Intellectual Property Law

TAXATION OF SOFTWARE IN WASHINGTON

By Jerry

Transaction of computer software is taxable in Washington State. Both custom and customized software products are subject to tax. Software written for one specific customer other than those which are considered canned is not taxed. In Washington custom computer programs are not subject to sales tax but are subject to Washington business and occupation tax. Installation for canned software is tax exempt for sales tax purposes if it is a separately stated charge.

In Washington, state law allows for the taxation of computer software. Washington Administrative Code 458-20-193 explains Washington's B&O tax and retail sales tax applications to interstate sales of tangible personal property. This section of the WAC deals with the outbound sales of goods that originate in Washington and are transmitted to persons outside this state, as well as inbound sales of goods that originate outside Washington State are brought into Washington State.
Information or software purchased via downloading from the Internet is subject to Washington State's sales and use tax law. If the seller has nexus within the state then they are required to collect and remit the compensating use tax to the state. If the seller does not have nexus, then it is the responsibility of the consumer by law to self-assess and remit the use tax directly to the state.

Canned software has been added to the definition of "Sale at Retail" and "Retail Sale". Thus, sales of canned software, except software for resale, are taxable regardless of the method of delivery to the end user.

Is canned software taxable in Washington State?
For the purpose of taxation, the sale, lease or licensing of canned software is treated in the same manner as the sale or lease of a non-software product even if it is produced through a computer system or process. Sales of canned software to consumers are subject to the business and occupation (B&O) tax under the retailing classification. Sellers are obligated to collect retail sales tax on the sale price.

Any sales of canned software to businesses which will resell the software without any intervening use are treated as wholesale sales and are subject to B&O tax under the wholesaling classification. The seller must obtain a resale certificate from the purchaser to document such types of sales.

Is custom software taxable in Washington State?
Both the creation and distribution of custom software and the customization of canned software are taxable as professional services. Any income from these professional services is subject to B&O tax under the service and other activities classification. Custom software duplicated for the same person or by the same person for their own use cannot be treated as change of custom software to canned software.

Is customized software taxable in Washington State?
The creation and distribution of custom software and customized canned software is taxable in Washington State as professional services. Any income derived from these professional services is subject to B&O tax under the relevant service and other activities classification. Duplication of custom software for the same person, or by the same person for their own use, does not change the custom software to canned software.

Is downloaded software taxable in Washington State?
The term ?sale at retail' even includes the sale of prewritten computer software other than a sale to a person who presents a resale certificate under RCW 82.04.470, regardless of the mode of delivery to the end user, but does not include custom software or the customization of prewritten computer software

Conclusion:
Tax is applicable to software transactions in Washington State. In Washington State, canned software, custom software, customized canned software, and downloaded software from the Internet are taxable events.

Full post as published by IBLS Internet Law Blog on July 22, 2008 (boomark / email).