Colorado’s second-highest court ruled on Thursday that a 90-year-old law taxing the sale of “tangible personal property” applies to Netflix subscriptions.

A three-judge Court of Appeals panel examined the 1935 definition of tangible personal property as “corporeal,” and asked whether that necessarily meant items have to be seen and touched in order to qualify for taxation. No, they do not, the panel decided.

What matters, wrote Judge Matthew D. Grove in the July 3 opinion, is whether customers can “perceive” Netflix’s product.

“It is a reality of modern life that substantial amounts of goods previously existing only in a form susceptible to touch are now routinely and increasingly sold in digital form — photographs, music, television shows, movies, newspapers, magazines, and educational content, to name just a few. The legislature obviously intended to tax such goods when passing the sales tax statute,” he wrote.

“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,” Grove added.

However, the appellate panel did not address Netflix’s other arguments for why its subscriptions should not be subject to the sales tax. The panel returned the case to the trial judge to address those additional contentions.

In 2015, the Colorado Department of Revenue alleged Netflix owed nearly $8.5 million in sales tax and penalties for its streaming subscriptions. Netflix protested and the department eventually dropped the bill.

Then in 2021, the department changed its rules to “clarify” that Internet streaming was a means of delivering tangible personal property. As a result, monthly streaming subscriptions were subject to the sales tax. The legislature amended the law the same year to reflect that principle.

Netflix paid the sales tax for 2021, then requested a refund. The department denied the request.

The company sued the department and made numerous arguments:

• The 1935 sales tax on tangible personal property, which applies to “corporeal” things, did not apply to streaming

• The 2021 changes were not enacted by popular vote and, therefore, violated the Taxpayer’s Bill of Rights

• The tax was not allowed under federal law

• The tax was really aimed at a service that is non-taxable

In an April 2024 order, Denver District Court Judge Sarah B. Wallace resolved the case in Netflix’s favor based on the first argument that the subscriptions were not “corporeal.”

“To the contrary, not only did the Legislature not likely contemplate a streaming service (which did not exist in 1935),” she wrote, “but the words that it did choose to use (‘corporeal’ and ‘tangible’) convince this Court that it intended to limit the reach of its taxation powers to that which could be seen and touched. Netflix’s streaming service, while capable of being seen, is not capable of being touched and therefore is not taxable under the 1935 law.”

During oral arguments last month, the appellate panel heard different interpretations of what it means for a streaming subscription to be “corporeal.”

“What comes across is not itself perceptible to any of the senses. It’s pulses of light. It’s electric signals or it’s radio waves,” argued Jean A. Pawlow for Netflix, describing the mechanics of streaming.

“I mean, we experience things by touch, but also by seeing and hearing,” responded Judge Sueanna P. Johnson. “We’re not just sitting there and looking at it and going, ‘Wow these are great atoms’ and everything. We’re looking at so-and-so on the screen. So, it’s part of the sense of the experience. I think you’re getting way too philosophical.”

“But the reality of the transaction is that it has to be a sale of tangible property, which is a sale of corporeal property,” said Pawlow. “The sales tax doesn’t say we’re going to tax you on an experience.”

Ultimately, the panel agreed with the department’s interpretation that tangible personal property is “corporeal” so long as it is “perceptible to the senses.”

A review of 1930s definitions “reveals that that term encompasses things that can be perceived by any of the senses — not exclusively the sense of touch,” wrote Grove. “The images and sounds that a Netflix subscription permits customers to view and hear physically exist because subscribers can perceive them with their eyes and ears; they are not abstractions. A Netflix subscription must therefore be corporeal.”

The panel returned the case to Wallace to address Netflix’s other arguments challenging its tax liability, which the state admitted was necessary.

The case is Netflix, Inc. v. Department of Revenue of the State of Colorado et al.