Are licensed digital movies and the hard drives they arrive on taxable tangible personal property, and who owes the tax?

Plain-English summary

A movie theater licenses films from distributors under Master License Agreements. The distributor ships the movie/content on a computer hard drive by courier; the theater copies it to its library server, returns the hard drive, and unlocks playback with an emailed digital key (KDM) that expires after the contracted run. The theater doesn't own the hard drive, the content, or the key — it only licenses the right to exhibit for a set time, paying a percentage of box-office. It asked whether the movies/content and hard drives are tangible personal property subject to tax. The Department ruled: both are taxable TPP — and the film distributors, as lessors, owe the tax, regardless of any contract to the contrary.

Film licensing involves tangible property. Colorado courts have twice held that film-rental agreements involve the sale/use of TPP: American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64 (Colo. App. 1995) and Cinemark USA, Inc. v. City of Fort Collins, 190 P.3d 793 (Colo. App. 2008). Theaters argued they were buying an intangible right to exhibit copyrighted material, but the courts held the license to exhibit is inseparable from the tangible film — the exhibitor's purpose "is to obtain a finished product which it can exhibit to the public," and a reel or cassette "is an item of tangible personal property."

Hard drives and digital content are no less tangible than film reels. That the content is uploaded to the server before the showing (rather than used instantly like a reel) is "immaterial" — Cinemark taxed payment that "depended upon the transmission of the films by way of some tangible medium," whether reel or hard drive. And the digital movies/content themselves are TPP: tangible personal property is "corporeal," and "digital goods, such as e-books, MP3 music files, or … digital movies/content … possess[] a physical existence." The Department quoted the Nebraska Supreme Court (May Broadcasting Co. v. Boehm): "The concept of physically storing an intangible thing is beyond comprehension" — the fact that the content can be received and stored on a hard drive and server shows it's tangible.

It's a lease, and the lessor owes the tax. Temporary possession doesn't avoid tax (Cinemark). Colorado taxes leases of TPP (§§ 39-26-102(23), 713(1)), and the theater "acquires possession and use" of both the hard drives and digital content — a taxable lease and use. Who pays depends on lease length: for leases of three years or less, the lessor (here the film distributor) bears the tax — paying sales/use tax at acquisition or first use, or (with prior Department permission) acquiring the property tax-free and collecting tax on the lease payments. The Department wasn't aware of any such permission here, so "responsibility falls on the film distributor," either way.

Because this is a private letter ruling, it binds the Department only as to this taxpayer and these facts and cannot be relied on by anyone else.

What this means for you

Movie theaters and exhibitors

The film content you license — and the hard drives it arrives on — are taxable tangible personal property under settled Colorado law, even though what you "really" get is a time-limited license to exhibit. The good news for the exhibitor: on these short-term (≤3-year) film licenses, the distributor (lessor) owes the tax, not you — and a contract shifting it to you doesn't change who Colorado holds responsible. Going digital instead of film reels, and loading content to a server before screening, doesn't change the result.

Film distributors / content licensors

If you license films into Colorado on short-term terms, you carry the sales/use tax obligation as lessor — pay it on the hard drives and content at acquisition/first use, or get Department permission to buy tax-free and collect tax on the lease payments. Contractual tax-shifting to the exhibitor won't move the obligation in the Department's eyes.

Accountants and tax professionals

This is the Colorado digital-goods-as-corporeal-TPP position applied to film licensing, anchored in American Multi-Cinema (910 P.2d 64) and Cinemark (190 P.3d 793) (license inseparable from the tangible medium; temporary possession and pre-load to server immaterial) and the May Broadcasting (241 Neb. 660) "stored ∴ tangible" reasoning. Characterized as a lease of TPP (§§ 39-26-102(23), 713(1)); short-term lessor liability puts the tax on the distributor, overriding contrary contract terms. Compare CO PLR 16-007 / GIL 17-013 on digital goods.

Common questions

Q: Are licensed digital movies taxable in Colorado, or is it just an intangible license?
A: Taxable. Colorado courts have twice held film-rental agreements involve tangible personal property — the license to exhibit is inseparable from the tangible medium — and digital movie content is itself treated as corporeal, taxable property.

Q: Does it matter that the content comes on a hard drive that's returned, or is loaded to a server first?
A: No. The hard drive is tangible property, and pre-loading to a server before screening is immaterial. Temporary possession and return don't avoid the tax.

Q: Who actually pays the tax — the theater or the distributor?
A: For leases of three years or less, the lessor — the film distributor — owes the sales or use tax, either at acquisition/first use or by collecting it on the lease payments with Department permission.

Q: Can a contract shift the tax to the theater?
A: The Department said responsibility falls on the film distributor "notwithstanding any contractual agreement between the parties to the contrary." A contract can allocate cost between the parties, but it doesn't change who Colorado holds responsible.

Q: Why are digital goods "tangible"?
A: Because Colorado treats corporeal property as TPP, and digital goods that can be received and stored have a physical existence — as the Department put it (quoting Nebraska), physically storing a truly intangible thing is "beyond comprehension."

Q: Can other theaters or distributors rely on this ruling?
A: No. A private letter ruling binds the Department only as to the taxpayer and facts it was issued to and cannot be relied upon by anyone else.

Q: Does this cover city sales tax?
A: No. The Department administers state and state-collected local taxes only; self-collected home-rule cities and counties set their own rules (and the cited cases were themselves home-rule city tax disputes).

Citations and references

Statutes and cases:
- § 39-26-104(1), C.R.S. (tax on sale, use, storage, or consumption of tangible personal property)
- § 39-26-102(15), C.R.S. (tangible personal property is "corporeal personal property"; digital goods included)
- § 39-26-102(23), § 39-26-713(1)(a), C.R.S. (lease of tangible personal property; short-term lessor pays the tax, or collects on payments with permission)
- American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64 (Colo. App. 1995); Cinemark USA, Inc. v. City of Fort Collins, 190 P.3d 793 (Colo. App. 2008) (film-rental agreements involve tangible personal property)
- May Broadcasting Co. v. Boehm, 241 Neb. 660 (1992) (stored signals are tangible)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-16-009.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

PLR-16-009
April 12, 2016
XXXXXXXXXXXXX
Attn: XXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX
Re: Licensed Movies and Content
Dear XXXXXXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXX ("Company") a request for a private letter
ruling to the Colorado Department of Revenue ("Department") pursuant to Department Rule
24-35-103.5. This letter is the Department's private letter ruling. This ruling is binding on
the Department to the extent set forth in Department Rule 24-35-103.5. It cannot be relied
upon by any taxpayer other than the taxpayer to whom the ruling is made.
Issues
Do the movies/content and the hard drives Company acquires from film distributors
constitute "tangible personal property" subject to sales/use tax?
Conclusion
Both the digital movies/content and the computer hard drives that Company receives from
the film distributors constitute tangible personal property subject to Colorado sales/use tax.
The film distributors, as lessors of this property, are responsible for paying this tax to the
Department, notwithstanding any contractual agreement between the parties to the
contrary.
Background
Company operates two businesses in the State of Colorado, each of which is a movie
theater or motion picture exhibitor. It contracts with motion picture distributors via a Master
License Agreement to exhibit motion pictures. The Master License Agreements specify the
motion picture, the dates of play and the percentage that Company pays for film rental.
The movie/content is sent to Company by the motion picture distributor and delivered to
Company by courier via a computer hard drive. The movie/content is copied to Company's
master library server from where it is downloaded for subsequent playback. The
movie/content hard drive is immediately returned to the motion picture distributor via
courier. The content requires a digital key or KDM that is delivered via email. The key or
KDM only authorizes the movie or content to be played for the contracted amount of time.
The key expires and the movie or content is no longer available for Company to play once
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the contracted amount of time occurs. The content is then deleted from Company's master
library server. The tangible hard drive that the content is delivered on is not required for
every showing of the movie/content. Company does not purchase or own the hard drive,
movie/content, or the digital key. Company only licenses to exhibit the movie/content for the
contracted amount of time.
After the movie/content is done playing at a location, a report (box office report) of how
many admissions were sold and the gross earnings for the days/weeks of play is sent to
the film distributor. The gross earnings are multiplied by the agreed upon film rental
percentage and a payment is then made to the film distributor for the film rental.
Structure of Analysis
To determine whether the movies/content and the computer hard drives are subject to tax,
the Department will examine the following questions:
1. Is the item taxable under§ 39-26-104(1). C.R.S.?
a. Is the item tangible personal property sold or purchased at retail?
2. Is the item eligible for any exemptions?
a. Is the item exempt under§ 39-26-713(1)(a), C.R.S.?
i. Did the lessor pay Colorado sales or use tax on such tangible personal
property upon its acquisition?
3. Does Company's temporary possession of both computer hard drives and digital
movies/content represent the lease thereof and if so, which party bears the
obligation for any applicable sales/use tax?
Discussion
Colorado imposes tax on the sale, use, storage, or consumption of tangible personal
property. The principal question Company raises is whether the film rental agreements
between motion picture distributors and Company involve "tangible personal property." The
Colorado Court of Appeals has twice considered the taxability of film rental agreements and
ruled that such agreements involve the sale and use of tangible personal property for sales
or use tax purposes.1 In both American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d
64 (Colo. App. 1995) and Cinemark USA, Inc. v. City of Fort Collins, 190 P.3d 793 (Colo.
App. 2008), the theater operator acquired copyrighted motion picture film reels from the
distributor that it used for movie exhibitions and subsequently returned to the distributor
after use. The theater operators contended that their transactions and agreements with film
distributors did not predominantly involve tangible personal property (i.e. the film reels upon
which copyrighted material was conveyed), but rather an intangible, incorporeal property
right to exhibit the copyrighted material.
The Court ruled in each case that the license to exhibit copyrighted material was
inseparable from the tangible film reels, and the film rental agreements were consequently
transactions involving the acquisition of tangible personal property. "[T]he purpose of a
motion picture exhibitor...is to obtain a finished product which it can exhibit to the public"
and "there can be no question...that...reels of motion picture film, or a cassette of video film,
is an item of tangible personal property."2

1

American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64 (Colo. App. 1995) and
Cinemark USA, Inc. v. City of Fort Collins, 190 P.3d 793 (Colo. App. 2008).
2
American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64 (Colo. App. 1995)
2

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Although the physical medium by which you receive the copyrighted material differs from
these cases, the Court's conclusions nonetheless apply. The computer hard drives by
which you receive films are no less tangible than the film reels contemplated in these
cases. The fact that the content of the computer hard drives are uploaded to Company's
master library prior to showing the movie, while the film reels in each case were used
instantaneously to exhibit movies/content, is also immaterial. In Cinemark, the Court found
that payment pursuant to the film agreement depended upon the transmission of the films
by way of some tangible medium and was taxable as a consequence. This is true whether
movies/content are transmitted via film reel or computer hard drive and whether that
tangible medium was utilized concurrent or prior to the movie screenings.
Company suggests that what it receives from film distributors pursuant to the agreements is
not tangible hard drives, but rather intangible digital movies/content. For Colorado sales
and use tax purposes, tangible personal property is defined as "corporeal personal
property."3 Corporeal is typically defined as that which is physical, tangible, or material in
nature. Digital goods, such as e-books, MP3 music files, or the digital movies/content you
receive are indeed physical, tangible, or material in nature - that is, possessing a physical
existence within a material realm - and are thus subject to Colorado sales and use tax. The
Department agrees with the Nebraska Supreme Court's discussion of this issue in the
similar context of electronic signals transmitted via satellite:
"The mere fact that the signals may be received and stored shows that a
tangible thing is in issue. The concept of physically storing an intangible thing
is beyond comprehension."5
The fact that digital movies/content can be received and stored in a computer hard drive
and the master library server - themselves both indisputably tangible - demonstrates the
tangible nature of the digital movies/content. Thus, Company acquires tangible personal
property as a result of your licensing agreements in both the form of the computer hard
drive and in the form of the digital movies/content.
Finally, Company states that it purchases neither the tangible hard drives on which the
movies/content are transmitted nor the movies/content, and that it possess such items only
temporarily before returning them to the film distributor. Again, in Cinemark the Court
considered the impact of temporary possession and found that it did not prevent the
taxability of the transaction. The use tax imposed by the City of Ft. Collins in that case
applied whether the tangible personal property in question was purchased, leased, rented,
sold, used, stored, distributed or consumed. Similarly, the State of Colorado levies sales or
use tax on leases of tangible personal property.6 A lease is generally defined as the right to
use or possess an item for a provided period of time. In this case, Company acquires
possession and use of both the hard drives and digital goods. Therefore, it has engaged in
a taxable lease and use of that property. However, the party obligated to pay the tax
depends on the duration of the lease. For leases of three years or less, the lessor (in this
case, the film distributor), bears the obligation to pay the applicable sales or use tax, either
at the time of acquisition or at the time when the property is first put into use. However, the
3

§ 39-26-102(15), C.R.S.
Merriam-Webster Desk Dictionary (1995); American Heritage College Dictionary, 3rd Ed. 1993.
5
May Broadcasting Co. v. Boehm, 241 Neb. 660,666 (1992).

4

6
3

§§ 39-26-102(23) and 713(1), C.R.S.
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lessor may obtain prior permission from the Department to acquire the property tax free
and collect the applicable sales tax on the lease payments.7 We are unaware of the
Department granting any such permission to the film distributor(s) in this case. Irrespective,
responsibility falls on the film distributor, either to pay sales or use tax on the hard drives
and movies/content they lease to Company, or to collect from Company and remit to the
Department sales tax on the lease payments (provided prior permission has been obtained
from the Department).
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. Please
note that the Department administers state and state-collected city and county sales taxes
and special district sales and use taxes, but does not administer sales and use taxes for
self-collected home rule cities and counties. You may wish to consult with local
governments which administer their own sales or use taxes about the applicability of those
taxes. Visit our web site at www.colorado.gov/tax for more information about state and
local sales taxes.
This ruling is premised on the assumption that Company has completely and accurately
disclosed all material facts. The Department reserves the right, among others, to
independently evaluate Company's representations. The ruling is null and void if any such
representation is incorrect and has a material bearing on the conclusions reached in this
ruling and is subject to modification or revocation in accordance to Department Regulation
24-35-103.5.
This ruling is binding on the Department to the extent set forth in Department Regulation
24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the
ruling is made.
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this
redacted version of the ruling will be made public within 60 days of the date of this letter.
Please let me know in writing within that 60 day period whether you have any suggestions
or concerns about this redacted version of the ruling.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue
This ruling cannot be relied upon by any other taxpayer other than the taxpayer to whom
the ruling is made.

7

4

§ 39-26-713(1), C.R.S.
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