The Colorado Court of Appeals held that the City of Aurora correctly levied use tax on American Multi-Cinema, Inc.’s (AMC’s) license agreements with film distributors. The court concluded that the true object of the arrangement was to obtain tangible personal property (i.e., the data files) rather than being a nontaxable, intangible right. In the past, AMC had received motion pictures from distributors in the form of film reels, but now AMC receives motion pictures via digital files on portable hard drives. AMC argued that the intangible right to exhibit the film was more valuable than the tangible good (i.e., the data files), which was provided at no cost. Unpersuaded, the court stated that without the transfer of the actual film, the license to exhibit it would be valueless. Thus, the data files were not “merely incidental” to the licensing agreements, and the true object of the agreements was to obtain the tangible data files.
The court also rejected AMC’s contention that the transactions were exempt sales for resale. AMC argued that because it could not alter the data files and could use only unaltered versions to exhibit to its movie patrons, the final consumers of the film were its patrons. In rejecting AMC’s argument, the court relied on prior decisions holding that a theater’s exhibition of films was not a resale. Because AMC acquired and displayed a final product, the court concluded that AMC was the final consumer of the data files and was not exempt from the City’s use tax.