Washington Adopts Final Computer and Digital Goods Rules

On Wednesday, February 27, 2013 the Washington Department of Revenue (DOR) adopted final regulations on the taxation of computer systems and hardware (WAC 458-20-15501), computer software (WAC 458-20-15502), and digital products (WAC 458-20-15503). In addition, the DOR repealed the very outdated previous rule on information and computer services (WAC 458-20-155).

The regulations are substantially consistent with the previous draft versions of the regulations. However, there appears to have been a distinct softening of the DOR’s approach to the definition of “digital automated services.”

One of the most critical issues going into the reform process on Washington’s taxation of digital goods had been the treatment of information services. Many may recall that the DOR initially indicated that information services would be treated as digital goods, not digital automated services. Subsequently, the DOR published a special notice on online searchable databases. This special notice stated that online searchable databases were the not the sale of digital goods, but were the sale of digital automated services “because they are transferred electronically and use one or more software applications.”

WAC 458-20-1 5502 uses different language to distinguish digital goods from digital automated services. The regulation notes “A digital good is not a service involving one or more software applications. A digital good consists solely of images, sounds, data, facts, information or any combination thereof. Clear examples of digital goods are digital books, digital music, digital video files, and raw data.” There appears to be a critical distinction based on whether a service is provided.

For example, it would appear that online searchable databases, such as LEXIS, Westlaw or CCH will be treated as digital automated services because in addition to providing access to information, these online searchable databases provide a number of additional features, such as citation checking, tracking the history of searches, multiple methods of searching, etc. on the other hand, it would appear that information that is merely transmitted in a database or spreadsheet format would not be treated as a digital service, but would be treated as a digital good.

This distinction is very important for businesses. Digital automated services are not eligible for the business input exemption that is available for digital goods. It will be interesting to see how the Department of Revenue interprets this provision on a go forward basis. Given the prior, unfortunate language used in the special notice I would expect the Audit Division to remain aggressive in taxing digital information purchases. In order to avoid this taxation, taxpayers should carefully consider the language that is used to describe the information being purchased in invoices and contracts.

As the regulations just came out, I have had scant time to look at many other issues. Expect future updates.

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