Ninety years later, Colorado’s sales tax regime still is officially called the “Emergency Retail Sales Tax Act of 1935” (see 39-26-101 in the statute books). That’s some emergency! That was, of course, the height of the Great Depression. Proceeds from the sales tax originally were designated for “the Colorado official state relief committee” or like body “to be expended for the purpose of relieving distress and suffering among the indigent unemployable residents of this state.”
The original language of the law (House Bill 984) anticipated a time, after the emergency had passed, “when this act shall cease to be in effect.” The legislature invoked the “safety clause” (today much-misused) and declared “an emergency exists.” The bill explicitly stated, “This act shall terminate at midnight on the 30th date of June, A.D. 1937, unless the governor . . . shall declare the emergency shall be at an end prior to that time.” (I know this because the Rocky Mountain News published the entire text of the bill on February 2, 1935.)
For reference, Colorado’s unemployment rate currently is under five percent. During the pandemic the rate was 6.8%; during the “mortgage meltdown,” 9.2%. In 1935 the unemployment rate approached twenty percent. I’m pretty sure we can safely declare the emergency of the Great Depression to be over. Yet, somehow, the “emergency” sales tax regime persists!
Colorado’s sales tax was a bureaucratic nightmare from the get-go. The Colorado Transcript reported on February 21, 1935, “The law . . . was written in very general terms—leaving the specific application and the promulgation of rules and regulations to an administrator,” the state treasurer. The treasurer “issued “43 very definite regulations outlining the operation of the law.”
Scofflaws are ubiquitous
As I have pointed out, a large fraction of Coloradans violate the sales and use tax laws. Have you ever bought an otherwise-untaxed item from out of state without paying “use” tax on it? You’re a tax outlaw. Have you ever had a garage sale or sold something online or to a friend without collecting sales tax? You are again a tax outlaw.
The legislature should repeal the use tax. The legislature also should exempt the first few thousand dollars (or at least the first few hundred dollars) of a person’s annual sales from sales taxes. That would mostly solve the problem of casual sales.
But the legislature so far has refused to do its job in these matters (I guess legislators are too busy harassing gun owners and the like), relying instead on the Colorado Department of Revenue (usually) unofficially declining to attempt to enforce the laws in such cases. Thus, we are put in the unfortunate and dangerous position where the sales and use tax laws in practice in some respects mean something quite different than what the statutes explicitly state. This is practically an open invitation for abusive bureaucrats and prosecutors to target individuals for political reasons.
DOR replies to questions
Recently a DOR representative replied to several of my questions, but you have to read between the lines to intuit the fuller meaning. To emphasize, I blame the legislature for asking DOR to enforce statutes that are in part ambiguous and unenforceable.
Me: Did you remove the line item (on the income tax form) for untaxed purchases from out of state (for use taxes)? If so why?
DOR: For tax year 2024, we eliminated form DR 0104US, and directed taxpayers to file form DR 0252 (Consumer Use Tax Return) instead. Based upon usage patterns, there was no longer a need to maintain two forms for reporting consumer use tax liabilities. (My note: I take this to suggest that hardly anyone was paying the use tax anyway.)
Me: Does Facebook marketplace collect and remit sales taxes? Ebay? Does Substack collect and remit sales taxes for paid subscriptions?
DOR: Because of the statutes governing confidentiality, we are not able to discuss the liabilities or returns of particular taxpayers. (My note: I think Ebay generally processes sales taxes. I’m not sure about Facebook’s or Substack’s policies.)
Me: Is a person required to collect sales taxes for a garage sale or the like? (If so, has your department taken any action against transgressors say, in the last five years?)
DOR: An individual who makes an occasional or isolated sale of tangible personal property is not required to obtain a sales tax license. The tax collected may be remitted on form DR 0154. Information on the conditions for using that form may be found in the form instructions. (My note: Notice what part of my question DOR declined to answer.)
Me: Does it remain the case that a seller is required to pay the local sales tax where an item is delivered?
DOR: In general, a retail sale is sourced to the location where the purchaser takes possession of the purchased property (“destination sourcing”). Information on the rules for sourcing sales may be found in part 1 of the Colorado Sales Tax Guide.
Me: If I charged someone $10 to tell them a story, would that also be subject to sales tax? If so, how is that different from, say, charging someone to deliver a massage?
DOR: In general, Colorado imposes a sales tax on the sale of tangible personal property and certain explicitly taxed services. Whether the purchase of a story is a taxable sale would depend on a number of facts that we are not able to get into in such a general hypothetical case.
The Netflix sales-tax fiasco
To emphasize, the Colorado Department of Revenue cannot give me a straight answer as to whether me charging people money to tell them a story would be taxable under the sales tax laws.
I asked the question to poke at some of the underlying statutory ambiguities. If someone starts a Substack, and paywalls stories published there, is the Substacker legally required to collect and remit sales taxes? What if someone charges money to tell a story live via Zoom?
If Netflix tells you a story through its streaming service, in that case the service may be taxed. We know this, not because the law clearly says so, but because that’s how a court decided to interpret the ambiguous statutes (see the reports by Westword and CPR).
Catie Cheshire reports for Westword that, over a decade ago, “Netflix asked the DOR to exempt the streaming arm of the company from taxes because streaming subscriptions are not tangible. The DOR instead audited the company and found Netflix owed Colorado $8.5 million in taxes, penalties and interest. After Netflix protested that finding, the DOR agreed to relent and handle the matter through a rulemaking process rather than punitive enforcement. Years later, in 2021, the Colorado state legislature passed a law expanding the definition of taxable tangible personal property to include digital property.” Just recently Netflix lost a related court case.
Let’s start with the 2021 bill (HB 1312). This bill is titled “Insurance Premium Property Sales Severance Tax.” What the heck does that have to do with Netflix streaming services?
Despite rules that bills must pertain to a single subject and must have clear titles, this bill also clarifies that “tangible personal property” includes digital goods. The bill declares, “The definition of ‘digital goods’ codifies the department of revenue’s long-standing treatment of digital goods, as reflected in its rule, and neither expands nor contracts the definition of ‘tangible personal property.'” Later the bill says that “tangible personal property” includes “digital goods,” regardless of “method of delivery,” and encompasses “electronic download” and “internet streaming.” The bill also says that “‘digital good’ means any item of tangible personal property that is delivered or stored by digital means.”
Okay, plausibly if I “buy” a movie from Amazon (actually I’m buying a license to use the movie under certain conditions), that would fall under the bill’s language. But Netflix isn’t selling me anything that I can keep; it’s more like a rental. I can watch a movie on Netflix, but I don’t own the movie. It’s not my “tangible personal property”; it’s not my property at all. So how can the state charge sales tax when nothing is being sold?
DOR helpfully says, “In general, leases of tangible personal property are considered retail sales and are subject to Colorado sales tax. However, a lease for a term of 36 months or less is tax-exempt if the lessor has paid Colorado sales or use tax on the acquisition of the leased property.” Okay, plausibly Netflix is “leasing” movies, even though a subscription lets you watch as many videos as you want.
Rubber stamp ruling
Let us now turn to the July 3 Court of Appeals decision. The first thing to notice is that various judges disagreed about the statutes’ meaning. The decision reviews, “The district court concluded that the sale of a Netflix subscription is not the sale of tangible personal property and is, therefore, not taxable under Colorado law. We disagree.”
The decision also reviews, “Netflix argued that its subscriptions are not taxable because the sale of a subscription is not a sale of tangible personal property.”
Here is a revealing line: “We generally defer to the interpretation of a statute given by the body charged with its administration.” In other words, where the statutes are unclear, the DOR can just make stuff up and the courts will rubber-stamp its rules. This dispute points to the legislature’s abnegation of its responsibilities to establish clear laws.
Then the court’s decision goes off on an extended tangent about whether a streamed movie counts as “corporeal” and whether “tangible personal property” must “have a real body that can be both seen and touched.” But none of that matters if we’re not talking about property at all.
In its enthusiasm to back the DOR, the court states, “We observe that absurd results would follow if physical touch were a prerequisite of tangibility for the purposes of the sales tax statute. 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.”
Sure, if someone is selling you a photograph or something, that’s property. If I buy a digital book and “own” a copy, that’s property. You’re buying something that you possess. But, again, Netflix isn’t selling you anything that you get to keep. You can say it’s selling you access to stream the videos on its site. But you don’t own any of those videos. They’re not your property.
Again, we can plausibly compare subscription-based streaming to movie rentals. Compare this to Netflix’s original model, which was to send you “unlimited” videos through the mail for a set monthly fee (details depended on the plan).
The dividing line between a good and a service quickly breaks down. The idea in Colorado was to tax goods, not services. But if a streamed movie that the user does not own counts as a good and as property, then how is that any different from someone charging money to tell someone else a story? If the issue is that a movie is recorded and permanent, then we can talk about a story told from a script. One possible avenue is to declare that any performance with a substantial live or extemporaneous component is not taxable. But then we get into the oddity that a story told live is not taxed, whereas the story recorded and shown five minutes later is taxed, even though it’s the exact same story. (Disclaimer: I’m not a lawyer and nothing in this article is intended as legal advice. Here I’m talking about possible interpretations.)
Incidentally, as you may have noticed, various municipalities, including Aurora, charge an “admissions tax” for things like movies and concerts.
A bureaucratic nightmare
If you’re a big store that can afford fancy electronic systems and specialized accountants, you can comply with the sales tax laws without much problem. You might even favor the sales taxes precisely because they’re a hassle for smaller players.
I have written four books. I do not sell these books directly to readers because compliance with the sales tax laws is nightmarish. I tried complying with these tax laws once, and the value of my time wasted on related paperwork was vastly greater than the value of the taxes remitted. So I gave up. Now my books sell exclusively through Amazon, which processes the sales taxes.
I have mentioned the problem of a lot of people unintentionally violating the tax laws.
Another problem is that, with shipped goods, sellers, even those outside the state, have to contend with multiple city, county, and regional sales taxes. Last year, with House Bill 24-1041, the legislature continued its efforts to try to clean up this problem to some degree by requiring local governments to join the state’s “electronic sales and use tax simplification system” if they want to “collect sales and use tax from a retailer that does not have physical presence in the state.” But this nibbles around the edges of the larger problem, and “simplification” here is a relative term.
My proposed solution is to declare an end to the 1935 emergency, repeal all sales and use taxes, and forbid all governments in Colorado to impose any tax on sales, use, admissions, or the like. That is a big ask, and I don’t expect it to happen any time soon (or at all). Such taxes are by this point well-entrenched here (although five states do not impose sales taxes).
If I had my way, we’d repeal sales taxes and the like even if that required hikes on income taxes to fill in the gaps and income taxes at the local level piggy-backing on state collection. What would be the point, then, if the switch were revenue-neutral? The point would be to eliminate an entire level of tax compliance and bureaucracy. We’re stuck with federal income tax compliance anyway, so the added compliance costs at the state and local levels are minimal.
You may call me a dreamer; hell, I may even be the only one. But abolishing sales taxes is still a good idea. It’s not an emergency, though!
Ari Armstrong writes regularly for Complete Colorado and is the author of books about Ayn Rand, Harry Potter, and classical liberalism. He can be reached at ari at ariarmstrong dot com.
