Thursday, July 14, 2016

Taxation of Digital Products in Washington State

The taxation of digital products for sales and use tax purposes varies state-to-state: some states tax digital products such as photographs, movies, or music when downloaded from the Internet, but some do not.
In the State of Washington, sales (or use) tax apply 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 and movies, etc.)
  • Streamed and accessed digital goods
  • Digital automated services (DAS)
The laws also cover remote access software (“RAS”) which is also subject to sales and use tax.
It does not matter if the purchaser obtains a permanent or nonpermanent right of use.
The Q&A below is provided by the Washington Department of Revenue. More detailed information is available on their website at 
 What is a digital product?
  • It is transferred electronically.
  • Digital goods (movies and music, etc.)
  • Digital automated services (services that have been automated)

What is a digital good?

  • Data
  • Facts
  • Information
  • Sounds (music)
  • Images (movies, pictures)
  • Any combination of the above.

When these are transferred electronically, they are digital goods.
Digital goods do not include:

  • The representation of a personal or professional service primarily involving the application of human effort
  • Internet access
  • Computer software
  • Digital automated services (DAS)
  • Remote access software (RAS)

What are digital automated services (DAS)?

DAS are services that use one or more software applications and are transferred electronically. DAS includes software, but it is not merely software. A DAS will frequently include data, information or additional functionality/services (e.g. chat rooms, multiplayer capabilities etc).
Examples include:
  • Photo sharing services
  • Car history report services
  • A service that crawls the internet and gathers, categorizes and stores information

DAS also does not include:
  • Internet access
  • Payment processing
  • Data processing services
  • Telecommunications
  • Live interactive presentations
  • Advertising services
  • Web hosting, storage, and back up

What are data processing services?

Data processing services are primarily automated services provided to a business or other organization where the primary object of the service is the systematic performance of operations by the service provider, on data supplied in whole or in part by the customer, to extract the required information in an appropriate form or to convert the data to usable information. Data processing services include check processing, image processing, form processing, survey processing, payroll processing, claim processing, and similar activities. Charges for data processing services are subject to service and other activities B&O tax as a professional service (sales tax does not apply).
How does B&O tax apply to sales of digital products, digital codes, and RAS?
Taxpayers with nexus in Washington who sell digital products, digital codes, or remote access software sourced to Washington are subject to the B&O tax under the Retailing classification on the gross proceeds of retail sales and the B&O tax under the Wholesaling classification on the grossproceeds for wholesaling receipts. If digital products are licensed to someone who is not an end user, then those gross receipts are likely subject to the Royalties B&O tax.

Is the production of digital goods classified as manufacturing?

No. The production of digital goods is not manufacturing.

From Washington State Department of Revenue