Netflix, Loveland in sales tax dispute

Netflix and the city of Loveland are in the middle of a spat over sales taxes, and now the city wants the state of Colorado to determine what's fair game.

The online streaming service and DVD rental company filed a complaint in Eighth District Court against the city of Loveland and its finance director Brent Worthington after Loveland issued a sales tax assessment of more than $116,000.

Netflix said the city's tax bill to the company for more than $116,508.22 in unpaid taxes violated state and federal law. The assessment recorded $85,504.43 in sales taxes, $8,550.49 in penalties and $22,453.30 in interest for the period between Sept. 1, 2012, and Aug. 31, 2015.

On Thursday, the city filed a motion to dismiss Netflix's complaint. It has decided to rescind the tax assessment and return the company's deposit, but now is asking the state to make a determination on whether it can tax online streaming services in the future.

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The city of Loveland assessed sales tax on Netflix's streaming service, but the company asserted in its complaint that the city sales tax should only be imposed on "sales of tangible personal property that are also subject to the Colorado sales tax" as well as certain retail services, per state guidelines.

So for Netflix, that could mean tax on the DVD rentals but not on its streaming service.

Netflix has had a sales tax license in the city since 2001, and the streaming service as a standalone monthly subscription began in 2010.

The company does not have any servers or cache boxes within Loveland's city limits, and for the streaming videos to be considered "tangible personal property," the company notes in its complaint, it would have to make a transfer of content to its subscribers, which it doesn't.

In addition to alleging the tax assessment violates state law, the complaint also alleges it violates the federal Internet Tax Freedom Act, passed by Congress in 1998, which doesn't allow governments to impose "multiple or discriminatory taxes on electronic commerce."

It also asserts that the assessment violates the U.S. Constitution, in which the U.S. Supreme Court has limited taxing transactions "to those where both the customer and the transaction (in whole or part) are located within the taxing jurisdiction," the complaint states.

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While city of Loveland Revenue Manager Jim Wedding said he can't comment on the specifics of the case, the city of Loveland determines whether an internet company will be taxed based on whether it has "nexus."

"Nexus is what's considered a physical connection engaged in business within the city," Wedding said.

That could be a contractor rendering services on behalf of a company located elsewhere; it could be a brick and mortar building leased or owned; or, as in Netflix's case, it could be renting or selling tangible property to residents (DVD rentals/purchases).

Wedding said if a company has nexus, anything it provides to customers in Loveland then becomes subject to the city's 3 percent sales tax.

The city of Loveland has been increasingly focused on sales tax collections from online companies it believes should be paying taxes, entering into agreements with companies such as Amazon.

As of September, about 2.5 percent of all sales tax within the city came from internet sales.

And while that's not a large percentage, Wedding said it's growing. 

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In the city's motion to dismiss, it stated that it would rescind the tax assessment, return the company's deposit and not reopen the three-year audit in its court-filed motion to dismiss the case.

While Netflix said it didn't oppose the motion to dismiss, it did oppose the city's cited reasons for doing so.

"The city ... acknowledged through its actions that its assessment was in error, and provided Netflix with the relief sought in the complaint," Netflix's response stated.

The company further objected to the city stating it would defer to a state entity for a legal interpretation in relation to streaming services.

"The city chose to issue its own assessment against Netflix in August 2016 — without deferring to the state entity," according to the motion from Netflix. "Following the filing of Netflix’s complaint, the city determined not to defend that assessment. Netflix respectfully reserves all rights to seek appropriate further relief as the prevailing party."

Assistant City Attorney Alicia Calderon said the city is waiting for further guidance from the state on the issue.

The Netflix complaint lists eight attorneys representing the company. The Morrison and Foerester law firm directed questions to Netflix public relations, but a representative did not return a request for comment.

Reporter Saja Hindi covers local politics and public safety. You can contact her on Twitter @BySajaHindi or email her at shindi@coloradoan.com.