Colorado taxes digital goods and streamed entertainment

Update, May 17, 2021

The Colorado Legislature is looking to codify a Colorado Department of Revenue rule clarifying the taxability of certain digital goods.

House Bill 1312 would codify the department rule that includes “digital goods” in the definition of “tangible personal property.” Per the measure, “The method of delivery does not impact the taxability of a sale of tangible personal property."

Thus, under HB 1312, Colorado sales and use tax applies to amounts charged for mainframe computer access, photocopying, and packing and crating. According to the bill, this “codifies the department of revenue’s long-standing treatment of digital goods, as reflected in its rule, and neither expands nor contracts the definition of ‘tangible personal property.’”

The bill goes on to clarify that “digital good” means “any item of tangible personal property that is delivered or stored by digital means, including but not limited to video, music, electronic books, or computer files.”

Original post, published January 28, 2021, is below.

Digital goods and streamed entertainment are subject to Colorado sales tax as of January 30, 2021.

The Colorado Department of Revenue has amended its tangible personal property rule to clarify that “the method of delivery does not impact the taxability of a sale of tangible personal property.” Amended Rule 39-26-102(15) is published in the Colorado Register (January 10, 2021).

The definition of “tangible personal property” left the taxability of intangible digital goods in doubt. It defined tangible personal property as “all goods, wares, merchandise, products and commodities, and all tangible or corporeal things and substances which are dealt in and capable of being possessed and exchanged.” Though streamed content can be experienced, it isn’t exactly tangible or corporeal.

The Digital Goods Rule removes the doubt. Thus, starting January 30, 2021, Colorado’s 2.9% state sales tax and applicable local sales taxes apply to tangible personal property delivered by:

• Compact disc
• Electronic download
• Internet streaming (e.g., Disney+ and Netflix)

Sales tax applies when a consumer buys a movie through an online purchase and downloads it to their computer, or buys a movie accessed through an internet browser but doesn’t download it. And it applies to monthly subscription fees that allow purchasers to “select and stream movies and television shows from a library of available titles.” See the adopted rules for more details.

Computer software not meeting the criteria enumerated in Rule 39-26-102(15) remains nontaxable.

As the state prepares to enforce the new tax, others are preparing to fight it. Tripp Baltz of Bloomberg Tax reports Stephen Kranz of McDermott, Will & Emery LLP is “ready to sue given the disregard of the law.” Kranz holds that the Digital Goods Rule is “a discriminatory tax on electronic commerce barred under the Internet Tax Freedom Act, expanding the scope of the statutory definition beyond what was intended by the Colorado General Assembly.”

Josh Pens, director of tax policy at the Department of Revenue, is undaunted. “We litigate in the gray areas often, if not frequently,” he said. Especially “where we’re clarifying ambiguities and gaps.” He’s backed by the Colorado Office of the Attorney General, which reviewed the Digital Goods Rule and found “no apparent constitutional or legal deficiency.”

It wouldn’t be the first time a tax authority in Colorado has been challenged for trying to tax streaming services. In 2017, the home-rule city of Loveland found Netflix liable for $116,000 in city sales tax on its sales and rentals of tangible personal property from September 1, 2012, through August 31, 2015 (including penalties and interest). Loveland was quickly sued and soon dropped the assessment. 

The taxation of digital goods is a tricky area because there are so many flavors of products and services. It’s common for a state to tax some digital goods and services but not others. Learn more in this state-by-state guide to the taxability of digital products.