USA: Washington state issues new regulations on software and digital products

The Washington Department of Revenue released new regulations on the taxability of software and digital products. The two new regulations, WAC 458-20-15502 and -15503 were adopted February 25, 2013, and became effective March 28, 2013.  The Department issued the new regulations to clarify the impacts of previous legislation taxing digital goods and to address other tax issues related to computer hardware, software, and computer services. Taxpayers engaged in selling software and digital products in Washington should review these regulations as they may provide clearer guidance for distinguishing between taxable and nontaxable digital goods, software, and services. [Computer Hardware, Software, and Digital Products, Washington Department of Revenue, WAC 458-20-155/15501/15502/15503]

In detail

In 2009, Washington passed legislation imposing retail sales tax on digital products, including digital audio works, digital audio-visual works, digital books, digital automated services, digital codes, and remote access software. Additional legislation passed in 2010 clarified ambiguities in the 2009 law.

On February 25, 2013, the Washington Department of Revenue issued new regulations to clarify the 2009 and 2010 legislation as well as give guidance related to sales of computer hardware, software, computer services, remote access software, and digital goods. The regulations were adopted to update and further explain the application of the business and occupation (B&O) tax, retail sales tax, and use tax to persons providing these products and services.  For greater detail on the regulations, please click here.

The takeaway

Although much of the language in the newly adopted regulations is similar to the previous versions, the regulations provide clearer guidance for practitioners who wade through an often murky area of distinguishing between taxable and non-taxable digital goods, software and services. One area still lacking clarity is the application of Washington’s definition of ‘digital automated service’ to today’s dynamic and complex business products, services, and subscription packages. An analysis of both the extent of human effort to provide the service (based on time and cost factors) and when the human effort originated may be required.

The new regulations help illustrate how taxpayers may benefit from the multiple points of use exemption. While the exemption on purchases of digital goods for business purposes has been around for a while and has been valuable for taxpayers, the exemption does not apply to other digital products and digital codes.  The new regulations clarify the multiple points of use exemption, which applies to all digital products and digital codes used concurrently within and outside the state. The regulations provide examples of the MPU requirements, apportionment, and key definitions.

About Jennifer Jensen

email: Mobile: +1 240 678 0226 Office: +1 202 414 1741

Jennifer is a state and local tax director in PwC Washington National Tax Services specializing in sales and use and indirect taxes. Her industry focus is in technology, entertainment, media, and communications. Jennifer helps lead the firm's cloud computing initiative and is the state and local subject matter expert in this area. Jennifer provides both internal firm and external client sales and use tax training in such issues as eCommerce, the taxation of digital products, and, of course, cloud computing. She also summarizes relevant legislation or other tax law changes to disseminate both externally and internally and writes thought leadership pieces for external publication by the firm.