Understanding Washington State's Taxation of Digital Products & Services

 
Taxing Digital Products & Services
 
Washington State Department of Revenue
 
April 28, 2021
 
Agenda
 
History of why Washington developed the digital
tax law
Overview of Washington’s digital tax law
Special areas for administration
Discussion with panel
 
All States Why Now?
 
Nexus barriers lowered after Wayfair decision
Possible erosion of tax base as transactions become
digital
Online sellers could get an advantage over main
street merchants
Old tax categories may not fit new transactions
 
Washington’s Reasons
 
Increasing issues with:
New products and services
Ambiguity and controversy on taxation
Legislature directed a study & committee (2007)
Committee provided a report in 2008:
Provided principles for legislation
Washington also needed to comply with SSUTA
 
Washington’s Choices at a High Level
 
Sourcing using the streamline model law
(destination)
Broad imposition on digitally supplied services
Many specialized exclusions and exemptions
Broad taxation of digital goods (broader than
SSUTA)
Also addressed prewritten software remotely
accessed (i.e. not delivered)
 
 
 
 
Imposition
 
The Categories
 
Digital goods (DG)
SSUTA books, music, video
Also static data, facts, information and any combination
Digital Automated Services (DAS)
Any service transferred electronically using one or more software applications
Broad imposition on digital services with many exclusions and exemptions
Remote Access Software (RAS)
Prewritten software not actually delivered (retail service)
Different than the sale of prewritten software
Digital codes (DC)
Code representing a digital good or digital automated service
 
 
Comparing Terms & Categories
 
Caveat
: these terms take on different technical meanings
depending on who is using them.
SaaS (Software as a service)
WA RAS or DAS
IaaS (Infrastructure as a service)
WA DAS
PaaS (Platform as a service)
WA DAS
Prewritten software not delivered (no download or
tangible media)
WA RAS
 
Digital Automated Services Unpacked
 
Unique cornerstone with broad taxation impact
“Any service transferred electronically that uses one or more
software applications”
It taxes services
Digital goods & software
Additional features & functionality
Must be transferred electronically
Must include software
Examples: Games, information services, etc.
 
Fitting it Together
Prewritten
Software
Remote Access to
Prewritten Software
Digital Automated Services
Digital Code
(Represents)
Digital Good
 
Delivered
digitally or TPP
 
Remotely
accessed
 
Something more
“bells & whistles”
 
Books, music,
video, data, facts,
information
 
Cloud
Computing
 
Good Faith and Amnesty
 
Phased Implementation
Almost two (2) years for good faith reporting for DAS related
Reasonable position based on available information
Amnesty
Digital goods were taxable but amnesty granted for past periods.
Digital automated services were always subject to service & other
B&O and there is no amnesty for that (this is a default B&O category)
 
 
 
 
Exemptions
 
Driving Administration
 
Exemptions
A digital product exempt from sales and use tax but still
owes retailing B&O tax
Exclusions
Excluded as a digital product, but subject to another
B&O classification
Classification
Which digital product are you?
Some exemptions/exclusions only apply to a digital goods, etc.
 
Exemptions – Specific Stakeholder Interests
 
Financial Transactions
ATM, wire services
Gambling
Storage and web hosting
Utilities and Federal Government
Expectations of industries
Marketplace facilitators, advertising & data processing
Other Related Services
Telecom & internet, RAS
 
 
Exemptions – Good Tax Policy
 
Making websites “sticky”
Given away free
Parity with TPP exemptions
Resale
ITFA and discrimination
Internet access
TPP vs specific to digital
Education related
Business use inputs and pyramiding
Solely business purpose
Fairness and sourcing
MPU
 
 
 
 
Noteworthy Complexities
 
Intersection of Software & Professional Services
 
Issue
: hybrid services involving professional services and software
based automation
This something that every state will have to address
Bright lines
All taxable if some digital service
All exempt if some professional service
What is the service being sold
Tool used by professional or true hybrid
Objective test based on data has been hard to administer
Alternatives? True object or primary purpose?
 
Taxing Related Services
 
Services sold exclusively in connection with a
digital product
Separately stated does not matter
Typical: implementation
Similar to “sales price” definition
Avoids bundling analysis
 
 
 
 
Digital Sourcing
 
Sourcing
 
Digital products use the sourcing hierarchy in SSUTA
rule
Cascading hierarchy
Issues
Collecting necessary data from provider
 
 
 
 
Trends & Summary
 
Trends
 
Movement toward holistic solutions and consolidation.
Exclusions becoming obsolete drive controversy.
Data processing
Advertising
Disappearance of pure remote access to prewritten software.
Compliance
Wayfair has spurred interest along with marketplace fairness and
tax discovery efforts.
The legislation has grown our tax base and it continues to
grow.
 
Summary
 
WA Decision
Revenue erosion, business impact,  fairness, ambiguity,
changes in economy
WA Planning and drafting legislation
Partnering and buy-in from taxpayers
WA Implementation
Broad imposition versus enumerated categories
Amnesty and phased implementation
Exemptions
Sourcing
 
Panel & Questions
 
Reference Material
 
Legislation in 
2009 (ESHB 2075) 
& 
2010 (SHB 2620)
Washington Admin Code 
458-20-15503
Study of the Taxation of Electronically Delivered Products
Contacts
Matt Largent
MatthewL@dor.wa.gov
Katie Koontz
KatieKo@dor.wa.gov
 
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Explore how Washington State developed its digital tax law, the reasons behind it, the key choices made at a high level, and the categories of digital goods and services subject to taxation. Learn about the impact of the Wayfair decision and the challenges faced by states in taxing digital transactions.


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  1. Taxing Digital Products & Services Washington State Department of Revenue April 28, 2021

  2. Agenda History of why Washington developed the digital tax law Overview of Washington s digital tax law Special areas for administration Discussion with panel

  3. All States Why Now? Nexus barriers lowered after Wayfair decision Possible erosion of tax base as transactions become digital Online sellers could get an advantage over main street merchants Old tax categories may not fit new transactions

  4. Washingtons Reasons Increasing issues with: New products and services Ambiguity and controversy on taxation Legislature directed a study & committee (2007) Committee provided a report in 2008: Provided principles for legislation Washington also needed to comply with SSUTA

  5. Washingtons Choices at a High Level Sourcing using the streamline model law (destination) Broad imposition on digitally supplied services Many specialized exclusions and exemptions Broad taxation of digital goods (broader than SSUTA) Also addressed prewritten software remotely accessed (i.e. not delivered)

  6. Imposition

  7. The Categories Digital goods (DG) SSUTA books, music, video Also static data, facts, information and any combination Digital Automated Services (DAS) Any service transferred electronically using one or more software applications Broad imposition on digital services with many exclusions and exemptions Remote Access Software (RAS) Prewritten software not actually delivered (retail service) Different than the sale of prewritten software Digital codes (DC) Code representing a digital good or digital automated service

  8. Comparing Terms & Categories Caveat: these terms take on different technical meanings depending on who is using them. SaaS (Software as a service) WA RAS or DAS IaaS (Infrastructure as a service) WA DAS PaaS (Platform as a service) WA DAS Prewritten software not delivered (no download or tangible media) WA RAS

  9. Digital Automated Services Unpacked Unique cornerstone with broad taxation impact Any service transferred electronically that uses one or more software applications It taxes services Digital goods & software Additional features & functionality Must be transferred electronically Must include software Examples: Games, information services, etc.

  10. Fitting it Together Digital Code (Represents) Prewritten Software Remote Access to Prewritten Software Digital Good Digital Automated Services Delivered digitally or TPP Books, music, video, data, facts, information Remotely accessed Something more bells & whistles Cloud Computing

  11. Good Faith and Amnesty Phased Implementation Almost two (2) years for good faith reporting for DAS related Reasonable position based on available information Amnesty Digital goods were taxable but amnesty granted for past periods. Digital automated services were always subject to service & other B&O and there is no amnesty for that (this is a default B&O category)

  12. Exemptions

  13. Driving Administration Exemptions A digital product exempt from sales and use tax but still owes retailing B&O tax Exclusions Excluded as a digital product, but subject to another B&O classification Classification Which digital product are you? Some exemptions/exclusions only apply to a digital goods, etc.

  14. Exemptions Specific Stakeholder Interests Financial Transactions ATM, wire services Gambling Storage and web hosting Utilities and Federal Government Expectations of industries Marketplace facilitators, advertising & data processing Other Related Services Telecom & internet, RAS

  15. Exemptions Good Tax Policy Making websites sticky Given away free Parity with TPP exemptions Resale ITFA and discrimination Internet access TPP vs specific to digital Education related Business use inputs and pyramiding Solely business purpose Fairness and sourcing MPU

  16. Noteworthy Complexities

  17. Intersection of Software & Professional Services Issue: hybrid services involving professional services and software based automation This something that every state will have to address Bright lines All taxable if some digital service All exempt if some professional service What is the service being sold Tool used by professional or true hybrid Objective test based on data has been hard to administer Alternatives? True object or primary purpose?

  18. Taxing Related Services Services sold exclusively in connection with a digital product Separately stated does not matter Typical: implementation Similar to sales price definition Avoids bundling analysis

  19. Digital Sourcing

  20. Sourcing Digital products use the sourcing hierarchy in SSUTA rule Cascading hierarchy Issues Collecting necessary data from provider

  21. Trends & Summary

  22. Trends Movement toward holistic solutions and consolidation. Exclusions becoming obsolete drive controversy. Data processing Advertising Disappearance of pure remote access to prewritten software. Compliance Wayfair has spurred interest along with marketplace fairness and tax discovery efforts. The legislation has grown our tax base and it continues to grow.

  23. Summary WA Decision Revenue erosion, business impact, fairness, ambiguity, changes in economy WA Planning and drafting legislation Partnering and buy-in from taxpayers WA Implementation Broad imposition versus enumerated categories Amnesty and phased implementation Exemptions Sourcing

  24. Panel & Questions

  25. Reference Material Legislation in 2009 (ESHB 2075) & 2010 (SHB 2620) Washington Admin Code 458-20-15503 Study of the Taxation of Electronically Delivered Products Contacts Matt Largent MatthewL@dor.wa.gov Katie Koontz KatieKo@dor.wa.gov Click image to open report

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