In a ruling that could have broader implications on how online services are taxed locally, the Colorado Court of Appeals has overturned a district court decision, ruling that Netflix movies and TV shows aren’t intangible goods exempt from taxation.
In its four-year-old legal dispute with the Colorado Department of Revenue, Netflix argued that because its content isn’t “corporeal property” — a material object — it can’t be lawfully taxed under state law. The appeals court disagreed.
“Casting aside nearly a century of historical practice simply because technological advancements have altered the specific form of delivery — while leaving the product itself largely unchanged — is a step that we are not willing to take,” wrote Judge Matthew Grove, who issued the court’s opinion. (Here’s the ruling.)
In making its ruling, the court referred to a 1933 law dictionary, which defined corporeal property as something that can be, in Grove’s words, “perceived by any of the senses — not exclusively the sense of touch.”
The ruling renders streamers like Netflix, and other providers of digital services, subject to a 2.9% Colorado state sales tax.
According to the Urban-Brookings Tax Policy Center, which bills itself as a non-partisan, Washington, D.C.-based think tank, at least 33 of the 45 U.S. states that charge a general sales tax include streaming services in their existing taxation policies.
Sympathy for Netflix might be difficult to muster, given that it declared an effective federal corporate income tax rate of just 1.1% in 2021 on profits of $5.3 billion, according to the Institute on Taxation and Economic Policy, another think tank declaring itself nonpartisan.
And Netflix is passing the local sales tax burden onto its customers.
Netflix outlines its policy on local taxes here. These fees are not included in its advertised price for services, but rather added on to a customer’s monthly bill, depending on where they base their service.
Luckily for Netflix, equity analysts generally rate the company’s demand as “inelastic,” meaning price increases haven’t generally coincided with huge spikes in customer defection. According to data released by research company Antenna earlier this year, Netflix has the lowest churn among U.S. SVOD services, with a churn rate hovering at only around 2% annually.