Colorado aims to tax Netflix as legal battle begins
Amanda Pampuro
DENVER (CN) — With Coloradans streaming over 100 billion hours of Netflix last year, the state Department of Revenue urged the Court of Appeals on Wednesday to let it tax subscription fees like any other sale of entertainment.
“Netflix’s argument is based on an unexamined assumption of what was for sale in 1935 when the legislature purposely chose a broad term,” argued senior assistant attorney general Emma Garrison.
In 2021, the Colorado legislature passed House Bill 21-1312, codifying Department of Revenue rules allowing the taxation of digital goods. Netflix, however, has long argued that the state’s taxation of “tangible personal property” cannot apply to streaming services that didn’t even exist when the law was written in 1935.
Under Colorado’s Taxpayer Bill of Rights, or TABOR, the government can’t raise taxes without first getting voter approval at the ballot box.
Netflix initially sued the state on Feb. 25, 2021, but withdrew its complaint on July 19, 2021, to challenge the tax rule through the administrative process.
After the executive director of the Department of Revenue denied Netflix’s claim for a tax refund, the streaming service appealed the decision in state court in June 2023. A Denver judge granted the streaming service summary judgment on April 19, 2024, which Colorado appealed, arguing that its application of an old law to a new good doesn't break the law.
Netflix’s attorney, Jean Pawlow, dove into a technical explanation of the company’s business, saying it merely provided subscribers with a license to access content.
“The Internet service provider, not Netflix, transfers pulses of light, electric signals, or radio waves, and the user converts them into content,” argued Pawlow, who practices with the D.C. firm Latham & Watkins.
When Colorado’s tax code was written, Pawlow argued the process would have seemed like alien technology — or “witchcraft,” quipped Court of Appeals Justice Craig Welling.
Court of Appeals Justice Sueanna Johnson was not wowed by either analogy, characterizing Pawlow’s argument as overly philosophical.
“The bottom line is the experience,” Johnson said. “We’re not just looking at our iPhones in chambers and saying ‘wow, look at these atoms. I think you’re getting philosophical about the reality of what the sale is.”
Johnson was quick to clarify she wasn't watching Netflix in her chambers.
The panel also worked to map out the taxability of other similar entertainment services, with Welling inquiring about Blockbuster rentals, Justice Matthew Grove raising the issue of jukebox plays, and Johnson questioning the status of cable providers.
Garrison distinguished Netflix from cable companies since content is actually a small portion of a cable company's business model.
On behalf of Netflix, Pawlaw urged the panel to consider streamers like AMC movie theaters, which show films but do not sell them.
Netflix also filed a 2017 challenge against Fort Collins’ attempt to pull $116,000 in taxes from the company from 2012 to 2015. Following the filing of litigation, the city rescinded the tax bill and Netflix dropped the suit.
Democratic Governor Jared Polis appointed all three appellate justices. They did not indicate when or how they would decide the issue.