As the episode begins, The King of Town institutes an e-mail tax. Strong Bad is the most heavily affected. However, being unaware of the existence of the tax, he is put under house arrest (with an explosive collar around his neck), a predicament that leads him to unite the citizens to rise up against the authorities. Strong Bad then declares his own plot of land (an empty lot featuring a fence, a spare tire, and a graffiti'd stop sign, which Strong Bad has named "Strong Badia") an independant nation.
Source: Wikipedia, "Strong Bad's Cool Game for Attractive People," available under the CC-BY-SA License.