I'm getting better, and there is inconsistency in the translations, but with isto and isso, as with este and esse, the rule seems to be that if there is a 't' in it (isto, este), it is 'this' and if there isn't (isso, esse) it means "that" Someone who knows more should verify this.
So you see that you often have multiple options for translating ‘it’, ‘this’ and ‘that’. There is no one-to-one correspondence between the Portuguese and English words.
You are correct except that DL is sometimes very inconsistent in translating/accepting what we know the rule to be. I have noticed in daily speech, Brazilians use "isso" for "this" and "that". I think because it simply slips off the tongue more easily. Paulenrique or Dan can verify that.