The Colorado Department of Revenue recently issued GIL 26-004, concluding that digitally delivered photographs and stand-alone licenses to use those photographs are subject to state sales tax. In the Department’s view, both transactions involve taxable transfers of interests in tangible personal property (“TPP”). The GIL applies Colorado’s digital goods statute to treat electronically stored photos as TPP, then relies on the state’s broad definition of a “sale” to tax a license to use that content as a transfer of a partial interest in TPP.

In a request for guidance, a taxpayer asked whether sales tax applied to two transactions: (1) a customer engages a photographer for a photoshoot and receives access to and a license to use digital photographs delivered through an online gallery, and (2) a third party purchases a stand-alone extended-use license to use those same photographs through the online gallery. The Department determined that both transactions are subject to Colorado state sales tax.

Colorado imposes sales tax on retail sales of TPP and certain enumerated services. Colo. Rev. Stat. § 39-26-104(1)(a). For custom-made goods, services that are inseparable from the creation of the item are taxed as part of the sale of that item. Colo. Rev. Stat. § 39-26-102(12). A special regulatory rule exists for photography: Special Rule 34.5 (1 CCR 201-5) exempts photography services only if the service is specifically bargained for without regard to the TPP involved and the value of the service exceeds the value of the property transferred.

Having determined that the digital photographs were an expressly bargained-for component of each transaction, the Department addressed whether digitally delivered photographs constitute taxable TPP. Colorado law defines TPP to include traditional corporeal property as well as “digital goods.” Digital goods are defined as items of TPP delivered or stored by digital means, including products such as electronic books, music, and video.  See Colo. Rev. Stat. § 39-26-102(15). The Department concluded that photographs delivered through an online gallery constitute TPP even though they exist solely in digital form.

Regarding the first transaction, the Department concluded that the combined photoshoot plus license transaction is taxable. Because the photographs were the expressly bargained-for deliverable rather than merely incidental to the photography services, the Special Rule 34.5 exemption did not apply. The Department noted that taxability was further supported as the photography services were inseparable from the creation of the digital photographs themselves. Colo. Rev. Stat. § 39-26-102(12).

The Department reached the same result for the sale of the stand-alone extended-use license to a third party with no connection to the original photoshoot. Having determined that the photographs constitute TPP as digital goods, the Department reasoned that a license granting rights to use those photographs constitutes the transfer of a partial interest in TPP. The Department relied on Colorado’s broad definition of a “sale,” which includes the transfer of “all or part of” an interest in TPP. 1 CCR 201-4, Rule 39-26-102(10). The license to use the digital photographs thus constituted a taxable transfer of a partial interest in TPP. While the GIL represents only the good-faith, non-binding opinion of Department personnel and is limited to the facts presented, its reasoning may provide insight into the Department’s broader approach to digital content licensing transactions. The Department’s willingness to treat licenses granting rights to use digital content as taxable transfers of a partial interest in TPP could have implications for a broad range of digital content licensing transactions extending well beyond photography.