City of Boulder v. Leanin’ Tree, Inc.

Leanin’ Tree, Inc. (plaintiff), a company based in Boulder, Colorado, manufactured and sold greeting cards and other gift products. Leanin’ Tree licensed the artwork of independent artists, receiving exclusive rights to reproduce and publish the artwork on its products. To produce its products, Leanin’ Tree would borrow or digitally reproduce the licensed artwork, alter the artwork to fit its needs, and return the original artwork to the artist. Leanin’ Tree would pay the artists royalties in exchange for the right to reproduce their artwork. The city of Boulder (defendant) assessed a tax deficiency against Leanin’ Tree for unpaid use taxes associated with the reproduced artwork. Under Boulder’s tax code, a sales or use tax would be applied to the purchase price of tangible personal property bought or used in the city. Because taxable tangible personal property was often intertwined with a service or intangible property that was not subject to taxation, Boulder’s regulations provided for a true-object test to determine whether a purchase was taxable. According to that test, if the true object sought by a purchaser was not taxable, the entire transaction—including the purchase or use of the tangible-personal-property component—was not subject to taxation. Leanin’ Tree challenged the assessed deficiency in state court. The district court granted summary judgment for Leanin’ Tree, holding that the right Leanin’ Tree acquired through its licensing agreements was an intangible right that was not subject to Boulder’s use tax. The court of appeals affirmed the district court, holding that Leanin’ Tree was exempt from the use tax under a manufacturer’s-processing exemption, which exempted from taxation the sale of tangible personal property that was used as a component part of a manufactured product. Boulder appealed.