administrative Appeal Decision correctly construed the VUT as applicable to the petitioners’ services. The court finds no abuse of discretion in the Administrative Appeal Decision on this ground.

(3)       First Amendment

Petitioners next argue that application of the VUT to petitioners’ streaming services violates the First Amendment of the United States Constitution. Petitioners assert that the VUT is improperly content-based and fails strict scrutiny. In particular, petitioners argue that the VUT taxes online speech if it is video content, but not when it is music, a book, or a newspaper or magazine. The Administrative Appeal Decision rejected this argument, citing Leathers v. Medlock (1991) 499 U.S. 439 [111 S.Ct. 1438, 113 L.Ed.2d 494] (Leathers) and Sacramento Cable Television v. City of Sacramento (1991) 234 Cal.App.3d 232 (Sacramento Cable).

“ ‘The First Amendment to the United States Constitution, made applicable to the states through the Fourteenth Amendment, prohibits the enactment of any law ‘abridging the freedom of speech, or of the press....’ [Citation.] This limitation applies to municipal ordinances. [Citation.] Disseminators and subscribers of cable television service are engaged in protected First Amendment ‘speech’ and are therefore entitled to protection.” (Sacramento Cable, supra, 234 Cal.App.3d at p. 237.) “It is only when a taxing scheme singles out protected speakers or differentiates between protected speakers and others or among protected speakers that First Amendment concerns arise.” (Id. at pp. 237–238.)

In Minneapolis Star and Tribune Co. v. Minnesota Com’r of Revenue (1983) 460 U.S. 575 [103 S.Ct. 1365, 75 L.Ed.2d 295] (Minneapolis Star), cited in Sacramento Cable, a tax on the use by newspaper publishers of ink and paper was found to implicate First Amendment rights both because it singled out the press for different tax treatment and because it differentiated among First Amendment speakers. (Minneapolis Star, at pp. 582, 591.) Not only did the tax apply solely to newspapers but it exempted the first $100,000 of ink and paper used, thereby singling out only a few large newspapers to bear the full burden of the tax. (Id. at p. 591.)

In Leathers, supra, the Arkansas Legislature amended its gross receipts tax to impose a four percent sales tax on cable television. (Leathers, supra, 499 U.S. at p. 442.) Exempted from this tax were newspapers, magazines, and satellite broadcast services. (Ibid.) “Cable television provides to its subscribers news, information, and entertainment. It is engaged in ‘speech’ under the First Amendment, and is, in much of its operation, part of the ‘press.’ [Citation.] That it is taxed differently from other media does not by itself, however, raise First Amendment concerns. Our cases have held that a tax that discriminates among speakers is constitutionally suspect only in certain circumstances.” (Id. at p. 444.) “[D]ifferential taxation of First Amendment speakers is constitutionally suspect when it threatens to suppress the expression of particular ideas or viewpoints. Absent a compelling justification, the government may not exercise its taxing power to single out the press. [Citations.] The press plays a unique role as a check on government abuse, and a tax limited to the press raises concerns about censorship of critical information and opinion. A tax is also suspect if it targets a small group of speakers. [Citations.] Again, the fear is censorship of particular ideas or viewpoints. Finally, for reasons that are obvious, a tax will trigger heightened scrutiny under the First Amendment if it discriminates on the basis of the content of taxpayer speech.” (Id. at p. 447.)

Consequently, the Leathers court found no improper discrimination because the Arkansas sales tax is a tax of general applicability and so does not threaten to hinder the press as a watchdog of government activity, because the tax did not target a small number of speakers where it affected approximately 100 suppliers of cable television services, and because it was not content based. (Leathers, supra, 499 U.S. at pp. 447-449.) “There is nothing in the language of the statute that refers to the content of mass media communications. Moreover, the record establishes that cable television offers subscribers a variety of programming that presents a mixture of news, information, and entertainment. It contains no evidence, nor is it contended, that this material differs systematically in its message from that communicated by satellite broadcast programming, newspapers, or magazines.” (Id. at p. 449.)

“[Cammarano v. U.S. (1959) 358 U.S. 498 [79 S.Ct. 524, 3 L.Ed.2d 462]] established that the government need not exempt speech from a generally applicable tax. [Regan v. Taxation With Representation of Washington (1983) 461 U.S. 540 [103 S.Ct. 1997, 76 L.Ed.2d 129]] established that a tax scheme does not become suspect simply because it exempts only some speech. Regan reiterated in the First Amendment context the strong presumption in favor of duly enacted taxation schemes.” (Leathers, supra, 499 U.S. at p. 451.) “Taken together, Regan, [Mabee v. White Plains Pub. Co. (1946) 327 U.S. 178 [66 S.Ct. 511, 90 L.Ed. 607]], and [Oklahoma Press Pub. Co. v. Walling (1946) 327 U.S. 186 [66 S.Ct. 494, 90 L.Ed. 614]] establish that differential taxation of speakers, even members of the press, does not implicate the First Amendment unless the tax is directed at, or presents the danger of suppressing, particular ideas.” (Id. at p. 453.)

In Sacramento Cable, the plaintiff cable television provider transmitted video service to subscribers through coaxial cables in the City of Sacramento. (Sacramento Cable, supra, 234 Cal.App.3d at p. 236.) The plaintiff had a franchise agreement, adopted as a municipal code, that required the plaintiff to pay a franchise fee, which agreement precluded additional fees except generally applicable taxes. (Ibid.) The defendant city imposed a sales tax on tangible personal property, including books, video tapes, and audio tapes, but excluding newspapers, periodicals, radio transmission, single channel distribution systems, satellite master antenna systems, and multi-point microwave distribution systems. (Id. at pp. 236-237.) The defendant also imposed a tax on the price of admission to live entertainment events and closed circuit transmission of live events. (Id. at p. 237.) The defendant then passed an ordinance to add cable television service to the existing utility users’ tax on telephone, electric, and gas service. (Ibid.) The plaintiffs challenged the cable television tax on various grounds, but the trial court granted defendant’s motion for summary judgment. (Ibid.)

On appeal in Sacramento Cable, the plaintiff argued that the cable television tax was invalid under the First Amendment considerations because it treated cable television differently from other protected speakers and because it singled out the plaintiff cable television provider, which provided 99 percent of the cable service in the city. (Sacramento Cable, supra, 234 Cal.App.3d at p. 236.) The Sacramento Cable court rejected this argument. The court first observed, citing Minneapolis Star, that “Were the tax here one imposed solely on cable television we might agree it cannot withstand constitutional scrutiny. Individualized treatment, which threatens individualized mistreatment and the consequent suppression of ideas, is at the heart of First Amendment concerns. [Citation.]” (Id. at p. 239.) The court noted that the tax at issue was the expansion of an existing utility users’ tax. (Ibid.) The court stated:

“Like the classification of newspapers and periodicals as ‘goods, wares, or merchandise’ and publishing and printing as ‘manufacturing’ in [Times Mirror Co. v. City of Los Angeles (1987) 192 Cal.App.3d 170] and the classification of cable television differently from other media in Leathers, the grouping of cable television with the three utilities here is rationally based. This is not an arbitrary grouping designed to punish cable television but instead flows naturally from similarities in the businesses involved.” (Sacramento Cable, supra, 234 Cal.App.3d at p. 242.)

“Plaintiffs contend the tax is nevertheless discriminatory because 99 percent of its burden falls on [plaintiff cable television provider’s] customers. Regardless of its design or intent, a tax must be tested for First Amendment purposes ‘by its operation and effect.’ [Citations.] However, plaintiffs again misunderstand the nature of the tax in question. The relevant effect is not the percentage of cable television tax paid by … subscribers but the percentage of the overall utility users tax paid by [the cable television provider’s] customers. The record here is silent on the amount of tax paid for the use of telephone, gas and electric service.” (Sacramento Cable, supra, 234 Cal.App.3d at pp. 242-243.)

“Plaintiffs also contend the tax is discriminatory because it does not encompass all utilities or all services using public rights-of-way and imposes a 7– ½ percent tax while other taxes on First Amendment speakers are much lower. However, perfection in a taxing scheme has never been a prerequisite to validity. Equal taxation of all is not the constitutional mandate but equal taxation of those ‘similarly situated.’ [Citation.] There need only be a rational basis for the classification used, even though more equitable classifications may exist. Here a rational basis exists for grouping cable television with telephone, gas and electric service. And because the record contains no evidence of intent to suppress ideas and no evidence such suppression will result from enforcement of [the tax ordinance], we find no First Amendment violation.” (Sacramento Cable, supra, 234 Cal.App.3d at p. 243.)

Petitioners here argue that the Administrative Appeal Decision fundamentally misconstrues Sacramento Cable, arguing that Sacramento Cable depends upon the shared physical characteristics of cable television with gas, telephone, electricity, and water, namely the physical transmission paths operating in city rights of way. (Motion, at p. 25.) Because the Modernization Ordinance expands the VUT to streaming services, the VUT loses the shared non-speech characteristic approved in Sacramento Cable. Petitioners thus argue that the VUT constitutes content-based discrimination subject to strict scrutiny, additionally citing City of Cincinnati v. Discovery Network, Inc. (1993) 507 U.S. 410 [113 S.Ct. 1505, 123 L.Ed.2d 99] (City of Cincinnati).

In City of Cincinnati, one respondent engaged in the business of providing adult education, recreational, and social programs to individuals in the Cincinnati area. (City of Cincinnati, supra, 507 U.S. at p. 412.) It advertises those programs in a free magazine that it published nine times a year, also including some information about current events of general interest. (Ibid.) About a third of these magazines were distributed through 38 newsracks that the petitioner city authorized the respondent to place on public property in 1989. (Ibid.) Another respondent published a free magazine advertising real estate and containing general information about real estate matters, also using approved newsracks. (Id. at pp. 412-413.) In March 1990, the city notified the respondents to remove the newsracks because the respective publications were commercial handbills in violation of the local municipal code. (Id. at p. 413.) The respondents filed an action in federal court. (Ibid.)

The District Court in City of Cincinnati concluded that the regulatory scheme adopted by the city violated the First Amendment. (City of Cincinnati, supra, 507 U.S. at p. 414.) The District Court noted that both publications were “commercial speech” protected under the First Amendment. (Ibid.) Although the city had a substantial interest in protecting safety and aesthetics in public rights-of-way, the number of commercial handbills affected was minute compared with the total number of authorized newsracks. (Ibid.) On appeal, the Circuit Court affirmed, holding that because the city sought to regulate only the manner in which respondents’ publications were distributed, as opposed to their content, the burden placed on speech cannot be justified by the paltry gains in safety and beauty achieved by the ordinance. (Ibid.)

The Supreme Court affirmed. (City of Cincinnati, supra, 507 U.S. at p. 431.) The court stated:

“[F]or the purpose of deciding this case, we assume that all of the speech barred from Cincinnati’s sidewalks is what we have labeled ‘core’ commercial speech and that no such speech is found in publications that are allowed to use newsracks. We nonetheless agree with the Court of Appeals that Cincinnati’s actions in this case run afoul of the First Amendment. Not only does Cincinnati’s categorical ban on commercial newsracks place too much importance on the distinction between commercial and noncommercial speech, but in this case, the distinction bears no relationship whatsoever to the particular interests that the city has asserted. It is therefore an impermissible means of responding to the city’s admittedly legitimate interests.” (City of Cincinnati, supra, 507 U.S. at p. 424.)

“In the absence of some basis for distinguishing between ‘newspapers’ and ‘commercial handbills’ that is relevant to an interest asserted by the city, we are unwilling to recognize Cincinnati’s bare assertion that the ‘low value’ of commercial speech is a sufficient justification for its selective and categorical ban on newsracks dispensing ‘commercial handbills.’ Our holding, however, is narrow. As should be clear from the above discussion, we do not reach the question whether, given certain facts and under certain circumstances, a community might be able to justify differential treatment of commercial and noncommercial newsracks. We simply hold that on this record Cincinnati has failed to make such a showing. Because the distinction Cincinnati has drawn has absolutely no bearing on the interests it has asserted, we have no difficulty concluding, as did the two courts below, that the city has not established the ‘fit’ between its goals and its chosen means that is required by our opinion in [Board of Trustees of State University of New York v. Fox (1989) 492 U.S. 469 [109 S.Ct. 3028, 106 L.Ed.2d 388]].” (City of Cincinnati, supra, 507 U.S. at p. 428.)

The City of Cincinnati court determined that the ordinance was content-based: “The argument is unpersuasive because the very basis for the regulation is the difference in content between ordinary newspapers and commercial speech. True, there is no evidence that the city has acted with animus toward the ideas contained within respondents' publications, but just last Term we expressly rejected the argument that ‘discriminatory ... treatment is suspect under the First Amendment only when the legislature intends to suppress certain ideas.’ [Citation.] Regardless of the mens rea of the city, it has enacted a sweeping ban on the use of newsracks that distribute ‘commercial handbills,’ but not ‘newspapers.’ Under the city’s newsrack policy, whether any particular newsrack falls within the ban is determined by the content of the publication resting inside that newsrack. Thus, by any commonsense understanding of the term, the ban in this case is ‘content based.’ ” (City of Cincinnati, supra, 507 U.S. at p. 429.)

Petitioners make three related points to argue that the VUT violates the First Amendment. Petitioners argue that the VUT targets protected activity and therefore is subject to strict scrutiny, the VUT is content-based discrimination and therefore also subject to strict scrutiny, and the VUT cannot survive strict scrutiny.

Taking these arguments together, it is useful to note that the Modernization Ordinance, like the ordinance at issue in Sacramento Cable, expanded an existing ordinance that previously taxed only cable television to include other means by which functionally the same content is transmitted to consumers within the City by alternative technologies. There is no dispute that petitioners’ content is entitled to First Amendment protection. But, as Leathers, supra, makes clear, differential taxation raises First Amendment concerns only in certain circumstances. None of those circumstances are present here. The mere fact that the VUT targets video services no more implicates First Amendment concerns than in Leathers or Sacramento Cable. In both of these cases, the base of generally applicable taxes was expanded to include cable television services. The Modernization Ordinance itself addressed parts of the already-existing utility users’ tax (see, e.g., SBMC, § 4.26.220), in this case attempting to bring up-to-date taxation provisions regarding both video services and telecommunications services. Under both Leathers and Sacramento Cable, the taxation of speech-related services, independent of its underlying content, does not invoke First Amendment concerns, and hence only involves rational basis analysis.

Petitioners assert that the VUT is content-based because the VUT taxes video services but not music, book, or newspaper content over the internet. This argument is effectively refuted by Leathers, where the Supreme Court found no First Amendment concern in taxing cable television services but not newspapers, magazines, and satellite broadcast services. (Leathers, supra, 499 U.S. at pp. 442, 444.) City of Cincinnati does not alter this analysis. In City of Cincinnati, the prohibition was aimed at specific content of publications, i.e., commercial content, being distributed in newsracks on city rights-of-way. The only means by which one could determine a violation of the city ordinance in that case was to open a publication and read it. Nothing like that appears here. The only issue is the medium used, i.e., video. What content exists in that video is wholly outside the scope of the VUT. Similarly, the comment in Sacramento Cable that the tax there at issue might trigger First Amendment concerns if focused only on television connects to the issue that a tax focused on an individualized speaker is at the heart of First Amendment concerns, as in Minneapolis Star. This court therefore concludes that the VUT does not implicate First Amendment concerns so as to trigger strict scrutiny, but that only a rational basis is necessary to uphold the Modernization Ordinance as against a First Amendment challenge. (See Sacramento Cable, supra, 234 Cal.App.3d at pp. 241-243.)

The rational basis test is easily met here. The pre-existing ordinance already taxed video services delivered by cable television. The VUT modernizes the tax to create a level playing field among all providers of similar video services. The VUT is intended to raise revenue, with its expansion intended to make the tax burden more equitable among all consumers of video services. This is sufficient to demonstrate a rational basis for the VUT. (See Sacramento Cable, supra, 234 Cal.App.3d at pp. 241-243.)

Accordingly, for all of the reasons set forth above, the VUT is not invalid under the First Amendment as applied to the petitioners’ services. The court finds no abuse of discretion in the Administrative Appeal Decision on this ground.

(4)       Proposition 218

Petitioners next argue that the VUT is invalid because the City did not get voter approval applying the VUT to petitioners’ services as required under article XIIIC of the California Constitution (Proposition 218).

“No local government may impose, extend, or increase any general tax unless and until that tax is submitted to the electorate and approved by a majority vote. A general tax shall not be deemed to have been increased if it is imposed at a rate not higher than the maximum rate so approved.” (Cal. Const., art. XIIIC, § 2, subd. (b).)

There is no factual dispute that the Modernization Ordinance was submitted and approved by City voters in accordance with Proposition 218. Petitioners’ argument is that, as discussed above in the context of the meaning of the VUT, the VUT was not intended to extend to video services and therefore applying the VUT now is more than merely changing enforcement practices and is an unconstitutional expansion of the Modernization Ordinance. This argument fails at a practical level for the reasons explained above, namely, that the VUT was intended and is properly understood to apply to petitioners’ video streaming services.

With that construction of the Modernization Ordinance, there is no Proposition 218 issue. “[A] local taxing entity can enforce less of a local tax than is due under a voter-approved methodology, or a grandfathered methodology, and later enforce the full amount of the local tax due under that methodology without transgressing Proposition 218.” (AB Cellular LA, LLC v. City of Los Angeles (2007) 150 Cal.App.4th 747, 763.)

Accordingly, for the reasons set forth above, the VUT is not invalid under Proposition 218 as applied to the petitioners’ services. The court finds no abuse of discretion in the Administrative Appeal Decision on this ground.

(5)       Public Utilities Code Section 799

Petitioners next argue that the City did not notify petitioner before enforcing the VUT as required by Public Utilities Code section 799.

“With respect to all taxes enacted by any local jurisdiction, including any city, county, or city and county, including a chartered city or county, any district, including an agency of the state, formed pursuant to general law or special act, for the local performance of governmental or proprietary functions within limited boundaries, or any public or municipal corporation, and imposed on the customers of public utilities or other service suppliers, which taxes have been collected by the public utilities and other service suppliers and remitted to the local jurisdiction all of the following shall apply: [¶] … [¶]

“(5)      If a local jurisdiction repeals the tax, reduces an existing tax rate, changes the tax base, or makes any other changes to the tax that would affect the collection and remittance of the tax, the local jurisdiction shall submit, on and after the effective date of the enactment of the change, a written notification and supply all requisite information to the public utility or service supplier, in accordance with the procedures established by the public utility or service supplier. The public utility or other service supplier shall not be required to implement the changes any earlier than 60 days from the date on which the public utility or other service provider receives the written notification and all other information required by the public utility or other service supplier. If the 60th day is not the first day of a month, then the public utility or other service provider shall implement the changes on the first day of the month following the month in which the 60th day occurs.

“(6)      If a local jurisdiction adopts a new tax, the local jurisdiction shall submit, on and after the effective date of the adoption of the new tax, a written notification to the public utility or other service supplier, in accordance with procedures established by the public utility or other service supplier, requesting that the tax be collected. The public utility or other service supplier shall not be required to begin collecting the tax any earlier than 90 days from the date on which the public utility or other service provider receives written notification and all other information required by the public utility or other service supplier. If the 90th day is not the first day of a month, then the public utility or other service provider shall begin the tax collection on the first day of the month following the month in which the 90th day occurs. Nothing in this section shall be construed to prevent the public utility or other service provider from beginning the tax collection at an earlier date.” (Pub. Util. Code, § 799.)

The Administrative Appeal Decision found first that this argument was forfeited on administrative appeal because it was not raised in proceedings before the Tax Administrator. (AR 1, p. 9.) The Administrative Appeal Decision alternatively found that the petitioners failed to demonstrate that section 799 applies and the City violated section 799. (AR 1, pp. 10-13.) On the merits, the Administrative Appeal Decision states:

“The City did not send § 799 notices to Appellants because it had no reason to do so. As explained above, ESPN+ and Disney+ did not start operating in the City until 2018 and 2019, at least a decade after the VUT Ordinance was adopted by a majority vote. (Appendix Ex. 36-37.) Hulu did exist in 2008, at that time as a free service with no VUT due from its subscribers. Hulu began offering paid video services in 2010. (Appendix Ex. 32, 43.)

“Appellants essentially contend that § 799 imposes a preemptive and perpetual obligation on local jurisdictions to provide advance notice to every service supplier that enters the market, even those that do so (like the Disney Companies) decades, after the adoption of a tax is enacted. This interpretation would require notice of every applicable tax to every potential new provider. Section 799’s purpose and text, as well as the structure of § 799’s notice requirements, cannot be contorted to fit that construction.

“The Legislature enacted § 799 in response to the California Supreme Court’s decision in Santa Barbara County Local Transportation Authority v. Guardino (1995) 11 Cal.4th 220 (affirming the constitutionality of Proposition 62’s voter approval requirements for local taxes). The Legislature obviously wanted to give service suppliers time to adjust their billing practices when tax ordinances were amended in response to the Guardino decision.

“Section 799’s notice provision are consistent with this purpose. Notice is triggered by changes to an existing tax, and not by a service supplier’s entrance into the marketplace. [Citation.] Therefore, the fact that § 799 gives service suppliers 90 days after receiving a notice to implement a new tax but only 60 days after receiving a notice to implement an amended tax is notable.

“The different time frames of the notices shows that the purpose of the notice is to give existing service suppliers time to update their billing practices. The Legislature could reasonably assume that implementing a new tax is more burdensome than implementing an adjustment to an existing tax. However, when a new service supplier enters the market for the first time, the distinction between new tax and an amended tax is meaningless. For a new provider there is only an existing tax ordinance to deal with and the new provider must be presumed to know the law.

“Section 799’s ‘limits on a ... service supplier’s duties and liabilities with regard to collecting utility taxes ....’ (AOB at 20) are necessarily narrow in scope. When a local jurisdiction adopts or amends a tax, it must notify existing service suppliers that are required to collect the new or amended tax. If notice is not provided in that, and only in that situation, the service supplier is relieved of its duty to collect. Requiring preemptive notice to all potential service providers would impose an absurd burden for a local jurisdiction bear especially in the rapidly evolving video services marketplace.

“Appellants’ surplus objection that the remittance form the City sent to existing service suppliers with its §799 notice did not describe online streaming services (and only included ‘Cable TV’ AOB at 21; Appendix Ex. 39) is not pertinent. Neither is the objection that the City’s notice would have been defective if delivered in 2008. And it is not relevant that the City’s initial list of notice recipients did not include ‘online streaming.’ The notice directed notice recipients to a copy of the VUT Ordinance which explicitly stated that the Video Users Tax applied to IP-TV. (Appendix Ex. 39.)

“The City was not required to send preemptive § 799 notices to Appellants when they entered the market. The online video industry was in its infancy in 2008 and Appellants have offered no evidence demonstrating that City officials were aware that any online streaming services were operating in Santa Barbara in 2008. Moreover, whether the City provided a notice to any video service supplier other than Appellants has no bearing on whether Appellants were entitled to receive notices under § 799 because for the reasons set forth above, such notices were not required.” (AR 1, pp. 11-12.)

Petitioners argue that the change in the scope of the collection of the VUT required notice under section 799. For the reasons explained above in the Administrative Appeal Decision, no such notice was required. Petitioners argue that Hulu existed in 2008 and so should have received notice. However, there is substantial evidence to support the Administrative Appeal Decision’s factual finding that it was not a “video service supplier” within the meaning of the VUT in 2008 and, moreover, the weight of the evidence in the record supports that finding.

The Administrative Appeal Decision also found an alternative reason why no notice was required:

“Section 799 states that whenever a local jurisdiction adopts or amends a tax, it must “submit ... a written notification and supply all requisite information to the ... service supplier, in accordance with the procedures established by the ... service supplier.” (Emphasis added, Pub. Util. Code § 799(a)(5).) Appellants were therefore required to notify the City of their procedures when they entered the market. In other words, ‘[t]he ... service supplier establishes the notice procedure ....’ [Citation.] [P]ursuant to § 799 the new provider entering the market must notify the City rather than requiring the City to anticipate its intended arrival.

“If a local jurisdiction is not made aware of the service supplier’s notice procedure, it has no way of providing notice in the manner required by the statute and, thus, it should have no duty to do so. [Citation.] The service supplier must make its procedures easily accessible somewhere. Here, Appellants have offered no evidence showing that they have any established procedures for the delivery of section 799 notices, let alone that they communicated those procedures to the City or made them easily accessible.” (AR 1, pp. 10-11.)

This alternative basis is not challenged in the moving papers and is addressed only in the reply.

Accordingly, for the reasons set forth above, petitioners are not excused from collection VUT under Public Utilities Code section 799. The court finds no abuse of discretion in the Administrative Appeal Decision on this ground.

(6)       Violation of Internet Tax Freedom Act

Finally, petitioners argue that, although the Administrative Appeal Decision is correct in applying the ITFA to the VUT, the Decision was incorrect in finding no violation.

“No State or political subdivision thereof may impose any of the following taxes: [¶] … [¶] (2) Multiple or discriminatory taxes on electronic commerce.” (47 USC. § 151, note, ITFA, § 1101(a)(2).)

“ ‘The term “electronic commerce” means any transaction conducted over the Internet or through Internet access, comprising the sale, lease, license, offer, or delivery of property, goods, services, or information, whether or not for consideration, and includes the provision of Internet access.” (ITFA, § 1105(3).)

“The term ‘discriminatory tax’ means— [¶] (A) any tax imposed by a State or political subdivision thereof on electronic commerce that— [¶] (i) is not generally imposed and legally collectible by such State or such political subdivision on transactions involving similar property, goods, services, or information accomplished through other means ….” (ITFA, § 1105(2)(A)(i).)

Petitioners argue that the VUT is discriminatory because it applies the VUT to video streaming services but not to the sale of the same video content through brick-and-mortar retailers, i.e., DVD stores or Redbox kiosks. (Motion, p. 34.) There is apparently no controlling California authority addressing the issue of what constitutes “transactions involving similar property, goods, services, or information accomplished through other means.” Petitioners note that Representative Cox, at the time the ITFA was before Congress, provided material in extension of remarks:

“New Section 155(3)(A)(i) defines ‘discriminatory tax’ as any tax on electronic commerce that is not generally imposed and legally collectable by a State or local government on transactions involving similar property, goods, services, or information accomplished through other means. For example, if a State requires the seller of books at a retail outlet to collect and remit sales tax, but does not impose the same tax collection and remittance obligations on the seller if the same sale is made over the telephone from a mail-order catalog, then the State would be prohibited from imposing collection and remittance obligations on the seller when the transaction occurs in whole or in part over the Internet. A tax is discriminatory if it is imposed on an Internet transaction but not imposed on any other similar transaction off the Internet, or if it is imposed only in some but not all other cases. The property, goods, services, or information need not be identical, but only ‘similar.’ This is intended to cover the common phenomenon of ‘interactive’ Internet versions of non-interactive products sold off the Internet. Likewise, any taxation of property, goods, services, or information that is inherently unique to the Internet would be discriminatory, because there is no non-Internet property, goods, services, or information that is similar and that the State generally taxes.” (Remarks of Rep. Cox on H.R. 4105, 144 Cong. Rec. E1288-03, E1289 (daily ed. July 14, 1998).)

Petitioners also cite to two Illinois cases, Performance Marketing Ass’n, Inc. v. Hamer (Ill. 2013) 998 N.E.2d 52 (Performance Marketing) and Labell v. City of Chicago (Ill.App. 2019) 147 N.E.2d 732 (Labell). (Motion, pp. 34, 35.)

Performance Marketing is helpfully summarized in Labell:

“Performance Marketing involved a use tax on a particular type of contractual relationship known as ‘performance marketing.’ [Citation.] As explained by [the Illinois] supreme court, ‘performance marketing’ refers to marketing or advertising programs in which a person or organization that publishes or displays an advertisement (often referred to as an ‘affiliate’ or ‘publisher’) is paid by the retailer when a specific action, such as a sale, is completed. [Citation.] In performance marketing, the retailer tracks the success or ‘performance’ of the marketing campaign, and sets the affiliate’s compensation accordingly. [Citation.] Such contractual arrangements are not limited to the Internet but are also used in print and broadcast media, where promotional codes are used to generate and track sales.” (Labell, supra, 147 N.E.2d at p. 73.)

“At issue in the case was the Illinois General Assembly’s enactment of Public Act 96-1544 (Act), which required ‘out-of-state internet retailers and servicemen to collect state use tax if they had a performance marketing contract with a person in Illinois who displayed a link on his or her website that connected an internet user to that remote retailer or serviceman's website.’ [Citation.] In contrast, performance marketing by an out-of-state retailer which appeared in print or on over-the-air broadcasting in Illinois did not trigger the Illinois use tax collection obligation.” (Labell, supra, 147 N.E.2d at pp. 73-74.)

“[The Illinois] supreme court determined that the Act was preempted by section 1101(a)(2) of the ITFA because it imposed a discriminatory tax on electronic commerce. [Citation.] The court explained that under the Act, performance marketing over the Internet provided the basis for imposing a use tax collection obligation on an out-of-state retailer when a threshold of $10,000 in sales through the clickable link was reached. [Citation.] Performance marketing by an out-of-state retailer which appears in print or on over-the-air broadcasting in Illinois, and which reaches the same dollar threshold, however, does not trigger an Illinois use tax collection obligation. [Citation.] The court concluded that ‘by singling out retailers with Internet performance marketing arrangements for use tax collection, the Act imposes discriminatory taxes within the meaning of the ITFA.’ [Citation.]” (Labell, supra, 147 N.E.2d at p. 74.)

In Labell, the city of Chicago imposed an amusement tax on charges paid for the privilege to enter, witness, view, or participate in certain activities within Chicago. (Labell, supra, 147 N.E.2d at p. 61.) In 2015, Chicago amended that tax to include amusements delivered electronically to mobile devices, such as in the case of video streaming, audio streaming, and on-line games. (Ibid.) The amendment was challenged by plaintiffs who were subscribers to video streaming services, including Netflix, Hulu, Spotify, and Amazon Prime. (Id. at p. 62.) The trial court upheld the validity of the amendment on summary judgment. (Ibid.)

On appeal in Labell, the plaintiffs argued, among other things, that applying the tax to streaming services imposes a discriminatory tax on electronic commerce in violation of the ITFA. (Labell, supra, 147 N.E.2d at p. 64.)

The Labell court distinguished Performance Marketing:

“Plaintiffs assert that the same outcome achieved in Performance Marketing is warranted in this case because the streaming services tax imposes an unlawful discriminatory tax on electronic commerce by taxing streaming services but not similar amusements that take place in Chicago. The outcome of Performance Marketing, however, is not determinative of the outcome here as the case at bar bears no factual resemblance to Performance Marketing. The services at issue in Performance Marketing were identical, the only difference was that those services which were provided over the internet were taxed and those that were in print or over-the-air broadcasting were not. [Citation.] In the context of this case, plaintiffs’ arguments under the ITFA are essentially the same as their arguments under the uniformity clause. Indeed, plaintiffs’ ITFA argument references and relies upon those same arguments. Moreover, similar to their uniformity clause argument, plaintiffs continued in their failure to cite to any authority that live cultural performances are similar to streaming services in their ITFA argument. [Citation.] Had we agreed with plaintiffs and come to the conclusion that streaming services were the same as automatic amusement devices and live cultural performances, a discussion of the potential discrimination against electronic commerce under section 1105(2)(A)(ii) would be warranted. We, however, came to the opposite conclusion. Accordingly, we conclude that the ITFA does not operate to invalidate the amusement tax on streaming services.” (Labell, supra, 147 N.E.2d at p. 74.)

The issue here ultimately is at what level of abstraction transactions involve “similar property, goods, services, or information accomplished through other means.” Petitioners compare the underlying content, i.e., the video as and when observed by a consumer; the City compares the services and goods provided to the consumer at the time of the transaction.

The Administrative Appeal Decision found that petitioners “failed to show that purchasing a subscription to an online streaming service is analogous or even remotely like the purchase or rental of a DVD from a brick-and-mortar retailer. Streaming video services, and cable television services involve entirely different transactions when each are compared to in-hand storage devices that can be purchased and rented. In the context of the VUT, digital rentals, streaming services and cable television are essentially indistinguishable, and it is well-settled that the utility of cable services can be taxed.” (AR 1, p. 15.)

To the extent that the Administrative Appeal Decision is making a factual finding, there is substantial evidence to support that finding by petitioners’ failure to meet their burden of proof and the weight of the evidence in the record supports that finding.

To the extent that this question is one of law, the court agrees with the Administrative Appeal Decision. As defined in the ITFA, a “discriminatory tax” is a “tax imposed … on transactions,” which transactions “involv[e] similar property, goods, services or information accomplished through other means.” (ITFA, § 1105(2)(A)(i).) Consequently, the similarity of property, goods, services, or information is appropriately determined at the time of the transaction, i.e., the time of the imposition of the tax.

When a consumer is involved in the purchase or rental of a DVD at a brick-and-mortar store, the transaction involves acquiring a physical DVD of a video (a good, rather than a service) for use with a DVD player. When a consumer is involved in the purchase of video streaming services as provided by petitioners, the transaction involves a subscription (a service, rather than a good). The subscription service acquired by such a consumer is qualitatively different in a real and substantial way from the good that is acquired by a consumer in the DVD transaction.

By way of contrast, if a local agency imposed a tax on the purchase of DVDs over the internet, but did not impose such a tax on the purchase of DVDs at a brick-and-mortar store, that tax would be discriminatory because the goods involved in the transaction would be similar at the time of taxation. Indeed, the purpose of the Modernization Ordinance was to expand the scope of the utility user’s tax so as to create a level playing field as between cable-supplied video services and internet-supplied video services, taxing these similar services equally.

In opposition, the City argues that petitioners’ argument is “strange” because the VUT tax rate is lower than the aggregate rate of sales tax applied to physical media sales. (Opposition, at p. 33.) In reply, petitioners respond: “But, the tax rate on physical media sales is entirely irrelevant here. The sales tax is conceptually distinct from the VUT and presumably applies even if a transaction occurs online. That it does not apply to streaming does not open the door to a discriminatory tax targeting online streaming.” (Reply, at p. 19.)

The City’s point, however, is substantial. Under the ITFA, “tax” is defined to include “the imposition on a seller of an obligation to collect and to remit to a governmental entity any sales or use tax imposed on a buyer by a governmental entity.” (ITFA, § 1105(8)(A)(ii).) Because the term “discriminatory tax” is itself defined as a “tax,” the comparison of what is discriminatory appropriately considers tax that applies to transactions “involving similar property, goods, services or information accomplished through other means.” Presumably under petitioners’ argument, in order to avoid being a “discriminatory tax” the City would also have to tax the sale of physical DVDs. But petitioners go further by their argument and impliedly insist that such a non-discriminatory tax include the sale of physical DVDs within the same name and code sections as the VUT. Petitioners essentially argue that tax on their video streaming services is discriminatory by looking only at the part of the larger scheme of taxation that involves their service and ignoring the tax imposed on the goods they argue are “similar.”

If, as petitioners argue, the sale of physical DVDs is a transaction involving similar goods or services within the meaning of section 1105(2)(A)(i), it is equally appropriate to consider the tax imposed on such a transaction. In such case, it is clear that the VUT does not impose tax on video streaming services where tax is not also imposed on what petitioners assert are similar goods or services by the sale of physical DVDs. Both are taxed as a sale or use tax. Indeed the tax rate in the VUT is considerably lower, both in percentage and when the difference between a subscription to a streaming library of videos and a DVD purchase is considered.

Alternatively, to argue that a sales tax is conceptually different from the VUT, as petitioners assert dismissively in reply, is to concede the City’s point. Petitioners’ entire discriminatory tax argument is premised on the asserted lack of taxation of a transaction in similar goods or services. Taxation of a transaction in the sale of goods is a sales tax; taxation of a transaction in the use of such goods is a use tax. If the VUT is a tax under that definition (which all parties otherwise agree), then any conceptual difference implies that the underlying goods are services are conceptually different. If sales and use tax are collectively conceptually different from the VUT, then the VUT is not a “tax” as defined in the ITFA. In all of these cases, the VUT as applied to petitioners’ streaming services is not a “discriminatory tax.”

Accordingly, for the reasons set forth above, the application of the VUT to petitioners’ video streaming services is not preempted by the ITFA’s anti-discrimination provision. The court finds no abuse of discretion in the Administrative Appeal Decision on this ground.

(7)       Conclusion

As discussed above, upon a review of the entire record and all of the arguments of the parties, the court finds no abuse of discretion in the Administrative Appeal Decision within the meaning of Code of Civil Procedure section 1094.5. The petition will therefore be denied.