Existing law authorizes counties, cities, and other local agencies to impose various taxes and fees in connection with activity or property within those jurisdictions. The California Constitution also authorizes a charter city to levy local taxes to raise revenues for local purposes, subject to restrictions imposed by that citys charter or preemption in matters of statewide concern.

This bill, until January 1, 2023, would prohibit the imposition by a city, city and county, or county, including a chartered city, city and county, or county, of a tax on video streaming services, including, but not limited to, any tax on the sale or use of video streaming services or any utility user taxes. tax on video streaming services.

This bill would make a legislative finding and declaration regarding the statewide concern of the promotion of uniformity in access throughout the state to video streaming services.

Existing law authorizes counties, cities, and other local agencies to impose various taxes and fees in connection with activity or property within those jurisdictions. The California Constitution also authorizes a charter city to levy local taxes to raise revenues for local purposes, subject to restrictions imposed by that citys charter or preemption in matters of statewide concern.

This bill, until January 1, 2023, would prohibit the imposition by a city, city and county, or county, including a chartered city, city and county, or county, of a tax on video streaming services, including, but not limited to, any tax on the sale or use of video streaming services or utility user taxes.

This bill would make a legislative finding and declaration regarding the statewide concern of the promotion of uniformity in access throughout the state to video streaming services.

Date of Hearing: April 24, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 252 (

Author:Ridley-Thomas) – As Amended Ver:February 28, 2017

Majority vote.

SUBJECT: Local government: taxation: prohibition: video streaming services

SUMMARY: Prohibits a city, city and county, or county from imposing any tax on "video streaming services". Specifically, this bill:

1. Prohibits a city, city and county, or county (including a chartered city, city and county, or county) from imposing any tax on "video streaming services", including any tax on the sale or use of "video streaming services" or any utility user tax (UUT) on "video streaming services".
2. Defines "video streaming service" as the provision of video content sent in compressed form over the Internet and displayed by the viewer in real time for a fee on a subscription basis.
3. Contains legislative findings and declarations noting that the promotion of uniformity in access throughout the state to video streaming services is a matter of statewide concern and, therefore, is not a municipal affair as that term is used in Section 5 of Article XI of the California Constitution.
4. Provides that the taxing prohibition shall sunset on January 1, 2023.

EXISTING LAW:

1. Authorizes cities, counties, and other local agencies to impose various taxes and fees connected to activities or property within their respective jurisdictions.
2. Authorizes a charter city to levy local taxes to raise revenues for local purposes, subject to restrictions imposed by the city's charter or preemption in matters of statewide concern.
3. Authorizes the legislative body of a general law city to levy any tax that may be levied by a charter city, subject to the voters' approval pursuant to Article XIII A of the California Constitution. [Government Code Section 37100.5.]
4. Authorizes any county to levy a UUT on the consumption of electricity, gas, water, sewer, telephone, telegraph, and cable television services in the county's unincorporated area. [Revenue and Taxation Code Section 7284.2.]

FISCAL EFFECT: Unknown

COMMENTS:

1. The author has provided the following statement in support of this bill:

The Internet has given rise to new technologies and services that were beyond our imagination just a generation ago. Many of these technologies were developed and nurtured right here in California – a state that prides itself as being on the cutting edge of the innovation economy. To this end, California must ensure that its tax and regulatory environment spurs, rather than impedes, continued growth in this vital sector of the economy. AB 252 takes an important step in this direction by temporarily preventing local governments from imposing a complicated and onerous patchwork of different taxes on video streaming services.

1. This bill is supported by the Computing Technology Industry Association (CompTIA), which notes the following:

Last year, the City of Pasadena's director of finance reportedly concluded that all video programming should be treated the same "regardless of technology or service provider," which opened the door for streaming video services to become subject to a utility user tax approved by Pasadena voters in 2008. Recent news reports, outline that at least 45 additional cities, have been advised that their local utility user taxes could be extended to video downloads. These cities include San Bernardino, Glendale, Santa Monica, Culver City, and Pico Rivera, which reportedly have tax rates ranging from 4.5 to 11 percent.

Video streaming companies are entertainment providers; the mere fact that their services are delivered over the Internet should not, by itself, transform these services into utilities akin to electricity, sewer, or even cable TV.

1. This bill is opposed by the City of Pasadena, which notes the following:

By prohibiting local governments from imposing any tax, including any sales, use, or UUT on video streaming services, while continuing to allow such taxes to be imposed on cable and video services, AB 252 imposes a discriminatory tax that disadvantages cable and video providers. Tax policy should be fundamentally technology neutral and applied based on services provided, not the technology used. As such, our elected representatives are obligated to strike down any policy that favors one industry over another.

1. Committee staff comments:
   1. An overview of UUTs: Cities may impose a UUT on the consumption of utility services, including electricity, gas, water, sewer, telephone, sanitation, and cable television. The local agency in question determines both the rate of tax and the use of revenues generated. While a UUT is levied on the consumer of utility services, it is collected by the appropriate utility and remitted to the local agency.

According to California City Finance, most cities and counties with UUTs adopted their tax ordinances before 1986 by a vote of the city council or county board of supervisors. Any increase or extension of a local tax now requires voter approval. It is estimated that city and county UUTs generate nearly $2 billion a year statewide.

• 1. The City of Pasadena: On September 22, 2016, Pasadena's City Manager issued a newsletter noting that the city had been working with MuniServices over several months to determine if Pasadena's UUT ordinance applies to video services. The newsletter announced that, "[a]n administrative ruling will now allow the city to apply UUT to video program services referred to as Over the Top Television (OTT) such as Hulu and Netflix."

The newsletter included a memorandum from the city's Director of Finance ("Finance Memo") providing details on the ruling to ensure "that all 'video programming' is treated the same, regardless of technology or service supplier." The Finance Memo noted that the ruling interpreted the existing language of Pasadena's UUT ordinance, which would apply to OTT services effective January 1, 2017. The Finance Memo also noted the following:

• • 1. Pasadena's voter-approved UUT applies to "video programming" irrespective of the technology used to deliver the programming. Traditionally, video services only encompassed cable television. Over roughly the last decade, however, video programming has been provided using new technologies, including satellite and broadband.
    2. Two of the largest telecommunications providers (Verizon and AT&T) are now offering cable-like services over their broadband networks. More recently, a variety of companies have begun offering similar video services over the Internet – commonly referred to as "over the top television" or OTT.
    3. When Pasadena sought voter approval of an updated UUT ordinance in 2008, the ballot measure indicated that the new definitions provided for taxable services would be "technology-neutral". In addition, the UUT ordinance was amended to allow for the city's tax administrator to issue periodic "administrative rulings" to provide guidance to tax collecting utilities on their responsibility to collect UUT on their video services from end-users.

The Finance Memo concluded by noting:

During the past several months, and on advice of MuniServices (the City's UUT consultant), numerous UUT cities with similar UUT ordinances that apply to "video services, including video programming" have discussed the need to issue an administrative ruling to providers of OTT "video programming services" (e.g., Hulu, Netflix, Sling TV, Fullscreen Media).

• 1. On second thought: On September 29, 2016, Pasadena's City Manager issued another newsletter providing an update on the "potential application" of the City's UUT to OTT services. The newsletter noted:

As a result of a memorandum included in last week's newsletter, questions have been raised as to whether the City is planning to apply its Utility Users Tax (UUT) to Over the Top Television (OTT) services such as Hulu and Netflix. The City is not presently adopting nor applying an administrative ruling that would tax OTT services.

The newsletter advised that "[t]he recent direction being taken by other local governments with similar UUT Ordinances is to tax these OTT services." The newsletter also noted, however, that Pasadena would make a decision on adopting an administrative ruling only after a full and complete review of the matter, including a review of Pasadena's underlying ballot measure and ordinance.

Nevertheless, Pasadena notes that over the past two decades, voters in over 107 cities and 3 counties have adopted measures "to modernize local UUT policy . . . ." MuniServices, in turn, contends that of these, 87 cities and 1 county have approved ordinances "to permit a UUT on video providers."^[1]

• 1. What is motivating the push to tax OTT services? Some local governments have been encouraged to expand their UUT ordinances to cover OTT services like Netflix and Hulu in reaction to the market phenomenon of "cord-cutting". Pasadena appears to concede as much by noting:

Additional figures estimate that cable will experience a 6 percent decline in the number of subscribers, 12 percent of whom are likely to switch in the next six months. The City of Pasadena could lose approximately $2.3 million annually if its ability to collect on video service is eroded.

• 1. What would this bill do? AB 252 would temporarily prohibit cities and counties from imposing a tax on video streaming services. This prohibition would include both local sales and use taxes and UUTs. This prohibition would sunset, by its own terms, on January 1, 2023. Thus, the temporary ban this bill provides would allow local governments and streaming service providers time to develop policies appropriate to the provision of streaming services. Proponents note that the temporary ban would also provide support to a signature California industry as it seeks to develop new platforms and improve market share.
  2. Should OTT services be considered utilities? Proponents of this bill argue that video streaming companies like Netflix and Hulu are first and foremost entertainment providers. Thus, the fact that their services are delivered over the Internet should not, by itself, transform these services into utilities akin to electricity, sewer, or even cable TV. In addition, if cities and counties are given free rein to tax video streaming services today, what is to stop the taxation of other services provided over the Internet? Is there a principled reason to tax the provision of streaming video services and not the provision of music services like Apple Music and Spotify? What about online gaming, audio podcasts, or YouTube?

New OTT services are being announced with regularity. For example, on April 5, 2017, YouTube launched a live and on-demand streaming television service called "YouTube TV". A subscription to this service costs $35 a month for a family plan with up to six accounts. Subscribers have access to more than 50 networks, along with original content.

The rapid growth in the OTT sector seems to be driven both by technological advancements and generational preferences. At a press event, YouTube CEO Susan Wojcicki noted, "There's no question that millennials love great TV content, but what we've seen is they don't want to watch it in the traditional setting."

Given the recent growth in this industry, the author argues that streaming video companies should be given an opportunity to work collaboratively with local governments to structure appropriate tax and regulatory regimes instead of having a patchwork of varying taxes applied to their services with minimal or no debate.

There are also a number of technical and legal issues that still require resolution, and additional time may be useful in striking the appropriate balance between local government revenue generation and a healthy business environment for an emerging technology. For example, Michael Cataldo, an attorney with Pillsbury Winthrop Shaw Pittman LLP told Tax Analysts that he believes a number of complicated issues are raised by municipal efforts to extend UUTs to video streaming services. He noted, "unlike a typical cable service . . . people are mobile", which makes it difficult to assess how much authority local governments have to impose a UUT on a service being used largely outside the local government's jurisdiction. In addition, the Tax Analysts article noted:

Critics of the proposal to use UUTs to tax streaming services also argue that the plan could run afoul of California's Proposition 218, the 1996 ballot measure that requires voter approval for new local taxes. Although cities have adopted updated, voter-approved ordinances with broader language, Cataldo said the ordinances might not be specific enough to satisfy Proposition 218's intent that voters knowingly approve new levies. He also argued that UUTs have generally focused on services linked to infrastructure maintained in a community, such as cable, but many video streaming services like Netflix and Hulu only provide content.

(Jones, Paul. "California Bill Would Pause Video Streaming Tax Efforts." State Tax Notes February 13, 2017)

REGISTERED SUPPORT / OPPOSITION:

Support

AT&T

California Manufacturers and Technology Association

Computing Technology Industry Association (CompTIA)

CTIA

Diane Harkey, Chairwoman, Board of Equalization

Digital Goods and Services Coalition

DISH Network, LLC

DISH Network Corporation

Howard Jarvis Taxpayers Association

Internet Association

Satellite Broadcasting and Communications Association

Silicon Valley Leadership Group

Sling TV

Opposition

Association of California Cities – Orange County

California Cable & Telecommunications Association

California Contract Cities Association

California Federation of Teachers

California Professional Firefighters

California State Association of Counties

City of Azusa

City of Beverly Hills

City of Brisbane

City of Burbank

City of Claremont

City of Cloverdale

City of Culver City

City of Daly City

City of Garden Grove

City of Gilroy

City of Glendale

City of Hayward

City of Hermosa Beach

City of Huntington Beach

City of Indian Wells

City of Indio

City of La Habra

City of Lakewood

City of Long Beach

City of Modesto

City of Novato

City of Palm Desert

City of Pasadena

City of Pleasant Hill

City of Pico Rivera

City of Salinas

City of San Leandro

City of San Pablo

City of Santa Barbara

City of Santa Cruz

City of Santa Monica

City of Soledad

City of Sunnyvale

City of Union City

City of Walnut

City of Whittier

City of Winters

Frontier Communication

League of California Cities

MuniServices

South Bay Cities Council of Governments

Urban Counties of California

One private individual

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

1. MuniServices notes that the average UUT rate for these 87 jurisdictions is 6%, with a low of 1% in Vernon and a high of 11% in Culver City. ↑

Date of Hearing: March 13, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 252 (

Author:Ridley-Thomas) – As Amended Ver:February 28, 2017

Majority vote.

SUBJECT: Local government: taxation: prohibition: video streaming services

SUMMARY: Prohibits a city, city and county, or county from imposing any tax on "video streaming services". Specifically, this bill:

1. Prohibits a city, city and county, or county (including a chartered city, city and county, or county) from imposing any tax on "video streaming services", including any tax on the sale or use of "video streaming services" or any utility user tax (UUT) on "video streaming services".
2. Defines "video streaming service" as the provision of video content sent in compressed form over the Internet and displayed by the viewer in real time for a fee on a subscription basis.
3. Contains legislative findings and declarations noting that the promotion of uniformity in access throughout the state to video streaming services is a matter of statewide concern and, therefore, is not a municipal affair as that term is used in Section 5 of Article XI of the California Constitution.
4. Provides that the taxing prohibition shall sunset on January 1, 2023.

EXISTING LAW:

1. Authorizes cities, counties, and other local agencies to impose various taxes and fees connected to activities or property within their respective jurisdictions.
2. Authorizes a charter city to levy local taxes to raise revenues for local purposes, subject to restrictions imposed by the city's charter or preemption in matters of statewide concern.
3. Authorizes the legislative body of a general law city to levy any tax that may be levied by a charter city, subject to the voters' approval pursuant to Article XIII A of the California Constitution. [Government Code Section 37100.5.]
4. Authorizes any county to levy a UUT on the consumption of electricity, gas, water, sewer, telephone, telegraph, and cable television services in the county's unincorporated area. [Revenue and Taxation Code Section 7284.2.]

FISCAL EFFECT: Unknown

COMMENTS:

1. The author has provided the following statement in support of this bill:

The Internet has given rise to new technologies and services that were beyond our imagination just a generation ago. Many of these technologies were developed and nurtured right here in California – a state that prides itself as being on the cutting edge of the innovation economy. To this end, California must ensure that its tax and regulatory environment spurs, rather than impedes, continued growth in this vital sector of the economy. AB 252 takes an important step in this direction by temporarily preventing local governments from imposing a complicated and onerous patchwork of different taxes on video streaming services.

1. This bill is supported by the Computing Technology Industry Association (CompTIA), which notes the following:

Last year, the City of Pasadena's director of finance reportedly concluded that all video programming should be treated the same "regardless of technology or service provider," which opened the door for streaming video services to become subject to a utility user tax approved by Pasadena voters in 2008. Recent news reports, outline that at least 45 additional cities, have been advised that their local utility user taxes could be extended to video downloads. These cities include San Bernardino, Glendale, Santa Monica, Culver City, and Pico Rivera, which reportedly have tax rates ranging from 4.5 to 11 percent.

Video streaming companies are entertainment providers; the mere fact that their services are delivered over the Internet should not, by itself, transform these services into utilities akin to electricity, sewer, or even cable TV.

1. This bill is opposed by the City of Pasadena, which notes the following:

By prohibiting local governments from imposing any tax, including any sales, use, or UUT on video streaming services, while continuing to allow such taxes to be imposed on cable and video services, AB 252 imposes a discriminatory tax that disadvantages cable and video providers. Tax policy should be fundamentally technology neutral and applied based on services provided, not the technology used. As such, our elected representatives are obligated to strike down any policy that favors one industry over another.

1. Committee staff comments:
   1. An overview of UUTs: Cities may impose a UUT on the consumption of utility services, including electricity, gas, water, sewer, telephone, sanitation, and cable television. The local agency in question determines both the rate of tax and the use of revenues generated. While a UUT is levied on the consumer of utility services, it is collected by the appropriate utility and remitted to the local agency.

According to California City Finance, most cities and counties with UUTs adopted their tax ordinances before 1986 by a vote of the city council or county board of supervisors. Any increase or extension of a local tax now requires voter approval. It is estimated that city and county UUTs generate nearly $2 billion a year statewide.

• 1. The City of Pasadena: On September 22, 2016, Pasadena's City Manager issued a newsletter noting that the city had been working with MuniServices over several months to determine if Pasadena's UUT ordinance applies to video services. The newsletter announced that, "[a]n administrative ruling will now allow the city to apply UUT to video program services referred to as Over the Top Television (OTT) such as Hulu and Netflix."

The newsletter included a memorandum from the city's Director of Finance ("Finance Memo") providing details on the ruling to ensure "that all 'video programming' is treated the same, regardless of technology or service supplier." The Finance Memo noted that the ruling interpreted the existing language of Pasadena's UUT ordinance, which would apply to OTT services effective January 1, 2017. The Finance Memo also noted the following:

• • 1. Pasadena's voter-approved UUT applies to "video programming" irrespective of the technology used to deliver the programming. Traditionally, video services only encompassed cable television. Over roughly the last decade, however, video programming has been provided using new technologies, including satellite and broadband.
    2. Two of the largest telecommunications providers (Verizon and AT&T) are now offering cable-like services over their broadband networks. More recently, a variety of companies have begun offering similar video services over the Internet – commonly referred to as "over the top television" or OTT.
    3. When Pasadena sought voter approval of an updated UUT ordinance in 2008, the ballot measure indicated that the new definitions provided for taxable services would be "technology-neutral". In addition, the UUT ordinance was amended to allow for the city's tax administrator to issue periodic "administrative rulings" to provide guidance to tax collecting utilities on their responsibility to collect UUT on their video services from end-users.

The Finance Memo concluded by noting:

During the past several months, and on advice of MuniServices (the City's UUT consultant), numerous UUT cities with similar UUT ordinances that apply to "video services, including video programming" have discussed the need to issue an administrative ruling to providers of OTT "video programming services" (e.g., Hulu, Netflix, Sling TV, Fullscreen Media).

• 1. On second thought: On September 29, 2016, Pasadena's City Manager issued another newsletter providing an update on the "potential application" of the City's UUT to OTT services. The newsletter noted:

As a result of a memorandum included in last week's newsletter, questions have been raised as to whether the City is planning to apply its Utility Users Tax (UUT) to Over the Top Television (OTT) services such as Hulu and Netflix. The City is not presently adopting nor applying an administrative ruling that would tax OTT services.

The newsletter advised that "[t]he recent direction being taken by other local governments with similar UUT Ordinances is to tax these OTT services." The newsletter also noted, however, that Pasadena would make a decision on adopting an administrative ruling only after a full and complete review of the matter, including a review of Pasadena's underlying ballot measure and ordinance.

Nevertheless, Pasadena notes that over the past two decades, voters in over 107 cities and 3 counties have adopted measures "to modernize local UUT policy . . . ." MuniServices, in turn, contends that of these, 87 cities and 1 county have approved ordinances "to permit a UUT on video providers."^[1]

• 1. What is motivating the push to tax OTT services? Some local governments have been encouraged to expand their UUT ordinances to cover OTT services like Netflix and Hulu in reaction to the market phenomenon of "cord-cutting". Pasadena appears to concede as much by noting:

Additional figures estimate that cable will experience a 6 percent decline in the number of subscribers, 12 percent of whom are likely to switch in the next six months. The City of Pasadena could lose approximately $2.3 million annually if its ability to collect on video service is eroded.

• 1. What would this bill do? AB 252 would temporarily prohibit cities and counties from imposing a tax on video streaming services. This prohibition would include both local sales and use taxes and UUTs. This prohibition would sunset, by its own terms, on January 1, 2023. Thus, the temporary ban this bill provides would allow local governments and streaming service providers time to develop policies appropriate to the provision of streaming services. Proponents note that the temporary ban would also provide support to a signature California industry as it seeks to develop new platforms and improve market share.
  2. Should OTT services be considered utilities? Proponents of this bill argue that video streaming companies like Netflix and Hulu are first and foremost entertainment providers. Thus, the fact that their services are delivered over the Internet should not, by itself, transform these services into utilities akin to electricity, sewer, or even cable TV. In addition, if cities and counties are given free rein to tax video streaming services today, what is to stop the taxation of other services provided over the Internet? Is there a principled reason to tax the provision of streaming video services and not the provision of music services like Apple Music and Spotify? What about online gaming, audio podcasts, or YouTube?

New OTT services are being announced with regularity. For example, just last month YouTube announced a live and on-demand streaming television service called "YouTubeTV". A subscription to this service will cost $35 a month for a family plan with up to six accounts. Subscribers will reportedly have access to 40 networks, along with original content.

The rapid growth in the OTT sector seems to be driven both by technological advancements and generational preferences. At a press event, YouTube CEO Susan Wojcicki noted, "There's no question that millennials love great TV content, but what we've seen is they don't want to watch it in the traditional setting."

Given the recent growth in this industry, the author argues that streaming video companies should be given an opportunity to work collaboratively with local governments to structure appropriate tax and regulatory regimes instead of having a patchwork of varying taxes applied to their services with minimal or no debate.

There are also a number of technical and legal issues that still require resolution, and additional time may be useful in striking the appropriate balance between local government revenue generation and a healthy business environment for an emerging technology. For example, Michael Cataldo, an attorney with Pillsbury Winthrop Shaw Pittman LLP told Tax Analysts that he believes a number of complicated issues are raised by municipal efforts to extend UUTs to video streaming services. He noted, "unlike a typical cable service . . . people are mobile", which makes it difficult to assess how much authority local governments have to impose a UUT on a service being used largely outside the local government's jurisdiction. In addition, the Tax Analysts article noted:

Critics of the proposal to use UUTs to tax streaming services also argue that the plan could run afoul of California's Proposition 218, the 1996 ballot measure that requires voter approval for new local taxes. Although cities have adopted updated, voter-approved ordinances with broader language, Cataldo said the ordinances might not be specific enough to satisfy Proposition 218's intent that voters knowingly approve new levies. He also argued that UUTs have generally focused on services linked to infrastructure maintained in a community, such as cable, but many video streaming services like Netflix and Hulu only provide content.

(Jones, Paul. "California Bill Would Pause Video Streaming Tax Efforts." State Tax Notes February 13, 2017)

REGISTERED SUPPORT / OPPOSITION:

Support

AT&T

Computing Technology Industry Association (CompTIA)

Opposition

California State Association of Counties

California Cable & Telecommunications Association

City of Glendale

City of Pasadena

City of Pico Rivera

League of California Cities

MuniServices

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

1. MuniServices notes that the average UUT rate for these 87 jurisdictions is 6%, with a low of 1% in Vernon and a high of 11% in Culver City. ↑