Ending a lengthy legal dispute regarding the state's taxation of streaming service subscriptions, a Colorado judge ruled in favor of Netflix Inc. (Netflix). The ruling is an interpretation of Colorado's sales tax law and its applicability to intangible digital services, such as the streaming services offered by Netflix and similar platforms.
“... the statute says nothing more than ‘tangible personal property’ is corporeal personal property.”
Tangible Personal Property
Central to the dispute is the interpretation of Colorado's definition of "tangible personal property” within its sales tax law. While the Colorado Department of Revenue (Department) advocated for a broad interpretation that encompasses goods perceptible by the senses, the District Court took a more restrictive stance. The Court stated that the language and intent of the 1935 law did not anticipate modern digital services like streaming subscriptions, implying they do not fit within the law's scope.
Analysis
This ruling follows a decade-long dispute between Netflix and the Department. Despite Netflix's unsuccessful attempts in 2013 to convince the Department that its subscriptions should not be taxed, Netflix was audited in 2015 and an assessment was subsequently issued. In 2021, Colorado attempted to clarify its stance on intangible digital services through the enactment of House Bill 21-1312. The bill sought to codify a proposal by the Department that expanded the definition of tangible personal property to include “digital goods.” Prompted by these developments, Netflix initiated legal action in 2023 and challenged the constitutionality of the new law.
The Department cited precedents from other states where similar digital services were deemed tangible personal property subject to taxation. Notably, they referenced the Supreme Court of Arizona’s opinion in State v. Jones, wherein justices ruled that a jukebox constituted tangible personal property because the “playing of the record was perceptible to the sense of hearing.” However, Colorado’s District Court dismissed these arguments. The Court highlighted that the 2021 state law does not alter the definition of “tangible personal property,” which is further defined as “corporeal property.”
Takeaway
This ruling highlights the evolving nature of taxation in the digital age and the importance of legislative clarity in tax laws that address emerging technologies. As the legal landscape continues to change, this decision will be viewed as precedent for the taxation of intangible digital goods.