Netflix Settles, and Colorado Keeps Taxing Streaming Like It Is 1943

It was recently announced that Netflix put its sales tax case to bed with the Colorado Department of Revenue. As part of the settlement, the case was formally dismissed with the Colorado Supreme Court on July 22, 2026. Practitioners and taxpayers alike, both inside and outside of Colorado, are left somewhat disappointed. There was at least some speculation that by agreeing to hear the case, the Colorado Supreme Court would step in and correct a questionable procedure and a suspect opinion from the Court of Appeals.

This case traces back to 2013. Netflix essentially sought a ruling, the Department of Revenue declined, and Netflix started collecting tax. Several years later Netflix challenged the statute through a refund. Along the way, in 2021, the agency issued an administrative rule, and a few months later the state amended the statute to explicitly tax digital goods. Netflix originally won at the trial level, that opinion got reversed on appeal, and the Supreme Court agreed to hear the case before the settlement closed it out.

Being that the case has now settled, we are left with an unfavorable appellate opinion on the books. As explained below, it opens the door for other state agencies to broadly tax digital goods that do not clearly fit their statutes, using this Colorado opinion as ammunition. Both sides had reasons to reach a settlement, but it leaves a disappointing finish to an interesting case. It also incentivizes states to leave the law ambiguous and let taxpayers guess what is and is not taxable.

How a 1935 Statute Ended Up Governing Netflix

Since 1935, Colorado has had a somewhat amorphous law on the books taxing tangible personal property. The statute defines that term as "corporeal" personal property, which, in an honest moment, I had to look up what it meant. Colo. Rev. Stat. § 39-26-102(15)(a)(I). Historically it meant any physical property, but not intangible property such as stocks, bonds, mortgages, and the like.

Fast forward to the age of digital goods, and it is easy to see why it was unclear whether that antiquated definition applied to digital goods in the modern economy. Although the Department understood the law to broadly tax digital goods, it remained unclear where the line was and what it applied to. It is no surprise that it was unclear whether movies or shows streamed on Netflix constituted taxable tangible, "corporeal" personal property or nontaxable intangible property. Unsure, Netflix sensibly sought a letter ruling from the Department of Revenue, which was promptly denied. However, after determining Netflix owed millions in uncollected tax, the Department abated the assessment to allow the issue to be addressed through rulemaking. Some taxes had been paid, which Netflix sought to recover through a refund, which ultimately led to the litigation.

The 2021 Clarification That Wasn't

During the disagreement, in 2021, the agency "clarified" the law and said the existing statute taxed movie streaming by way of an example in the rule. 1 Colo. Code Regs. § 201-4:39-26-102(15)(4). It is worth noting that a clarification carries real legal significance. A clarification explains what a law always said, whereas an amendment changes the law. This distinction affects how the rule can be applied to periods before it was issued.

Later that year, the General Assembly amended the sales tax statute to effectively mirror the agency rule. Like the DOR rule, the law specified that a "digital good" means any item of tangible personal property that is delivered or stored by digital means, including but not limited to video, music, or electronic books. § 39-26-102(15)(b.5)(II). That language would capture Netflix's streaming. Many states also require that for an item to be taxable it must squarely fit the statute, and any ambiguity goes in the taxpayer's favor. Given the antiquated old statute, the agency changes, and the legislative amendment, it would be hard to say streaming squarely met the original definition.

The Court of Appeals Finds a Jukebox

Netflix prevailed at the trial level and the Department appealed to the Colorado Court of Appeals. In an opinion I would describe as interesting, the Court determined that tangible or corporeal personal property means anything perceptible to any of the senses, drew support from a jukebox case out of Arizona in 1943, and concluded that streaming a movie is perceptible to your senses because you can see and hear it, therefore it is taxable. Netflix, Inc. v. Dep't of Revenue, 575 P.3d 465 (Colo. Ct. App. 2025). The Colorado Supreme Court agreed to hear the case, so there was a real chance it would reverse. Moreover, allowing this ruling to stand sent a message that agencies can leave taxpayers to guess what is taxable, and face no real consequence for it.

Why Both Sides Blinked

The settlement is instructive as to how each side read its own hand. On the Department's side, it had a favorable ruling on the books that faced a real risk of reversal at the Supreme Court level. A reversal would have wiped out the opinion, opened the door to refunds well beyond Netflix, and left the Department defending an assessment history with nothing behind it. For Netflix, it was looking at more years and more fees to protect a refund it had already fought over for a decade, with a real chance of losing. Both sides had reason to take the certain outcome. I understand the decision. It just resulted in an anti-climactic ending to an interesting issue.

The Opinion Has Holes

The Court of Appeals opinion is now the only appellate authority on this question in Colorado, and the Department will treat it that way at audit. The opinion is not ironclad, however.

For starters, the Court relied heavily on an Arizona case for support. In Jones, the case involved jukeboxes, dealt with an Arizona law, and that law was almost as archaic as the Colorado statute at issue. Moreover, the Arizona law defined tangible personal property as property "which may be seen, weighed, measured, felt, touched, or is in any other manner perceptible to the senses." Ariz. Code Ann. § 73-1302 (1939). Colorado's statute is not nearly as descriptive and just says corporeal personal property and stops. The Court of Appeals acknowledged the Arizona statute "is more detailed" and then concluded it did not "sweep more broadly." 575 P.3d at 470. If Colorado wanted "perceptible to the senses," Arizona's language was available for eighty-six years.

There is also a surplusage problem. Legislatures do not use surplusage or unnecessary language in a statute. The statute not only addresses tangible property but also separately reaches "electrical energy, gas, steam, telephone, or telegraph services." § 39-26-102(10). If corporeal already swept in everything a person could perceive, the General Assembly wasted its time enumerating those terms.

Finally, the court leaned on a comment in a 1933 dictionary to establish what "corporeal" meant in 1935, while conceding the common definition was narrower. The Colorado Supreme Court has warned that reaching for an obscure dictionary definition "does not establish that the term is ordinarily understood in that sense." Marquez v. People, 311 P.3d 265, 267 (Colo. 2013). The Court of Appeals went the other way anyway.

The Argument Nobody Decided

There is one more issue worth flagging, and it may be the biggest of them all. Colorado's Taxpayer's Bill of Rights requires voter approval before the state imposes a new tax or makes a tax policy change that produces a net revenue gain. Colo. Const. art. X, § 20(4)(a). Extending an existing tax to transactions it did not previously reach can qualify, and the Colorado Supreme Court struck down ordinances on exactly that basis last year in MetroPCS California, LLC v. City of Lakewood, 576 P.3d 139 (Colo. 2025). Netflix raised the argument below. The Court of Appeals never reached it because it found the subscriptions taxable under the 1935 statute.

That explains why the Department cannot afford to call 2021 a change. The moment it concedes the rule and the amendment expanded the tax base, TABOR is in play and the tax may be invalid without a vote. Insisting a 1935 statute silently covered streaming all along is not just a litigation position. It is the only one available. The argument was never adjudicated, which means it is still sitting there for the next taxpayer.

Who Gets Hit Next

The opinion addressed one subscription product, and it should be read against those facts. Expect the Department to argue the perceptibility rationale reaches anything a customer can see or hear. If a streaming movie fits the definition, it is tough to imagine a digital product that it does not reach. Software as a service, hosted platforms, data and information services, digital advertising, online gaming, e-learning, digital publishing, access models generally. If you are in one of those categories, the answer is to distinguish your facts, not to assume the case decides them.

Expect other states to reach for it as well. Every state still operating on a mid-century definition of tangible personal property just watched a revenue department win an appellate opinion, decline the chance to defend it in front of a supreme court, and keep it anyway. That is a low-cost playbook and it will get run again.

What To Do Now

If you sell or buy digital products with Colorado customers, quantify the exposure now and protect the refund periods. A Colorado sales tax refund claim is generally due within three years after the twentieth day of the month following the date of purchase. § 39-26-703(2)(d). Periods drop off the back end every month you wait.

At audit, do not concede taxability because the Department hands you a copy of the opinion. It is one division of an intermediate appellate court reading a 1935 statute, and the Colorado Supreme Court agreed to review it and never did. Raise TABOR and preserve it in the protest and in the refund claim, because an argument left out of the administrative record is an argument you will fight to make later.

Agencies Should Be Held to Their Own Standard

When a business asks what the law means and gets no answer, then gets assessed under a reading nobody could have found in the statute, the failure is not on the business. Colorado had a rulemaking process available the whole time and used it in 2021, which tells you it was always the right tool. Waiting until litigation to explain the rule, and then arguing the rule was always there, gets the sequence exactly backwards.

The settlement means no court above the Court of Appeals will hold the agency accountable. What is left is an opinion that reached a modern industry through a 1943 jukebox case and a 1933 dictionary, standing unreviewed, and a message to every revenue department in the country that ambiguity is worth more than clarity. If you sell digital products into states that have not squarely amended their statutes, get your positions documented before an assessment forces the conversation. The states are not going to volunteer where the line is.

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