## Facts

- Leanin’ Tree, a greeting card manufacturer in Boulder, contracted with independent artists through license agreements to use their artwork images on cards and related products.
- Under the agreements, Leanin’ Tree temporarily obtained original artwork or image media (e.g., negatives or digital files) to reproduce the images, then returned the originals or media to the artists.
- The agreements granted Leanin’ Tree exclusive rights to reproduce and publish the images and permitted alterations to fit product formats.
- Artists were compensated chiefly by royalties tied to sales of products bearing their images, rather than a lump-sum purchase price for physical artwork.
- Following a 1997 audit for 1994–1997, the City assessed use tax against Leanin’ Tree based on the “purchase price of tangible personal property” allegedly acquired in the licensing transactions.
- Boulder’s tax regulations applied a “true object” test for mixed transactions involving tangible property and services or intangible rights.

## Issues

1. Whether Leanin’ Tree’s licensing transactions with artists were taxable as the sale or use of tangible personal property under Boulder’s use tax provisions.
2. Whether, under the “true object” analysis, the substance of the transactions was the acquisition of intangible reproduction/publishing rights rather than tangible artwork or image media.

## Decision

- The Colorado Supreme Court affirmed judgment for Leanin’ Tree, invalidating the City’s use-tax assessment on the artist-license transactions.
- The court held that the transactions were not, in substance, purchases or uses of tangible personal property within the contemplation of Boulder’s tax code.
- Applying a totality-of-the-circumstances “true object” analysis, the court concluded the essential object was obtaining intangible rights to edit, reproduce, and publish images.
- Because the transactions fell outside the tax’s scope, the court did not decide whether a manufacturer’s-processing exemption applied, and it rejected reliance on that exemption as the basis for decision.

## Legal Principles

- In applying sales/use taxes limited to “tangible personal property,” courts may characterize mixed transactions by examining the transaction’s true object under the totality of the circumstances.
- A multi-factor approach may consider: (i) the consideration structure (e.g., royalties reflecting ongoing exploitation rather than a property purchase), (ii) whether physical items are retained as inventory or returned after use, (iii) the centrality of exclusive reproduction/publication rights, and (iv) whether tangible and intangible elements are meaningfully separable.
- Temporary transfer of a physical medium to facilitate reproduction does not necessarily convert a license of intellectual property rights into a taxable transfer of tangible personal property.

## Conclusion

The court concluded that Leanin’ Tree’s agreements with artists were fundamentally licenses of intangible rights to reproduce and publish images, with any transfer of physical artwork or media incidental, and therefore the transactions were not subject to Boulder’s use tax on tangible personal property.


City of Boulder v. Leanin’ Tree, Inc., 72 P.3d 361 (Colo. 2003)