Like any good Disney story, there are surprises, plot twists and a sense of betrayal.
There’s even some revenge.
However, this story isn’t streaming on the television. It’s playing out on hundreds of pages in a lawsuit inside the Santa Barbara County Courthouse.
The City of Santa Barbara is standing up to Disney in an odd legal standoff over $642,000 and a video utility-users tax.
The Santa Barbara City Council met in a closed session on Tuesday to discuss the matter but took no reportable action.
Essentially, the city in 2022 decided to bill Disney, which also owns Hulu, for back taxes related to a video utility-users tax approved in 2008. Disney claims it was never informed that the city was applying a 5.75% tax to its streaming services until it received a bill in the mail.
Disney, according to public documents, claimed that it didn’t owe the city any money because video utility-user taxes don’t apply to streaming services, only cable and traditional television channel services. The two sides went to mediation, and a hearing officer ruled in favor of the city, saying the definition of television channel has evolved.
As a result, Disney earlier this year paid the city $642,000, including interest.
However, the story doesn’t end there.
On April 24, Disney filed a new lawsuit asking the city to pay back the money, claiming the hearing officer missed the plot. Santa Barbara Finance Director Keith DeMartini was named as a defendant.
“The Hearing Officer got it wrong,” according to the lawsuit, filed by a team of Los Angeles attorneys on behalf of Disney Platform Distribution Inc., Bamtech LLC and HULU LLC. “The VUT does not apply to internet streaming.”
The suit alleges that the hearing officer “rubber stamps” the city’s “unsupported narrative” that the video utility-users tax always applied to internet streaming.
“The city simply sat on its heels for 13 years before applying it,” the suit states.
Disney never collected a tax yet was responsible for paying it to the city.
In its lawsuit, Disney reviewed Santa Barbara Finance Committee meetings from 2008 to attempt to bolster its case.
Like a good movie flashback, the lawsuit quotes former committee chair Iya Falcone saying the city needs to be “really very clear with the voters” that “this is not about taxing the internet.”
The suit then quotes former City Administrator James Armstrong asking whether the tax “only applies to cable television services, not the internet access services.”
Falcone then responded, according to the lawsuit, that “it’s not the internet streaming video downloading the things that you get.”
Then, a week later, according to the public filings, former city Finance Director Robert Peirson stated: “I want to stress when we say video, we’re not talking about going to YouTube and watching YouTube videos.”
The documents use a quote from former City Councilman Grant House as evidence, saying it was imperative that the city ensure “it’s clear we’re not taxing the internet” with the video utility-users tax.
The City of Santa Barbara, however, disagrees, and trusts the decision by retired appellate court Justice James Lambden, who was the hearing officer in the administrative appeal brought by the Disney companies.
“The city prevailed on all issues in that hearing,” Acting City Attorney Tava Ostrenger said. “The lawsuits seek judicial review of Justice Lambden’s decision. The City intends to fully defend the lawsuits.”
Lambden’s ruling states that Disney owed the tax to the city.
“The VUT approved by the City’s voters was patently intended to consider future developments in the 21st century’s changing technological environment,” the ruling states. “Applying the meaning of ‘channel’ as defined to over-the-air broadcasts in the former century to defeat that intention would be absurd in the context of new technology.”
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