The following information is intended to help Internet businesses better understand their Washington tax liability.
Digital Products
Beginning July 26, 2009, sales or use tax will be due on digital products and online prewritten software ranging from downloaded music and streaming video to online video games and legal research tools. Engrossed Substitute House Bill (ESHB) 2075 clarifies how taxes apply to products that exist only as computer bits and bytes. Specifically, it:
- Defines digital products as goods and services transferred electronically.
- Includes certain exemptions for businesses and end consumers.
- Requires sellers of digital products to electronically file their tax returns.
- Provides amnesty to those who didn’t collect or pay sales or use tax on digital products that were taxed before July 26, 2009.
What digital products are subject to tax?
While downloaded digital goods (music, movies, etc.) have always been subject to sales or use tax, ESHB 2075 applies sales or use tax to all digital products, regardless of how they are accessed (downloaded, streamed, subscription service, networking, etc.).
Digital products subject to sales or use tax include:
- Downloaded digital goods (music, movies, etc.)
- Streamed and accessed digital goods
- Digital automated services (DAS)
The bill also covers remote access software (e.g. application service providers), which is now subject to sales and use tax too.
It does not matter if the purchaser obtains a permanent or nonpermanent right of use. (See sections 301(8) and 305(1)(e) of the digital products bill).
For further information on sales of digital products, go to our online questions and answers regarding sales of digital products.
Businesses that sell tangible personal property, prewritten software, digital products or provide services over the Internet are taxable as follows:
- Advertising Income
Income from advertising involving professional services (involving human effort) is subject to the business and occupation (B&O) tax under the service and other activities classification. Online advertising services that are automated are taxable as digital products (digital automated services).
- Subscription Income
The taxability of subscription income depends on what the subscription provides to the customer. Some examples are:
- Retail sales: Effective July 26, 2009, if the subscription entitles the subscriber to stream or download music or videos, access a product, publication, or a database (including standard information or digital automated services), the income is subject to retailing B&O tax and retail sales tax if the subscriber/purchaser is in Washington. Examples of retail sales include music files, video files, information files, and search engines that are sold to multiple users.
- Access charges (Application Service Providers): Prior to July 26, 2009, for subscriptions entitling the subscriber to read, use, or access information or software applications online but not allowing the subscriber to download software applications, products, or publications, the income was subject to B&O tax under the service and other activities classification (sales tax did not apply). Effective July 26, 2009, sales tax and retailing B&O tax will apply to such subscriptions.
- Data processing services:
Prior to July 26, 2009, charges for data processing services performed in this state were 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. Effective July 26, 2009, sales tax and retailing B&O tax will apply to data processing services that have been automated and are transferred electronically (digital automated services).
Internet access
Gross income received for Internet access provided in this state is subject to service and other activities B&O tax. Internet access is excluded from the definition of digital products.
What is Internet access?
"Internet access" is a service furnished by an Internet service provider (ISP) for access to the Internet, along with ancillary services provided with the access. "Internet access" 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. See the definition of “Internet access” and related terms in the federal Internet Tax Freedom Act, Title 47 U.S.C. Sec 151 note, as existing on July 1, 2009.
The Department of Revenue has determined that the Legislature did not intend with Engrossed Substitute House Bill (ESHB) 2075 to change the taxation of the following services:
Web site development or hosting services
"Web site development service" means the design and development of a web site provided by a web site developer to a customer. Gross income received for web site development services in this state is subject to service and other activities B&O tax as a professional service (sales tax does not apply).
Digital data storage
"Digital data storage services" means the service of a provider offering server space to host a customer's web site or a customer's electronic data. Charges for digital data storage services are subject to B&O tax under the service and other activities classification (sales tax does not apply).
Online advertising services
"Advertising services" means all services directly related to the creation, preparation, production, or the dissemination of advertisements. Advertising services include layout, art direction, graphic design, mechanical preparation, production supervision, placement, and rendering advice to a client concerning the best methods of advertising that client's products or services. Advertising services also include search engine optimization, web campaign planning, the acquisition of advertising space in the internet media, and the monitoring and evaluation of web site traffic for purposes of determining the effectiveness of an advertising campaign. Charges for online advertising services are subject to B&O tax under the service and other activities classification (sales tax does not apply).
Sales to Washington consumers
Washington sales tax must be collected on sales of, tangible personal property, prewritten software and digital products sold 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.
Sales to consumers outside of Washington
When, tangible personal property, prewritten software, and digital products are sold to a buyer that is located 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.
Digital products exemptions
Exemptions (digital products that are not subject to sales or use tax) include digital products purchased:
- For resale. (Purchaser must provide a resale certificate (reseller permit after December 31, 2009) or the Digital Products and Remote Access Software Exemption Certificate.)
- To be ingredients or components of a new product. (Purchaser must provide the Digital Products and Remote Access Software Exemption Certificate.)
- To be made available to others for free. (Purchaser must provide an exemption certificate.)
- For a business purpose, if the digital product is standard information to be used for a business purpose. (Purchaser must provide an exemption certificate.)
- To be used concurrently by a business inside and outside Washington. (Purchaser must provide an exemption certificate).
More information