Doing business

 

As more businesses make sales or provide services via the Internet, we're often asked whether Internet-based businesses are taxed differently from other businesses. The answer is no. The following information is intended to help Internet businesses better understand their Washington tax liability.

 

Study of the Taxation of Electronically Delivered Products

Internet-based businesses located in Washington

Washington businesses that sell tangible personal property or provide services over the Internet are taxable in the same manner as any brick and mortar business.

• Advertising Income
  

  Income from advertising is subject to the business and occupation (B&O) tax under the service and other activities classification.

• Subscription Income
  

  The taxability of subscription income depends on what the subscription provides to the customer. Some examples are:

  
  
  • Retail Sales: If the subscription entitles the subscriber to download a product or publication,  including  standard information sold to any consumer, the income is subject to retailing B&O tax and retail sales tax if the subscriber/purchaser is in Washington. Examples of retail downloads include music files, video files, and information files that are sold to multiple users.
    
  • Access Charges (Application Service Providers) If the subscription entitles the subscriber to read, use, or access information or software applications online but does not allow for the subscriber to download software applications, products, or publications, the income is subject to B&O tax under the service and other activities classification (sales tax does not apply) based on the service being provided in Washington (not dependent on where the customer is located).
  
  
• Data processing services: 
  Charges for data processing services performed in this state are subject to service and other activities B&O tax (sales tax does not apply). "Data processing services" include, word processing, data entry, data retrieval, data search, information compilation, payroll processing, business accounts processing, data production, and other computerized data and information storage or manipulation. "Data processing services" also includes the use of a system for data processing.
  
  
• Internet service:
  Gross income received for Internet services provided in this state are subject to service and other activities B&O tax.
  
  
• What are Internet services?
  "Internet service" is a service furnished by an Internet service provider (ISP) for access to the Internet. An ISP provides the service through the use of computer processing applications that either provides the user with additional or restructured information or permits the user to interact with stored information through the Internet or a proprietary subscriber network. "Internet service" includes the following services furnished by the ISP: provision of Internet electronic mail, access to the Internet for information retrieval, and hosting of information for retrieval over the Internet. "Internet service" does not include telephone service as defined in RCW 82.04.065. See WAC 458-20-245 (Telephone business, telephone service) for more information about telephone service.
  
  
• What is the Internet?
  "Internet" means the international computer network of both federal and nonfederal interoperable packet switched data networks, including the graphical subnetwork called the World Wide Web. RCW 82.04.297.
  
  
• Web site development or hosting services.
  Gross income received for web site development or hosting services in this state are subject to service and other activities B&O tax (sales tax does not apply). "Web site development service" means the design and development of a web site provided by a web site developer to a customer. "Web site hosting service" means the service of a provider offering server space to host a customer's web site.
  
  
• Items delivered in Washington
  Washington sales tax must be collected on all sales of items delivered to customers in Washington. Income from such sales is also subject to retailing B&O tax. Any items delivered outside of Washington are exempt from Washington sales & B&O taxes, as an interstate and foreign sale.
  
• Items delivered outside of Washington
  When items are delivered to the buyer at a location outside of Washington, the sale is considered an interstate or foreign sale and is not subject to Washington sales tax. The sale is also deductible for retailing B&O tax. See WAC 458-20-193(4) for details on information on documenting out-of-state delivery.
  
  
• Services performed in Washington
  Many Internet businesses provide or perform services rather than sell tangible personal property, for instance, web design businesses. Income earned from providing services over the Internet is generally subject to service and other activities B&O tax if the service is performed in Washington. In such cases, the customer's location does not matter.
  
  

Internet-based businesses located outside of Washington

Out-of-state businesses that sell tangible personal property or perform services to Washington residents over the Internet are generally taxable in the same manner as other out-of-state businesses.

To be subject to Washington tax, a company must:

• Deliver goods to the buyer in Washington, and
• Have a physical presence or "nexus" in Washington

Nexus is created by any number of activities, including sending a sales representative to Washington, installing items in-state, and using an independent sales representative to promote products. (See WAC 458-20-193(7) for a list of activities.)

• Items delivered in Washington from outside the state
  

  If an out-of-state Internet business has established nexus in Washington, they must collect sales tax on all sales delivered to customers in Washington. Income from such sales is also subject to retailing B&O tax..

  
  

  If an out-of-state based Internet business does not have nexus in Washington, then it is not required to register in Washington or collect Washington sales tax.

• Services performed outside of Washington for customers in the state
  

  If an out-of-state Internet business performs services for a Washington customer from a location outside of Washington, the income is not subject to Washington taxes because the services are not performed in this state.

  
  

  If services are performed both within and without the state, the service provider may be able to apportion the income between Washington and the out-of-state location. (For additional information on apportioning, see RCW 82.04.460.)