Background

Colorado’s retail sales tax applies to “all sales and purchases of tangible personal property at retail.” ¹ The statute defines “tangible personal property” to mean “corporeal personal property.”² This language has remained substantially unchanged since 1935.

In 2021, the Colorado Department of Revenue promulgated a rule providing that the method of delivery does not affect taxability and identifying internet streaming as a delivery method.³ Under this rule, the Department’s position was that streaming services had always been taxable. The General Assembly also amended the statute to state that “tangible personal property” includes digital goods.⁴

Netflix, Inc. v. Department of Revenue was the first case to put the Department’s position on streaming to the test.⁵ In that case, the taxpayer argued that the sale of a streaming subscription is not a sale of tangible personal property within the meaning of the 1935 statutory text, and that, to the extent the Department’s rule or the amended statute authorized the tax, the rule conflicted with the statute it purported to implement or violated TABOR⁶ by effecting a new tax or tax policy change without voter approval. The district court granted summary judgment for the taxpayer, holding that the streaming service, “while capable of being seen, is not capable of being touched and therefore is not taxable” under the 1935 statute, and declined to reach the remaining issues.⁷

The Court of Appeals reversed, holding the subscriptions taxable and remanding for further proceedings.⁸ According to the court, the statutory definition is unclear so it looked to the meaning “corporeal” would have carried in 1935, and adopted the Department’s broad construction on four grounds.

First, relying on a comment accompanying the definition of “corporeal property” in a Great Depression Era dictionary, it concluded that by 1933 “all things which may be perceived by any of the bodily senses are termed corporeal.”⁹ The court rejected as outdated the historic meaning of the term “corporeal,” as being limited objects that can be touched.

Second, the court drew support from State v. Jones, a 1943 Arizona Supreme Court decision that held that jukebox plays are taxable because “[t]he playing of the record is perceptible to the sense of hearing.”¹⁰ The court found that jukebox plays are analogous to streaming, and glossed over significant differences between the Arizona statute and Colorado’s statute.

Third, it found that the 1935 statute made a binary distinction between corporeal and incorporeal property, with incorporeal property limited to abstract rights such as stocks, bonds, and licenses. Appling this binary choice theory, the court noted that that streamed images and sounds “physically exist” insofar as they are perceived, and concluded the subscriptions “must therefore be corporeal.”

Fourth, the court observed that “absurd results would follow if physical touch were a prerequisite of tangibility.” The court explained that photographs, music, movies, newspapers, and similar goods that were historically sold in physical form and taxed without dispute should not escape taxation simply because technological advancements have altered the method of delivery.

Having found the streaming subscriptions taxable under the 1935 statute, the court expressly declined to address the Department’s rule, the 2021 amendment, or the challenge under the Taxpayer’s Bill of Rights.

The certiorari grant and settlement

On March 30, 2026, the Colorado Supreme Court granted certiorari en banc on whether the tax on “tangible personal property,” which had been “defined since 1935 as ‘corporeal personal property,’” encompasses the streaming service at issue.¹¹ Review by the Colorado Supreme Court is discretionary and comparatively rare, requiring the agreement of at least three of the court’s seven justices, and the criteria favoring review include a question of substance not yet determined by the supreme court and a lower court’s departure from the accepted and usual course of judicial proceedings.¹² The grant therefore indicates that multiple justices regarded the question as open and substantial.

While the appeal was pending before the Colorado Supreme Court, the parties reached a settlement. The parties filed a joint stipulation to dismiss the appeal on July 22, 2026, and the court promptly dismissed the appeal. Following the dismissal, a Department official stated that the ruling “will stand.” That is accurate as to the decision’s continued existence as applied to the specific taxpayer, but it does not mean that Colorado’s sales tax treatment streaming subscriptions and other digitally delivered products has been finally resolved.

Questions the decision leaves open

The Court of Appeals decision addressed a particular subscription offering, and its holding is properly read against those facts. The Department may nonetheless take the more aggressive position that the perceptibility rationale reaches any offering a customer can see or hear — software as a service and hosted platforms, data and information services, digital advertising, online gaming, e-learning, digital publishing, and access-based models generally. Taxpayers in those categories should be prepared to distinguish their facts rather than assume the decision governs.¹³

Because the settlement removed the case before the Colorado Supreme Court could rule, the Court of Appeals’ analysis will not be reviewed. Taxpayers should expect that the Department will rely on the Court of Appeals’ decision and advance similar arguments at audit.

Although the Court of Appeals’ decision held that streaming services are subject to sales tax, that decision has several weaknesses and could be vulnerable to challenge by other taxpayers. Indeed, the fact that at least three justices voted to review the Court of Appeals’ decision (and the Department’s willingness to settle to avoid Supreme Court review) should embolden taxpayers.

Taxpayers should consider the following points in evaluating the Court of Appeals decision:

Reliance on out-of-state authority construing different statutory language. The Court of Appeals decision relied on the Arizona decision in Jones, but the Arizona statute at issue in Jones was significantly different from Colorado’s sales tax statute. The Arizona statute defined tangible personal property as property “which may be seen, weighed, measured, felt, touched, or is in any other manner perceptible to the senses.”¹⁴ Colorado’s statute contains no comparable language.¹⁵ The Court of Appeals acknowledged that the Arizona statute “is more detailed” but glossed over this difference with the conclusory statement that it does not “sweep more broadly.”¹⁶ It’s unclear if the Colorado Supreme Court would agree, as it has emphasized that the plain language of a statute is controlling unless the result would be “absurd or unconstitutional.”¹⁷

Treatment of the possession and exchange requirement. The same statutory subsection that defines “tangible personal property” as “corporeal personal property” provides that tangible personal property “embraces” goods and “all tangible or corporeal things and substances that are dealt in and capable of being possessed and exchanged.”¹⁸ The Court of Appeals opinion does not address that phrase, which may matter for subscription and access-based models under which the provider retains the underlying content and the customer receives only revocable access. It may also support a distinction between extending the 1935 Act to physical objects that did not exist in 1935, such as compact discs, and extending it to transactions involving no exchange of a physical object at all.

Weight given to the dictionary and regulatory sources. The Court of Appeals looked to a contemporaneous dictionary as its principal source for the 1935 meaning of “corporeal.” That entry defined corporeal property as that which “affects the senses, and may be seen and handled.”¹⁹ Rather than apply the definition itself, though, the court instead relied on an accompanying comment that the touch-based distinction had become outdated, acknowledging that the “common definition” was narrower while presuming that the General Assembly employed the technical legal meaning. The Colorado Supreme Court has recently warned that the use of an obscure dictionary definition “does not establish that the term is ordinarily understood in that sense,”²⁰ but the Court of Appeals may have missed that warning.

The statute’s separate enumeration of services. The legislature separately extended the definition of “sale” to reach “electrical energy, gas, steam, telephone, or telegraph services.”²¹ If “corporeal” encompassed all perceptible items, that enumeration would be unnecessary and would be rendered mere surplusage under the Court of Appeals’ decision.

Whether the alternative construction would be absurd. It is not self-evident that adopting the taxpayer’s construction of the statute would be absurd.²² The taxability of digital goods is a longstanding policy question on which states have reached divergent conclusions. Several jurisdictions — including Florida, Missouri, Nevada, and Virginia — have chosen to exempt electronically delivered products from sales tax, although several of them impose other transaction taxes on such sales.²³ Under the Streamlined Sales and Use Tax Agreement, the decision whether to tax “specified digital products” is left to each member state, and several member states have declined to do so.²⁴ Differential treatment of physically and electronically delivered products is, in other words, a common legislative choice rather than an absurdity.

The unresolved TABOR question

The constitutional challenge that the Court of Appeals declined to reach may prove more consequential than the statutory dispute, and it remains available to other taxpayers.

The Taxpayer’s Bill of Rights requires advance voter approval for any new tax, tax rate increase, or “tax policy change directly causing a net tax revenue gain.”²⁵ TABOR does not define “new tax,” but Colorado courts have explained that the term connotes creation rather than mere alteration, while recognizing that extending an existing tax to a new class of goods or services may itself constitute one; legislation producing only an “incidental and de minimis revenue increase does not.”²⁶ For example, applying that framework, the Colorado Supreme Court held that ordinances extending a 1969 telecommunications tax to additional providers and services effected new taxes so were invalid for lack of voter approval.²⁷

The argument presented below was that the Department’s 2021 rule and the 2021 amendment extended the sales tax to a class of transactions not previously subject to it, without the voter approval TABOR requires. The Court of Appeals avoided the question by holding the transactions taxable under the 1935 statute, while acknowledging it would have had to decide the issue had it agreed with the district court.²⁸

If a taxpayer brings a TABOR challenge, the Department may attempt to rely on a legislative declaration in the 2021 bill that recites that the digital goods definition “neither expands nor contracts” the tax base.²⁹ MetroPCS suggests that this declaration may not foreclose a successful TABOR challenge: the Lakewood ordinances likewise recited that they were codifications of an existing tax to a changed industry rather than new levies, but the court nonetheless held that they effected new taxes.

Next steps for taxpayers

The settlement of a single taxpayer’s litigation does not resolve the underlying question on the taxability of digital goods, and the Colorado Supreme Court’s decision to grant review indicates it is one on which reasonable minds differ. Taxpayers should exercise care in determining how to proceed in light of the ongoing uncertainty. Here are some points to consider:

• Quantify exposure and preserve refund periods. The deadline for a sales tax refund claim is generally three years after the twentieth day of the month following the date of purchase.³⁰ Purchasers should note that Colorado imposes civil penalties on certain purchaser refund claims of $5,000 or more found duplicative or materially incomplete or that lack a reasonable basis.³¹
• Evaluate audit positions rather than conceding taxability. The Department may be expected to treat the decision as controlling. It remains a single Court of Appeals division’s construction of a 1935 statute that the Colorado Supreme Court agreed to review but never decided.
• Consider raising the TABOR challenge. The constitutional argument was briefed but never adjudicated, and under MetroPCS a successful challenge may invalidate the tax and support refunds for vendors and purchasers alike. Taxpayers should consider asserting and preserving it in protests and refund claims.

If your business sells or purchases offerings to Colorado customers that are delivered by electronic means, we would be pleased to discuss how these developments could impact you. Please contact your usual Reed Smith contact or any member of the State Tax group.

1. Colo, Rev. Stat. § 39-26-104(1)(a).2. Colo. Rev. Stat. § 39-26-102(15)(a)(I).3. 1 Colo. Code Regs. § 201-4:39-26-102(15)(4).4. Colo. Rev. Stat. § 39-26-102(15)(b.5)(I)–(II).5. Netflix, Inc. v. Dep’t of Revenue, 575 P.3d 465 (Colo. Ct. App. 2025).6. Colo. Const. art. X, § 20.7. Netflix, Inc. v. Dep’t of Revenue, 575 P.3d 465, 468 (Colo. Ct. App. 2025).quoting City and County of Denver District Court No. 23CV31825.8. Netflix, Inc. v. Dep’t of Revenue, 575 P.3d 465, 471 (Colo. Ct. App. 2025).9. Id. at 470.10. State v. Jones, 137 P.2d 970 (Ariz. 1943).11. Netflix, Inc. v. Dep’t of Revenue, No. 25SC629 (Colo. Mar. 30, 2026) (order granting certiorari).12. C.A.R. 49.13. H.B. 26-1223, 2026 Gen. Assemb., Reg. Sess. (Colo. 2026), signed June 4, 2026, defines computer software as tangible personal property when delivered “by any means, including compact disc, download or remote access through the internet,” effective January 1, 2027. However, this does not address the past treatment of these products.14. Ariz. Code Ann. § 73-1302 (1939), quoted in Jones, 137 P.2d at 970–71.15. See Colo. Rev. Stat. § 39-26-102(15)(a)(I).16. Netflix, Inc. v. Dep’t of Revenue, 575 P.3d 465, 470 (Colo. Ct. App. 2025).17. Samuel J. Stoorman & Assocs., P.C. v. Dixon, 394 P.3d 691, 695 (Colo. 2017).18. Colo. Rev. Stat. § 39-26-102(15)(a)(I).19. Netflix, Inc. v. Dep’t of Revenue, 575 P.3d 465, 469 (Colo. Ct. App. 2025) citing the 1933 edition of Black’s Law Dictionary.20. Marquez v. People, 311 P.3d 265, 267 (Colo. 2013) (emphasis added).21. Colo. Rev. Stat. § 39-26-102(10).22. Cf. Smith v. Exec Custom Homes, Inc., 230 P.3d 1186, 1191 (Colo. 2010) (“The rule that we will deviate from the plain language of a statute to avoid an absurd result must be reserved for those instances where a literal interpretation of a statute would produce a result contrary to the expressed intent of the legislature”).23. See Nat’l Conf. of State Legislatures, Taxation of Digital Products (updated July 2026)24. See Streamlined Sales and Use Tax Agreement § 332(A), (C), (E), (H) (as amended through May 13, 2026).25. Colo. Const. art. X, § 20(4)(a).26. See TABOR Found. v. Reg’l Transp. Dist., 416 P.3d 101 (Colo 2018).27. MetroPCS California, LLC v. City of Lakewood, 576 P.3d 139 (Colo. 2025).28. Netflix, Inc. v. Dep’t of Revenue, 575 P.3d 465, 471 (Colo. Ct. App. 2025).29. H.B. 21-1312, Section 1(c)(II), 2021 Gen. Assemb., Reg. Sess. (Colo. 2026)).30. Colo. Rev. Stat. § 39-26-703(2)(d).31. Id. § 39-26-703(5).

Client Alert 2026-158