Original Notice.

     Preproposal statement of inquiry was filed as WSR 11-02-077.

     Title of Rule and Other Identifying Information: WAC 458-20-155 Information and computer services, 458-20-15501 Taxation of computer systems and hardware, 458-20-15502 Taxation of computer software, and 458-20-15503 Digital products.

     Hearing Location(s): Capital Plaza Building, 4th Floor Large Executive Conference Room, 1025 Union Avenue S.E., Olympia, WA, on October 3, 2012, at 10:00 a.m. Copies of draft rules are available for viewing and printing on our web site at Rules Agenda.

     Date of Intended Adoption: October 10, 2012.

     Submit Written Comments to: Dylan Waits, Caleb Allen, P.O. Box 47453, Olympia, WA 98504-7453, e-mail DylanW@dor.wa.gov; CalebA@dor.wa.gov, by October 3, 2012.

     Assistance for Persons with Disabilities: Contact Mary Carol LaPalm, (360) 725-7499, or Renee Cosare, (360) 725-7514, no later than ten days before the hearing date. For hearing impaired please contact us via the Washington relay operator at (800) 833-6384.

     Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: Chapter 535, Laws of 2009 (ESHB 2075), made major changes to the taxation of certain products and services provided or furnished electronically (commonly referred to as "digital products"). This legislation specifically imposed sales and use tax on digital products such as: Digital goods, including digital audio works, digital audio-visual works, and digital books; digital automated services; digital codes used to obtain digital goods or digital automated services; and remote-access software. The legislation also provided a number of sales and use tax exemptions.

     Chapter 111, Laws of 2010 (SHB 2620), clarified ambiguities and corrected unintended consequences related to the 2009 legislation.

     The department is proposing an amendment to Rule 15501, adoption of two new rules (Rules 15502 and 15503), and the repeal of one rule (Rule 155) to explain the impacts of the 2009 and 2010 legislation, and to address other tax issues related to computer hardware, computer software, and computer services.

     Reasons Supporting Proposal: To provide current guidance on how digital products are taxed.

     Statutory Authority for Adoption: RCW 82.32.300 and 82.01.060.

     Statute Being Implemented: Chapter 535, Laws of 2009, and chapter 111, Laws of 2010.

     Rule is not necessitated by federal law, federal or state court decision.

     Name of Proponent: Department of revenue, governmental.

     Name of Agency Personnel Responsible for Drafting: Dylan Waits, Caleb Allen, 1025 Union Avenue S.E., Suite #544, Olympia, WA, (360) 534-1583; Implementation: Alan R. Lynn, 1025 Union Avenue S.E., Suite #544, Olympia, WA, (360) 534-1599; and Enforcement: Russell W. Brubaker, 1025 Union Avenue S.E., Suite #544, Olympia, WA, (360) 534-1505.

     No small business economic impact statement has been prepared under chapter 19.85 RCW. The rules do not impose any new performance requirements or administrative burden on any small business not required by statute.

     A cost-benefit analysis is not required under RCW 34.05.328. The proposed rules are not significant legislative rules as defined by RCW 34.05.328.

August 22, 2012

Alan R. Lynn

Rules Coordinator

     The following section of the Washington Administrative Code is repealed:

WAC 458-20-155

Information and computer services.

OTS-4927.2

AMENDATORY SECTION(Amending WSR 09-01-088, filed 12/16/08, effective 1/16/09)

WAC 458-20-15501   ((Computer hardware, computer software, information service, and computer services.)) Taxation of computer systems and hardware.   (((1) Introduction. This section explains the business and occupation (B&O), retail sales, and use tax treatment of activities related to computer hardware, computer software, information service, and computer services. Such activities include, but are not limited to, selling, leasing, manufacturing, installing, repairing, and maintaining computer hardware and software, as well as developing, duplicating, configuring, licensing, downloading, and accessing computer software.

     This section contains examples that identify a number of facts and then state a conclusion. The examples should be used only as a general guide. The tax results in all situations must be determined after a review of all facts and circumstances.

     The information provided in this section is divided into five parts:

     (a) Part I provides information on taxation of computer systems.

     (b) Part II provides information on taxation of computer hardware.

     (c) Part III provides information on taxation of computer software.

     (d) Part IV provides information on taxation of information services and computer services.

     (e) Part V provides reference to WAC 458-20-155 (Information and computer services) on the distinction between sales of products and sales of services.

     (a) What is a computer? A "computer" is an electronic device that accepts information in digital or similar form and manipulates it for a result based on a sequence of instructions. RCW 82.04.215. Examples of a computer include, but are not limited to, mainframe computer, laptop, workstation, and desktop computer. "Computer" also includes automatic data processing equipment, which is a computer used for data processing purposes. "Computer" does not include any computer software or peripheral devices.

     (b) Computer systems and computer networks distinguished. A "computer system" is a functional unit, consisting of one computer and associated computer software, whereas a computer network is two or more computers and associated computer software that uses common storage. A computer system may or may not include peripheral devices.

     (c) Wholesale sale of computer systems. Gross proceeds of sales of computer systems to persons other than consumers (e.g., sales for resale without intervening use) are subject to B&O tax under the wholesaling classification. To verify the wholesale nature of the sale, the seller should obtain a ((resale certificate)) reseller permit from the buyer as provided by WAC 458-20-102 (((Resale certificates))) (Reseller permits).

     (d) Retail sale of computer systems. Gross proceeds of sales of computer systems to consumers are subject to B&O tax under the retailing classification. Persons making retail sales are responsible for collecting retail sales tax at the time of sale and remitting the tax to the department, unless the sale is specifically exempt by law. If the seller is required to collect Washington sales tax (such as in the case of the seller having nexus with Washington), but does not collect Washington sales tax, the buyer is responsible for remitting retail sales tax (commonly referred to as deferred sales tax), unless the sale is specifically exempt by law. If the seller is not required to collect Washington sales tax, then the buyer is responsible for remitting use tax, unless the transaction is specifically exempt by law. Separately stated charges for custom software sold with the computer system are subject to service B&O tax. ((See subsection (302) of this section))

     (e) Manufacturing of computer systems. Persons manufacturing computer systems are subject to manufacturing B&O tax upon the value of the products. See WAC 458-20-112 (Value of products) and 458-20-136 (Manufacturing, processing for hire, fabricating). Manufacturers of computer systems who sell their products at retail or wholesale are also subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases the manufacturer must report under both the "production" (manufacturing) and "selling" (wholesaling or retailing) B&O tax classifications and may claim a multiple activities tax credit (MATC). See WAC 458-20-19301 (Multiple activities tax credits) for detailed information about the MATC.

     (i) Separately stated charges for custom programming sold with the computer system are not subject to manufacturing B&O tax, but are subject to service B&O tax. ((See subsection (302) of this section.))

     (ii) Separately stated charges for computer software sold and installed after the sale of a computer system are not subject to manufacturing B&O tax.

     (iii) The combining of a computer system with certain peripheral devices is considered a packaging activity not subject to manufacturing B&O tax, when the following occurs:

     (A) The peripheral devices remain in the original packaging;

     (B) The person does not attach its own label to the peripheral devices;

     (C) The person maintains a separate inventory of the peripheral devices for sale apart from the sale of the computer system; and

     (D) The charge for the sale of peripheral devices is separately stated from the charge for the sale of computer systems.

     (((102))) (2) Examples.

     (a) ABC Computers, Inc., an in-state manufacturer, manufactures and sells at retail computer systems. ABC sells a computer system to Steve for one flat charge. The computer system includes a disk drive, memory, CPU, keyboard, mouse, monitor, and bundled prewritten computer software. ABC is subject to retailing B&O tax and must collect retail sales tax on the sale to Steve. In addition, ABC is subject to manufacturing B&O tax on the value of the product sold (which is generally the sales price). ABC is entitled to claim a multiple activities tax credit.

     (b) ADE Computers, Inc., manufactures and sells computer systems at retail to customers. ADE sells to Julie a computer system with certain peripheral devices at separate charges. The computer system without the peripheral devices consists of a disk drive, memory, CPU, and bundled prewritten computer software. The peripheral devices include a keyboard, mouse, and monitor. All peripheral devices remain in the original packaging of the manufacturers. ADE does not attach its own label to the peripheral devices. Finally, ADE maintains a separate inventory of the peripheral devices for sale apart from the sale of ADE's computer systems. ADE is subject to retailing B&O tax and must collect retail sales tax from Julie on the sales of the computer system including the peripheral devices. ADE is subject to manufacturing B&O tax on the value of the computer system excluding the peripheral devices. ADE is entitled to claim a multiple activities tax credit. ADE is not subject to manufacturing B&O tax on the value of the peripheral devices, because the combining of a computer system with the peripheral devices in this case constitutes packaging activities.

     (c) AFG Computers, Inc., an in-state company, manufactures and sells at retail computer systems. AFG sells a computer system to Joe for a lump sum. Joe purchases from AFG, as part of the sales package, prewritten computer software developed by a third-party software developer. AFG installs the prewritten computer software to Joe's computer. AFG is subject to retailing B&O tax and must collect retail sales tax from Joe on the sale of the computer system, including the bundled prewritten computer software. Also, AFG is subject to manufacturing B&O tax on the value of the computer system, including the value of the prewritten computer software. AFG is entitled to claim a multiple activities tax credit.

     (d) Same facts as (c) of this subsection, except that AFG sells and installs the prewritten computer software after Joe purchases and takes possession of the computer system. AFG is subject to retailing B&O tax and must collect retail sales tax from Joe on the sale of the computer system and the prewritten computer software. Also, AFG is subject to manufacturing B&O tax on the value of the computer system. AFG is entitled to claim a multiple activities tax credit. AFG is not subject to manufacturing B&O tax on the value of the prewritten computer software, because the installation of the software by AFG is not a part of AFG's manufacturing activity.

     (a) What is computer hardware? For purposes of this section, "computer hardware" includes, but is not limited to, the mechanical, magnetic, electronic, or electrical components of a computer system such as towers, motherboards, central processing units (CPU), hard disk drives, memory, as well as internal and external peripheral devices such as compact disk read-only memory (CD-ROM) drives, compact disk rewriteable (CD-RW) drives, zip drives, internal and external modems, wireless fidelity (Wi-Fi) devices, floppy disks, compact disks (CDs), digital versatile disks (DVDs), cables, mice, keyboards, printers, monitors, scanners, web cameras, speakers, and microphones.

     (b) Wholesale sale of computer hardware. Gross proceeds of sales of computer hardware to persons other than consumers (e.g., sales for resale without intervening use) are subject to B&O tax under the wholesaling classification. To verify the wholesale nature of the sale, the seller should obtain a ((resale certificate)) reseller permit from the buyer as provided by WAC 458-20-102 (((Resale certificates))) (Reseller permits).

     (c) Retail sale of computer hardware. Gross proceeds of sales of computer hardware to consumers are subject to B&O tax under the retailing classification. Persons making retail sales are responsible for collecting retail sales tax at the time of sale and remitting the tax to the department, unless the sale is specifically exempt by law.

     (d) Manufacturing of computer hardware. Persons manufacturing computer hardware are subject to manufacturing B&O tax upon the value of the products. See WAC 458-20-112 (Value of products) and 458-20-136 (Manufacturing, processing for hire, fabricating). Manufacturers of computer hardware who sell their products at retail or wholesale are also subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases the manufacturer must report under both the "production" (manufacturing) and "selling" (wholesaling or retailing) B&O tax classifications and may claim a multiple activities tax credit (MATC). See WAC 458-20-19301 (Multiple activities tax credits) for detailed information about the MATC.

     (((202))) (4) Examples.

     (a) ALM Computers, Inc., purchases used computers. ALM replaces a built-in CD-ROM drive with a CD-RW drive and adds a zip drive, additional memory, and an upgraded CPU. ALM is engaged in manufacturing activity subject to manufacturing B&O tax with respect to that computer.

     (b) AJK Computers, Inc., acquires damaged computers for refurbishment and sale. AJK removes damaged hardware components and replaces them with new components without upgrading these components. Refurbishing computers in this manner is not a manufacturing activity. Retail sales of such refurbished computers are subject to retailing B&O tax and retail sales tax.

     (c) APQ Computers, Inc., purchases computers for refurbishment and sale. APQ replaces the failed zip drive on one of the computers with an upgraded zip drive because the upgrade is the nearest version of the failed component that is available. The manufacturer has discontinued manufacturing the original version of the zip drive because of a flaw in the design. APQ is not engaged in manufacturing activity with respect to that computer. Retail sale of that refurbished computer is subject to retailing B&O tax and retail sales tax.

     (d) ATV Computers, Inc., is hired by a call center company to repair damaged computers. ATV removes damaged hardware components and replaces them with new components without upgrading these components. Refurbishing computers in this manner is not a manufacturing activity; however, it is a retail service. Refurbishing computers in this manner is subject to retailing B&O tax and retail sales tax must be collected. See WAC 458-20-173 (services on tangible personal property) for more information on repairs and maintenance.

     (((203))) (5) Taxation of other activities associated with computer hardware.

     (a) Installing computer hardware. Gross proceeds of sales for installing computer hardware are subject to wholesaling or retailing B&O tax, as the case may be. Installation of computer hardware for consumers is subject to retail sales tax. See ((WAC 458-20-145)) RCW 82.32.730 (sourcing) for more information on sourcing retail sales of computer services. See WAC 458-20-173 (services on tangible personal property) for more information on installations.

     (b) Repairing or maintaining computer hardware. Gross proceeds of sales for repair or maintenance of computer hardware are subject to wholesaling or retailing B&O tax. Repair of computer hardware for consumers is subject to retail sales tax. See ((WAC 458-20-145 (sourcing))) RCW 82.32.730 for more information on sourcing ((retail sales)). See WAC 458-20-173 (services on tangible personal property) for more information on repairs and maintenance. Also, see WAC 458-20-257 (Warranties and maintenance agreements) for information about repair performed as part of a warranty or maintenance agreement.

     (309) Special use tax exemption for computer hardware and computer software donated to certain schools or colleges. Use tax does not apply to the use of computer hardware and computer software irrevocably donated to any public or private nonprofit school or college, as defined under chapter 84.36 RCW. RCW 82.12.0284.

     (ii) Example. Same facts as (j)(i) of this subsection, except that, in addition, HH performs "live" data backup for disaster recovery purposes. HH purchases prewritten computer software to perform "live" backup of data. HH is subject to use tax for the use of prewritten computer software to perform "live" backup of data.

     Please see WAC 458-20-155 for more information.))

[Statutory Authority: RCW 82.32.300 and 82.01.060(2). 09-01-088, § 458-20-15501, filed 12/16/08, effective 1/16/09.]

OTS-4912.1

NEW SECTION
WAC 458-20-15502   Taxation of computer software.   (1) What is computer software? RCW 82.04.215 provides that "computer software" is a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task. All software is classified as either prewritten or custom. "Computer software" includes only those sets of coded instructions intended for use by an end user and specifically excludes retained rights in software and master copies of software. Computer software does not include data.

     (a) How is computer software delivered? Computer software may be delivered either by intangible means such as electronically downloaded or by tangible means such as tangible storage media.

     (b) What is automatic data processing equipment? "Automatic data processing equipment" includes computers used for data processing purposes and their peripheral equipment.

     (c) What are retained rights? "Retained rights" means any and all rights, including intellectual property rights such as those rights arising from copyrights, patents, and trade secret laws, that are owned or are held under contract or license by a software developer, author, inventor, publisher, licensor, sublicensor, or distributor. RCW 82.04.215.

     (d) What are master copies of software? "Master copies" of software means copies of software from which a software developer, author, inventor, publisher, licensor, sublicensor, or distributor makes copies for sale or license. RCW 82.04.215.

     (i) Development of a master copy of software. Development of a master copy of software by a software developer, or a third party hired by the software developer, that is used to produce copies of software for sale or commercial or industrial use, is not a manufacturing activity. A third-party charge for development of a master copy of software is a charge for custom software development and is subject to service and other activities B&O tax.

     (ii) Use of prewritten computer software by software developer. The internal use of prewritten computer software by the developer of that software is not subject to use tax because the software developer is not an end user of its own internally developed software. For example, VV Software, Inc., an in-state software developer, creates accounting software generally used by small businesses. VV plans to sell its newly created software to other companies. VV also plans to make a copy of this software and use it for its accounting operation. The copy of software used by VV for its accounting operation is not subject to use tax.

     (2) What is custom software? "Custom software" is computer software created for a single person. RCW 82.04.215. The use of library files in software development does not preclude the developed software from being characterized as custom software, as long as the software is created for a single person. The nature of custom software does not change when ownership is transferred to a person with no rights retained by the transferor.

     For purposes of this section, "library files" are a collection of precompiled and frequently used routines that a software developer can use in developing the software. The purchase or use of such "library files" may be subject to retail sales or use tax as the sale of prewritten software.

     (a) Creation of custom software. Gross income received for creating custom software is subject to service and other activities B&O tax.

     (b) Duplication of custom software. Duplication of custom software for the same person, or by the same person for the person's own use, does not change the character of the custom software. RCW 82.04.29001. Duplication of custom software for the same person, or by the same person for its own use, is not subject to manufacturing B&O tax.

     If a person duplicates custom software for sale to or use by another person other than the original purchaser, the software becomes prewritten computer software as defined in subsection (3) of this section and is subject to manufacturing B&O tax if the prewritten computer software is delivered by tangible storage media.

     (c) Sale of custom software. If custom software is sold to another person other than the original purchaser, the software loses its character as custom software and becomes prewritten computer software as defined in subsection (3) of this section.

     (d) Use of custom software. Use of custom software is not subject to use tax.

     (e) Example 1. PFC, Inc., develops software for its client. PFC is not subject to manufacturing B&O tax because the software is custom software. PFC's income from the sale of the custom software to the one specific client is subject to service and other activities B&O tax.

     (3) What is prewritten computer software? RCW 82.04.215 provides that "prewritten computer software" is computer software, including prewritten upgrades, patches, fixes, etc., that is not designed and developed by the author or other creator to the specifications of a specific purchaser.

     The combining of two or more prewritten computer software programs or prewritten portions thereof does not result in custom software. Configuration of prewritten computer software to work with other computer software does constitute customization of prewritten computer software.

     Prewritten computer software includes software designed and developed by the author or other creator to the specifications of a specific purchaser when it is sold to a person other than such purchaser.

     Where a person, who is not the author or creator, modifies or enhances prewritten computer software, that person is deemed to be the author or creator only of the modifications or enhancements made. Prewritten computer software, or a portion thereof, that is modified or enhanced to any degree, remains prewritten computer software, even though the modification or enhancement is designed and developed to the specifications of a specific purchaser. Where there is a reasonable, separately stated charge or an invoice or other statement of the price given to the purchaser for the modification or enhancement, the modification or enhancement will not be considered prewritten computer software.

     (a) Wholesale sales of prewritten computer software. Gross proceeds from sales of prewritten computer software to persons other than consumers (e.g., sales for resale without intervening use) are subject to B&O tax under the wholesaling classification, whether or not ownership or title passes to the buyer, and regardless of any express or implied restrictions upon the buyer. The method of delivery of prewritten computer software does not alter the wholesale nature of the transaction, whether it is through tangible storage media or any electronic means. Delivery of software manuals and backup copies of prewritten computer software does not alter the delivery of the actual copy of prewritten computer software to be used by the buyer in determining when and where the sale takes place. To verify the wholesale nature of the sale, the seller obtains a reseller permit from the buyer as provided by WAC 458-20-102 (Reseller permits).

     (i) Distinction between wholesale sales of prewritten computer software and royalties received for the licensing of prewritten computer software. Sales of prewritten computer software constitute wholesale sales if the reseller, who has no right to reproduce the software for further sales, sells the same software to its customers. The true object of the sale to the reseller is the sale of the software. On the other hand, income received for granting an intangible right to reproduce and distribute copies of prewritten computer software for sale constitutes royalties. The true object of the transaction that generates royalty income is the right to reproduce and relicense the software. See subsection (8) of this section for more information on royalties.

     (ii) Examples. The examples presume sellers have nexus with Washington.

     (A) Example 2. UM Computers, Inc., develops engineering software. UM sells the prewritten computer software at wholesale to OX Computers, Inc., in shrink-wrapped packages. UM delivers the software to OX. OX then resells the software to customers in the same shrink-wrapped packages. Sales of prewritten computer software by UM are subject to wholesaling B&O tax. Sales by OX to consumers are retail sales subject to retailing B&O tax and retail sales tax.

     (B) Example 3. GB Computers, Inc., develops engineering software. GB grants SE Computers, Inc., the right to reproduce and distribute copies of the prewritten computer software for sale to end users. GB retains all of its ownership rights to the software and delivers one copy of the software to SE to reproduce and sell. Amounts received by GB from SE for granting the right to reproduce and distribute prewritten computer software are subject to royalties B&O tax. Sales by SE to consumers are retail sales subject to retailing B&O tax and retail sales tax.

     (C) Example 4. DH Computers, Inc., develops engineering software. DH grants to WK Computers, Inc., the right to copy and redistribute its prewritten computer software. DH delivers the software electronically to WK. WK then sells the software to its customers, who download a copy of the software from WK. Income to DH from WK is subject to royalties B&O tax. Sales of prewritten computer software by WK to its customers are retail sales subject to retail sales tax.

     (D) Example 5. AJ Soft, Inc., is a software developer of architectural drafting software. AJ Soft enters into an agreement with DJ Sales, Inc., to sell AJ Soft's drafting software. DJ Sales must pay a fee for each copy DJ Sales sells through its web site. AJ Soft does not allow DJ Sales to reproduce the drafting software. Customers download the software, but are unaware the software is downloaded directly from AJ Soft. AJ Soft is making a wholesale sale of software to DJ Sales subject to wholesaling B&O tax. DJ Sales is making a retail sale to its Washington customers subject to retail sales tax.

     (E) Example 6. Same facts as Example 5, however, instead of customers downloading the prewritten software, DJ Sales' customers access the prewritten software remotely on AJ Soft's servers. AJ Soft is still making a wholesale sale of remotely accessed software to DJ Sales subject to wholesaling B&O tax. DJ Sales is making a retail sale of remotely accessed software to its Washington customers subject to retail sales tax.

     (b) Retail sales of prewritten computer software. Gross proceeds of sales of prewritten computer software to consumers are subject to B&O tax under the retailing classification, whether or not ownership or title passes to the buyer, and regardless of any express or implied restrictions upon the buyer. The method of delivery of prewritten computer software does not alter the retail nature of the transaction, whether it is through tangible storage media or any electronic means. Delivery of software manuals and backup copies of prewritten computer software does not alter the delivery of the actual copy of prewritten computer software to be used by the buyer in determining when and where the sale takes place. Persons making retail sales are responsible for collecting retail sales tax at the time of sale and remitting the tax to the department, unless the sale is specifically exempt by law.

     (c) Use of prewritten computer software. Prewritten computer software, regardless of the method of delivery, is generally subject to use tax upon use in this state if Washington retail sales tax was not previously paid. However, use of prewritten computer software is not taxable, if it is provided free of charge, or if it is provided for temporary use in viewing information, or both. RCW 82.12.020. This exception from use tax is limited to prewritten computer software provided free of charge or for temporary use in viewing information, such as free promotional software, donated software, free download of software, and software provided in beta testing to a third-party free of charge.

     For purposes of this use tax exception, "beta testing" means the last stage of testing for prewritten computer software prior to its commercial release including the release to manufacturing (RTM). Beta testing may involve sending the software to a third party for the use of the third party. Beta testing is often preceded by a round of testing called alpha testing.

     (i) Example 7. DS Computers, Inc., is a software developer. In order to perform beta testing of its new accounting software prior to commercial release, DS sends a copy of the software free of charge to KG Technologies, Inc. DS is not subject to use tax for the release of the beta software to KG. KG is not subject to use tax for the use of beta software free of charge.

     (ii) Example 8. DH, Inc., provides free card games on-line to its customers. The customers, however, must download DH's free software in order to be able to play card games on-line at DH's web site. Wendy downloads the software free of charge. Wendy is not subject to use tax for the use of the software.

     (iii) Example 9. DW, Inc., provides free software to the public for anyone to watch videos on-line. Roger downloads the software free of charge. Roger is not subject to use tax for the use of the software.

     (d) Manufacturing of prewritten computer software. Persons engaged in manufacturing prewritten computer software on tangible storage media are subject to manufacturing B&O tax upon the value of the products. See WAC 458-20-112 (Value of products) and WAC 458-20-136 (Manufacturing, processing for hire, fabricating). Manufacturers of prewritten computer software who sell their products at retail or wholesale are also subject to either the retailing or wholesaling B&O tax, as the case may be. In such cases the manufacturer must report under both the "production" (manufacturing) and "selling" (wholesaling or retailing) B&O tax classifications and may claim a multiple activities tax credit (MATC). See WAC 458-20-19301 (Multiple activities tax credits) for detailed information about the MATC. Income from the sale of prewritten software electronically delivered or transferred is not subject to manufacturing B&O tax.

     (e) Duplication of prewritten computer software. Duplication of prewritten computer software on tangible media for sales to or use by more than one person is subject to manufacturing B&O tax upon the value of products which includes both the value of the tangible media and the software. Duplication of prewritten computer software on tangible media outside this state is not subject to manufacturing B&O tax regardless of where software development takes place.

     Duplication of prewritten computer software is a manufacturing activity only if the prewritten computer software is delivered from the seller to the purchaser by means of tangible storage media which is retained by the purchaser. RCW 82.04.120.

     When a software developer contracts with a third party to duplicate prewritten computer software, the parties must take into account the value of all tangible and intangible materials or ingredients, including the software code, when determining the relative value of all materials or ingredients furnished by each party. If the third party furnishes less than twenty percent of the total value of all materials or ingredients that become a part of the produced product, then the third party is presumed to be a processor for hire and the software developer is presumed to be a manufacturer. See WAC 458-20-136 (Manufacturing, processing for hire, fabricating) for more information.

     (4) Site license of prewritten computer software. A site license provides a consumer acquiring prewritten computer software with the right to duplicate prewritten computer software for use on its own computers, based on the number of computers, the number of workers using the computers, or some other criteria. A site license agreement may cover one site or multiple sites of a purchaser.

     (a) Retail sales of a site license. Gross proceeds of sales of a site license to a consumer are subject to B&O tax under the retailing classification, whether or not ownership or title passes to the consumer, and regardless of any express or implied restrictions upon the consumer. Delivery occurs when and where the prewritten computer software subject to the site license is received by the consumer, whether it is through tangible storage media or any electronic means, regardless of the method of delivery. See RCW 82.32.730 for more information on sourcing prewritten computer software. Delivery of software manuals and backup copies of prewritten computer software does not alter the delivery of the actual copy of prewritten computer software to be used by the consumer in determining when and where the sale takes place. Persons making retail sales are responsible for collecting retail sales tax at the time of sale and remitting the tax to the department, unless the sale is specifically exempt by law.

     If the prewritten software is hosted by the licensor or a third party for remote access by the licensee, then see subsection (10) of this section.

     (b) Duplication of prewritten computer software by a person under a site license. A seller of a site license is subject to manufacturing B&O tax for its own duplication of prewritten computer software. Duplication of prewritten computer software is subject to manufacturing B&O tax only if the prewritten computer software is delivered from the seller to the purchaser by means of tangible storage media which is retained by the purchaser. RCW 82.04.120. Purchaser of a site license is not subject to manufacturing B&O tax for the duplication of prewritten computer software for its own use, pursuant to a site license agreement with the seller.

     (c) Use of a site license partly in this state and partly outside this state. The part of the site license used by the person in this state is subject to use tax, provided Washington state sales tax was not previously paid. For example, a person purchases and takes delivery of a site license in California. Pursuant to the multiple site license agreement, this person is licensed to use one thousand copies of prewritten computer software, of which four hundred copies will be used in Washington. Use tax is due on the four hundred copies of prewritten computer software used in this state. If the prewritten software purchased by the licensee is delivered in Washington, then the entire charge for the site license is subject to retail sales tax if purchased from a seller responsible for collecting Washington's sales tax. However, a purchaser can issue a multiple points of use exemption certificate under certain circumstances to minimize Washington tax as discussed below in subsection (11) of this section.

     (d) Sales and use of additional copies of prewritten computer software under the same site license. In some cases, the buyer of a site license may subsequently purchase additional copies of prewritten computer software under the same site license agreement. The seller may or may not deliver any additional copy of the software to the buyer, because the original copy of the software has already been delivered.

     (i) Retail sales of additional copies of prewritten computer software under the same site license. Retail sales of the additional copies of software occurs when and where the seller delivers any additional copy of prewritten computer software to the buyer, whether it is through tangible storage media or any electronic means, regardless of the method of delivery. If the seller does not deliver any additional copy of the software to the buyer, then the sales occur when the sales agreements are made to purchase the additional copies and where the original copy or copies of prewritten computer software was delivered. If the original sale of the site license was subject to manufacturing B&O tax, then the sale of additional licenses are also subject to manufacturing B&O tax.

     Delivery of software manuals and backup copies of prewritten computer software does not alter the delivery of the actual copy of prewritten computer software to be used by the buyer in determining when and where the sale takes place.

     (ii) Use of additional copies of prewritten computer software under the same site license. Where the use of the additional copies of software is partly in this state and partly outside this state and was not previously subject to Washington sales tax, the part of the additional copies of software used by the person in this state is subject to use tax.

     (e) Examples.

     (i) Example 10. DEF Computers, Inc., is located in Washington and sells in this state, at retail, a multiple site license of its prewritten computer software to P's Design, Inc. A copy of the prewritten computer software is electronically delivered to P's Design in Washington. P's Design then electronically duplicates the software and distributes the software in Washington and several other states for its use. Neither DEF nor P's Design is subject to manufacturing B&O tax. DEF, however, is subject to retailing B&O tax, and it must collect retail sales tax from P's Design for the entire sale of the software unless P's Design provides DEF with a multiple points of use exemption certificate as discussed in subsection (11) of this section.

     (ii) Example 11. Same facts as Example 10, except that in addition, DEF delivers a backup copy of the software to P's Design outside Washington. The backup copy of the software is for disaster recovery purposes and is not downloaded to any of P's Design's computers for use. There is no separate charge for the delivery of the backup software. The software manuals are mailed to P's Design in Washington. DEF is still subject to retailing B&O tax, and it must collect retail sales tax from P's Design for the entire sale of the software unless P's Design provides DEF with a multiple points of use exemption certificate as discussed in subsection (11) of this section. Delivery of the software manuals and the backup copy of the software are not relevant in determining when and where the sale takes place. This transaction is not subject to manufacturing B&O tax.

     (iii) Example 12. Same facts as Example 10 of this subsection, except that in addition, P's Design subsequently purchases 50 additional copies of the software from DEF under the same site license agreement. P's Design merges with another company, and the additional copies are needed for the use of its new employees. No additional copy of the software is delivered to P's Design in fulfilling this new agreement. Neither DEF nor P's Design is subject to manufacturing B&O tax. DEF, however, is subject to retailing B&O tax, and it must collect retail sales tax from P's Design for the subsequent sale of the 50 additional copies of software because the original copy of the software was delivered in Washington unless P's Design provides DEF with a multiple points of use exemption certificate as discussed in subsection (11) of this section. However, if the original sale of the license had included delivery of the prewritten software by a tangible storage device (and was therefore subject to manufacturing B&O tax), then the licensor is also subject to manufacturing B&O tax based on the value of the additional licenses.

     (iv) Example 13. GH Computers, Inc., sells at retail a multiple site license of its prewritten computer software to Quick, Inc. GH is located outside Washington, while Quick is located in Washington, other states and other countries. The desktop software is licensed on an unlimited basis, which means that there are no restrictions of its use by Quick. The software is delivered to Quick outside Washington. Quick then electronically duplicates the software and distributes the software to all of its 500 employees, of which 100 employees are located in Washington. The software is electronically downloaded into the desktop computers of all employees and is immediately put into use. Use tax is due on the value of the 100 copies of prewritten computer software used in Washington.

     (v) Example 14. Same facts as Example 13 of this subsection, except that under the original site license agreement, Quick is entitled to reproduce, distribute, and use up to 500 copies of the desktop software. Then Quick merges with another company, and additional copies are needed for the use of its new employees. Quick, therefore, subsequently purchases 100 additional copies of the software from GH under the same site license agreement. No additional copy of the software is delivered to Quick in fulfilling this new agreement. Quick distributes the additional copies of the software to its 100 new employees, of which 50 employees are located in Washington. Use tax is due on the value of the 50 additional copies of prewritten computer software used in Washington.

     (5) Key to activate computer software. A key, or an enabling or activating code, may be required in some instances to activate computer software and put the software into use, and the key may be delivered to a purchaser after the software is already delivered and in possession of the same purchaser. In such instances, the sale of computer software occurs when both the key and the software are delivered to the purchaser. The sale takes place where the software is received by the purchaser in accordance with RCW 82.32.730. However, if the place of receipt for the software is unavailable to the vendor because the software was delivered by a third party, then the sale takes place where the key is received in accordance with RCW 82.32.730. There is no separate sale of the key from the software, regardless of how such sale may be characterized by the vendor or by the purchaser.

     See subsection (4) of this section for more information if a site license of prewritten computer software is involved. If the sale of the prewritten software is subject to manufacturing B&O tax, then the sale of the key required by that prewritten software is also subject to manufacturing B&O tax. The income from the sale of a key is part of a sale of prewritten computer software, whether the sales transactions are together or separate.

     (a) Example 15. JKL Computers, Inc., an in-state business, sells at retail prewritten computer software to Rebecca. JKL delivers the software to Rebecca in this state. The prewritten computer software, however, cannot be activated without a key. JKL subsequently delivers the key in this state to Rebecca for a separate price. JKL is subject to retailing B&O tax, and it must collect retail sales tax from Rebecca on the entire sale of the software including the separate charge for the key. The entire sale takes place in this state (where the software is delivered) when both the software and the key are delivered to Rebecca. There is no separate sale of the key, regardless of the fact that JKL delivers the key to Rebecca for a separate charge.

     (b) Example 16. Same facts as Example 15 of this subsection, except that JKL subsequently delivers the key outside this state to Rebecca for a separate price. JKL is subject to retailing B&O tax, and it must collect retail sales tax from Rebecca on the entire sale of the software including the separate charge for the key. The entire sale takes place in this state (where the software is delivered) when both the software and the key are delivered to Rebecca. There is no separate sale of the key, regardless of the fact that JKL delivers the key to Rebecca for a separate charge.

     (c) Example 17. MNO Computers, Inc., is an in-state software developer. TKO Computers, Inc., an out-of-state original equipment manufacturer of computers (OEM), agrees in contract with MNO to distribute MNO's prewritten computer software on its computers. TKO delivers MNO's inoperable software to Sally as part of the sale of the computer system. Sally, however, must purchase a key directly from MNO in order to activate and use the software. MNO has no knowledge of where the software was initially delivered to Sally, but MNO knows that the key is delivered to Sally in this state. MNO is subject to retailing B&O tax, and it must collect retail sales tax from Sally on the entire sale of the key and the inoperable software. The entire sale takes place in this state because the key is delivered in this state and MNO has no knowledge of where the inoperable software was initially delivered by TKO.

     (6) Client access license and server license for the server software. A server license, paid for at the time the server software is purchased, grants the buyer the right to install the server software on the buyer's server. A client access license (CAL) grants the buyer the right to access the server software.

     Charges for server licenses and CAL are a part of the sale of the server software, even if the charges are separately stated. The sales take place where the server software is delivered to the buyer.

     In cases where server software is delivered to the buyer and used in multiple locations, see subsection (4) of this section on site licenses for more information.

     (a) Example 18. ZZ Computers, Inc., an in-state business, sells at retail server software to Jack. ZZ delivers the server software to Jack in Washington. ZZ also provides Jack with client access licenses for free allowing Jack the right to access the server software from his personal computers. The sale of server software to Jack is subject to retailing B&O tax, and ZZ must collect retail sales tax from Jack for the same sale.

     (b) Example 19. Same facts as Example 18 of this subsection, except that ZZ makes two separate sales at retail of two types of prewritten computer software to Jack. One is server software, and the other is client software (which is different from client access licenses). ZZ delivers the server software to Jack in Washington where Jack's server is located. ZZ delivers the client software to Jack outside Washington where all of Jack's personal computers are located. Only the sale of server software to Jack is subject to retailing B&O tax, and ZZ must collect retail sales tax from Jack for the same sale. Jack may use a multiple points of use exemption certificate for the server software.

     (7) Other activities associated with computer software.

     (a) Customizing prewritten computer software. Gross income received for customizing prewritten computer software is subject to service and other activities B&O tax. RCW 82.04.29001.

     (i) What is customizing prewritten computer software? RCW 82.04.215 provides that "customization of prewritten computer software" is any alteration, modification, or development of applications using or incorporating prewritten computer software for a specific person.

     "Customization of prewritten computer software" includes individualized configuration of software to work with other software and computer hardware but does not include routine installation. Customization of prewritten computer software does not change the underlying character or taxability of the original prewritten computer software.

     (ii) One nonitemized price for prewritten computer software, customization, and routine installation. If prewritten computer software, customization of prewritten computer software, and routine installation are sold for a one nonitemized price, the entire charge is considered to be subject to retail sales tax. See (a)(iv) of this subsection for more information on routine installation.

     (iii) Separately stated charge for customization of prewritten computer software. Where there is a reasonable separately stated charge on an invoice or other statement of the price given to the purchaser for customization of prewritten computer software (including installation that is not routine, see (a)(i) of this subsection), such customization is subject to service and other activities B&O tax. If a charge for customization of prewritten computer software is not separately stated from a sale of prewritten computer software, the entire charge is considered a retail sale subject to retail sales tax.

     (iv) Customization of prewritten computer software versus routine installation. Customization of prewritten computer software includes custom installations but does not include routine installation. "Routine installation" means the process of loading program files and installation files onto a computer. Routine installation includes the process of "clicking through" dialog boxes to install prewritten software. Routine installation does not require any specialized knowledge or skills. Custom installation generally requires programming by a programmer to integrate customized elements of prewritten computer software.

     (v) Separately stated charge for routine installation from customization of prewritten computer software. Where there is a separately stated charge on an invoice or other statement of the price given to the purchaser for routine installation from customization of prewritten computer software, routine installation is subject to retailing B&O tax and retail sales tax. If a charge for routine installation is not separately stated from customization of prewritten computer software and is de minimus the transaction would not be subject to retail sales tax, but instead subject to service and other activities B&O tax.

     (vi) Examples.

     (A) Example 20. Tee, Inc., needs financial modeling software that can tie into its existing computer systems. Because of its unique business, however, Tee needs the industry-wide computer software offered by PQR Computers, Inc., to be modified to meet the needs of Tee. Both Tee and PQR are in-state corporations, and the software is delivered in this state. PQR provides a separately stated charge to Tee for customization of prewritten computer software performed in this state that is supported by the terms of the sales agreement. PQR is subject to retailing B&O tax, and it must collect retail sales tax from Tee for the sale of prewritten computer software in Washington. PQR, in addition, is subject to service and other activities B&O tax for the customization of prewritten computer software in Washington.

     (B) Example 21. Same facts as Example 20 of this subsection, except that, in addition, PQR provides a separately stated charge to Tee for routine installation of prewritten computer software in this state. This charge represents installation of only the prewritten portion of the software. In addition to the tax treatments in Example 20 of this subsection, PQR is subject to retailing B&O tax and it must collect retail sales tax from Tee for the routine installation in Washington.

     (b) Installing or uninstalling computer software.

     (i) Gross income received from installing or uninstalling custom software is subject to service and other activities B&O tax.

     (ii) Gross proceeds of sales for routine installation of prewritten computer software are subject to retailing B&O tax and retail sales tax. See (a)(iv) of this subsection for more information on routine installation. Routine installation of prewritten computer software includes charges for labor and services in respect to the installation, such as travel costs for the routine installation of the software. As of July 1, 2008, if the routine installation occurs through remote access by someone outside the state of Washington, then the installation is sourced pursuant to RCW 82.32.730.

     Example 22. XYZ Computers, Inc., is hired by Dan for routine installation of prewritten software onto Dan's computers. XYZ's out-of-state employee remotely accesses Dan's computers in Washington to install the prewritten software on his computers. If XYZ has nexus with Washington, then it must collect and remit the sales tax. If XYZ does not have nexus, then Dan must pay use tax.

     Gross proceeds of sales from uninstalling prewritten computer software are subject to retailing B&O tax and retail sales tax.

     Example 23. XYZ Computers, Inc., is hired by Dan to remove prewritten computer software from his computers. Removal of the prewritten computer software requires uninstalling the software from the computer. XYZ sends an employee to Dan's location to remove the software from his computers. Charges for removal of the prewritten computer software are subject to retailing B&O tax and retail sales tax.

     (c) Repairing, altering, or modifying computer software. Repair of prewritten computer software for more than one person may be distributed as a fix or patch by tangible storage media or electronically in the nature of software upgrades and updates. The sale of prewritten computer software upgrades and updates is a sale of prewritten computer software subject to retailing B&O tax and retail sales tax.

     Alteration or modification of prewritten computer software performed for a specific person is subject to the service and other activities B&O tax. Such alteration or modification of prewritten computer software for a specific person constitutes customization of prewritten computer software. See RCW 82.04.215.

     (i) Example 24. STU Computers, Inc., a Washington company, is hired by Betty to perform repairs (using primarily human effort) via remote access on her prewritten computer software in Washington. STU is performing alteration or modification of prewritten computer software for a specific person and is subject to service and other activities B&O tax.

     (ii) Example 25. VW Computers, Inc., an out-of-state service provider, is hired by Clyde to perform alterations or modifications (using primarily human effort) via remote access on his prewritten computer software located in this state. VW's facility is located outside this state. VW may be subject to service and other activities B&O tax if it has nexus with Washington.

     (d) Maintaining computer software. Computer software maintenance agreements typically include, but are not limited to, support activities such as telephone consulting, help desk services, remote diagnostic services, and software upgrades and updates.

     (i) Tax treatment of computer software maintenance agreements in general. Sales of stand-alone computer software maintenance agreements that include telephone consulting, help desk services, remote diagnostic services, and other professional services only, are taxable under the service and other activities B&O tax. However, if the services are part of a sale of an extended warranty on or after July 1, 2005, then the sale is subject to retailing B&O tax and retail sales tax. See WAC 458-20-257 (Warranties and maintenance agreements) for information about extended warranties.

     Stand-alone sales of updates or upgrades to prewritten computer software are retail sales of tangible personal property subject to retailing B&O tax and retail sales tax.

     (ii) Prewritten computer software maintenance agreement with mixed elements. The sale of a prewritten computer software maintenance agreement for a single nonitemized price that includes professional service components such as telephone consulting and retail components such as upgrades and updates of prewritten computer software is generally considered a retail sale subject to retailing B&O tax and retail sales tax unless charges for the upgrades and updates are de minimis.

     In cases where the charges for the professional service component(s) and the retail component(s) are separately stated within a prewritten computer software maintenance agreement and invoice, then each activity is taxed according to the nature of the activity.

     (iii) Duplication of prewritten computer software upgrades and updates. Duplication of prewritten computer software upgrades and updates is subject to manufacturing B&O tax upon the value of products, if the software upgrades and updates are delivered by means of tangible storage media which is retained by the purchaser. This is the case regardless of any maintenance agreement with mixed elements involved. The measure of tax is presumed to be the contract price of the maintenance agreement, unless the person can prove otherwise. See WAC 458-20-112 (Value of products) for more information.

     If the software upgrades and updates are delivered from the seller by means other than tangible storage media which is retained by the purchaser, then the software upgrades and updates are not subject to manufacturing B&O tax.

     (iv) Maintenance agreement on custom software and customized elements of prewritten computer software. Sales of maintenance or support services relating to custom software or the customized elements of prewritten computer software are subject to the service and other activities B&O tax. Such services, including upgrades and updates, are rendered in respect to the custom or customized software and take on the underlying character and taxability of the custom or customized software.

     (v) Examples.

     (A) Example 26. On December 15, 2005, CBA Computers, Inc., sells at retail a prewritten computer software maintenance agreement to Frank for his prewritten software. The software maintenance agreement includes an extended warranty for the software, software upgrades and updates, and telephone consulting services for a single nonitemized price. The consulting services are not offered exclusively in connection with the software, nor are they essential to use of the software. CBA delivers the software upgrades and updates electronically. CBA is subject to retailing B&O tax, and it must collect retail sales tax from Frank for the sale of the mixed agreement.

     (B) Example 27. Same facts as Example 26 of this subsection, except that CBA delivers the software upgrades and updates on compact disks. CBA is subject to retailing B&O tax, and it must collect retail sales tax from Frank for the sale of the mixed agreement. In addition, CBA is subject to manufacturing B&O tax on duplication of software upgrades and updates. The measure of tax is presumed to be the contract price of the maintenance agreement, unless CBA can prove otherwise.

     (C) Example 28. Same facts as Example 26 of this subsection, except that CBA provides a separately stated charge for each component of the maintenance agreement. CBA is subject to retailing B&O tax, and it must collect retail sales tax from Frank for the charges on prewritten software upgrades and updates and on the extended warranty purchased after July 1, 2005. CBA is subject to service and other activities B&O tax for the charge on telephone consulting services.

     (D) Example 29. FED Computers, Inc., sells at retail a computer software maintenance agreement to Greta for her software. The maintenance agreement covers only software upgrades and updates. Greta's software is prewritten computer software with customized elements. FED provides the maintenance services to Greta at one nonitemized charge. FED is subject to retailing B&O tax, and it must collect retail sales tax from Greta for the sale of the entire maintenance agreement of the prewritten computer software.

     (E) Example 30. Same facts as Example 29 of this subsection, except that FED provides a separately stated charge for maintaining the customized elements. FED is subject to service and other activities B&O tax on the charges for maintaining the customized elements. FED is subject to retailing B&O tax, and it must collect retail sales tax from Greta for the charge on maintaining prewritten computer software.

     (e) Computer software training. Gross income received for training on the use of custom software is subject to service and other activities B&O tax. Gross income received for training on the use of prewritten computer software is subject to service and other activities B&O tax, if the charge for such training is separately stated from the sale of prewritten computer software. If the charge for software training is not separately stated from the sale of prewritten computer software and the prewritten software value is more than de minimus, the entire charge is considered to be a retail sale subject to retailing B&O tax and retail sales tax.

     (8) Licensing computer software - Royalties. Income received from charges in the nature of royalties for the licensing of computer software is taxable under the royalties B&O tax classification.

     (a) What are royalties? RCW 82.04.2907 provides that "royalties" means compensation for the use of intangible property, such as copyrights, patents, licenses, franchises, trademarks, trade names, and similar items. The true object of a transaction involving royalties is to grant an intangible right to reproduce and distribute copies of computer software for sale. It does not, however, include compensation for the licensing of prewritten computer software to the end user. The manner in which computer software is sold (e.g., volume of transactions, subscription license, term license, or perpetual license) or the manner in which payment amount is determined (e.g., fixed fee per copy, percentage of receipts, lump sum, etc.) does not alter the royalty nature of the transaction.

     (b) Royalties versus site license. Regarding royalties, the true object of the transaction is to grant an intangible right to reproduce and distribute copies of computer software for sale. In contrast, the true object of a site license is the sale to an end user of prewritten computer software for use on its computers. See subsection (4) of this section for more information on site licenses.

     (c) Royalties versus wholesale sales of prewritten computer software. See subsection (3)(a) of this section for more information.

     (d) Examples.

     (i) Example 31. HG Computers, Inc., an original equipment manufacturer (OEM), acquires prewritten computer software from LL Software, Inc., under a license to reproduce and distribute the prewritten computer software as part of a bundled computer hardware and software package HG sells to end users. LL retains all of its ownership rights to the software. The gross income received by LL from granting intangible rights to reproduce and distribute prewritten computer software to HG is subject to royalties B&O tax.

     (ii) Example 32. Same facts as Example 31 of this subsection, except that, in addition, HG acquires a site license from LL for the purposes of copying and using the prewritten computer software as an end user. LL delivers the software to HG. Amounts received by LL for the sale of a site license are subject to retailing B&O tax and retail sales tax.

     (9) Special use tax exemption for computer hardware and computer software donated to certain schools or colleges. Use tax does not apply to the use of computer hardware and prewritten software irrevocably donated to any public or private nonprofit school or college, as defined under chapter 84.36 RCW. RCW 82.12.0284.

     (10) Sales of remote access to prewritten software.

     (a) Remote access to prewritten software. Sales of remote access to prewritten software on the seller's (or a third-party's) servers are subject to retail sales tax, when the sale is sourced to Washington pursuant to RCW 82.32.730.

     Example 33. BE Software, Inc., a Washington corporation, offers a variety of prewritten software products on-line, but not for download, to its customers for a monthly subscription fee. BE Software must charge Washington customers retail sales tax and is subject to retailing B&O tax for the subscription fees received from its Washington customers.

     (b) Exemptions from retail sales or use tax for remote access software. The following exemptions only apply to remote access prewritten software, and not other types of prewritten software sold.

     (i) Purchases of prewritten software that will be offered remotely by the purchaser to its own customers is exempt from retail sales tax. The purchaser of the prewritten software must provide an exemption certificate to the seller in order to receive the exemption. The income from the sale of the prewritten software is subject to retailing B&O tax. RCW 82.04.190 (2)(f).

     Example 34. BE Software, a Washington company, purchases prewritten software from Joe's Software Developer Co., that BE will provide remotely to its customers. BE provides an exemption certificate to Joe's for the purchase of prewritten software. Joe's does not collect or remit retail sales tax, but does pay retailing B&O tax on the income from the sale.

     (ii) Made available free to the general public. Retail sales and use taxes do not apply to the purchase or use by a business or other organization of remote access prewritten software in order to make that remote access prewritten software available free of charge for the use or enjoyment of the general public. Buyers claiming this exemption must provide the seller with a properly completed "Digital Products and Remote Access Software Exemption Certificate" or other exemption certificate acceptable to the department.

     (A) Available for free. In order to qualify, the remote access prewritten software purchased must be made available for free. In this context, "free" means that the recipient of the remote access prewritten software does not need to provide anything of significant value. If the purchaser requires something of significant value from the recipient in exchange for the remote access prewritten software, it is not given away for free.

     (B) "General public" means all persons and is not limited or restricted to a particular class of persons, except that the general public includes:

     (I) Certain classes of persons defined by their residency or ownership: The general public includes a class of persons residing or owning property within the boundaries of any state (e.g., Washington), political subdivision of a state (e.g., King County), or a municipal corporation (e.g., Seattle).

     (II) Library customers. With respect to libraries, the term general public includes authorized library patrons.

     (C) Purchaser must have the legal rights to provide the remote access prewritten software to the general public: The exemption provided in subsection (3) of this section does not apply unless the purchaser has the legal right to broadcast, rebroadcast, transmit, retransmit, license, relicense, distribute, redistribute, or exhibit the remote access software, in whole or in part, to the general public.

     (11) Multiple points of use exemptions.

     (a) The retail sales tax does not apply to the sale of prewritten computer software or remote access prewritten software if the buyer provides the seller with an exemption certificate claiming multiple points of use.

     (b) If the sale of the remote access software or license to the remote access software is sourced to Washington and the purchaser does not provide an exemption certificate, then the entire charge is subject to retail sales tax.

     (i) Requirements. A buyer is entitled to use an exemption certificate claiming MPU only if the buyer is a business or other organization and the prewritten software or remote access prewritten software purchased will be concurrently available for use within and outside Washington. A buyer is not entitled to use an exemption certificate claiming MPU for prewritten software purchased for personal use.

     (ii) Concurrently available. "Concurrently for use within and outside this state" means that employees or other agents of the buyer may use the prewritten software or remote access software simultaneously from one or more locations within this state and one or more locations outside this state.

     (iii) Apportionment (allocation) of use tax. For purposes of this subsection on MPU, "allocation" and "apportionment" will have the same meaning. A business or other organization subject to use tax on prewritten software or remote access software that is concurrently available for use within and outside this state is entitled to apportion the amount of tax due this state based on users in this state compared to users everywhere. Additionally, the department may authorize or require an alternative method of allocation apportionment supported by the taxpayer's records that fairly reflects the proportion of in-state to out-of-state use by the taxpayer.

     (c) Records requirement. No allocation under this section is allowed unless the allocation method is supported by the taxpayer's records kept in the ordinary course of business.

     "User" means an employee or agent of the taxpayer who is authorized by the taxpayer to use the remotely accessed software purchased in the performance of his or her duties as an employee or other agent of the taxpayer.

[]

OTS-4877.1

NEW SECTION
WAC 458-20-15503   Digital products.   This rule provides a structured approach for determining tax liability for digital products and digital codes. For purposes of this rule, a digital product includes digital goods or digital automated services, which are described in detail below. The sale or use of digital products and digital codes is generally subject to retail sales or use tax unless purchased for resale or some other exemption applies.

     This rule is organized into six sections. Each section addresses a question or topic relevant to the determination of whether a person is selling or purchasing a digital product or digital code and, if so, what are the tax consequences that follow from such activity.

     1. Are the products or services transferred electronically?

     2. Does the product or service meet the general definitions of digital product or digital code?

     3. Are there applicable exclusions from the general definitions of the digital product or digital code?

     4. Are the sales of the digital product or digital code sourced to Washington?

     5. Are there applicable retail sales or use tax exemptions for the purchase or use of the digital product or digital code?

     6. Miscellaneous provisions.

     Examples included in this rule identify a number of facts and then state a conclusion; they should be used only as a general guide. Additionally, each fact pattern in each example is self contained (e.g., "stands on its own") unless otherwise indicated by reference to another example. The tax consequences of all situations must be determined after a review of all the facts and circumstances. Examples requiring that sales tax be collected by the seller assume that the seller has "tax nexus" with Washington and is therefore subject to Washington taxes.

     (102) Transferred electronically. Means the purchaser obtains the product by means other than tangible storage media. Generally, this means the product is transferred using the public internet, a private network, or some combination. However, it is not necessary that the product be delivered to the purchaser. As long as the purchaser may access the product, it will be considered to have been electronically transferred to the purchaser. For example, whether a digital movie is downloaded by the user or streamed by the user, it is considered to be "transferred electronically." Alternatively, the same movie purchased on tangible media (e.g., DVD, etc.) is the purchase of tangible personal property and is not considered to be either the sale of a digital product or transferred electronically.

     (202) Digital goods. Means sounds, images, data, facts, or information, or any combination thereof, transferred electronically, with certain exclusions discussed in Part III of this rule. The term "digital goods" includes within it the specific term "specified digital products" (as required by the Streamline Sales and Use Tax Agreement).

     (a) Specified digital products. Means electronically transferred digital audio-visual works, digital audio works, and digital books.

     (i) Digital audio works. These are products that result from the fixation of a series of musical, spoken, or other sounds. Digital audio works include ringtones, recorded or live music, readings of books or other written materials, speeches, and other sound recordings. For example, a music file in MP3 format accessed or downloaded through the internet is a digital audio work.

     (1) A "ringtone" is a digitized sound file that is downloaded onto a communication device (e.g., mobile phone) and may be used to alert the user to an incoming communication such as a call or text message.

     (2) A ringtone does not include "ring-back tones" or other digital audio files that are not stored on the purchaser's communication device. In other words a ring-back tone is not a "specified digital product." A ring-back tone may be a digital automated service or a digital good depending on the facts. See analysis for digital automated services in subsection (2) below.

     (ii) Digital audio visual works. These products are a series of related images which, when shown in succession, impart an impression of motion, together with accompanying sounds, if any. Digital audio visual works include movies, music videos, videos of live events, and news and entertainment programs. For example, a movie downloaded or accessed via the internet is a digital audio visual work.

     (iii) Digital books. These are books in a digital format that are generally recognized in the ordinary and usual sense as books. A digital book does not include periodicals, magazines, newspapers, chat rooms, or weblogs. For example, a cookbook in a PDF format downloaded or accessed through the internet is a digital book.

     (b) Other digital goods. The following list illustrates the types of products that are also digital goods in addition to the subclass of "specified digital products" discussed above. This list is merely illustrative and not exhaustive:

     (1) A digital schematic of a lawnmower engine transferred electronically.

     (2) A digital car history report transferred electronically.

     (3) A digital picture transferred electronically.

     (4) Digital periodicals or magazines transferred electronically.

     (5) A digital presentation that includes still photos and accompanying audio content transferred electronically.

     (c) Digital goods prior to July 26, 2009. The mere accessing or streaming of a digital good was not a retail sale before July 26, 2009, because the customer did not receive possession of the digital good. Instead, accessing or streaming a digital good was subject to the service and other activities business and occupation ("B&O") tax. The sale of a digital good to a customer who downloaded the digital good was a retail sale because the customer received possession of the digital good. See Part VI, subsection (3) for a discussion of tax amnesty for past periods.

     (203) Digital automated services. Means services transferred electronically that use one or more software applications.

     (a) Digital automated services may include. One or more software applications either prewritten or custom, as well as components that are similar to stand-alone digital goods. For example, an on-line information service may contain data, facts, or information whose use is facilitated by one or more software applications that provide search capabilities and other functionality. Thus, digital automated services will include software and may include elements similar to stand alone digital goods, which operate together in an integrated fashion to provide an electronically transferred service.

     (i) Distinguishing a digital good from digital automated services. A digital good is not a service involving one or more software applications. A digital good consists of static images, sounds, data, facts, information or any combination thereof. Clear examples of the static nature of digital goods are digital books, digital music, digital video files, and raw data.

     (ii) Distinguishing remote access software from digital automated services. Remote access software is solely prewritten software that is made remotely accessible by the vendor from the vendor's server (or other third-party server) for a customer. To the extent that components similar to digital goods and/or additional services or infrastructure are supplied with the prewritten software the sale may be the sale of a digital automated service (see also Part III subsection (2)(h) for an exclusion of remote access software from digital automated services).

     (b) Examples:

     Example 1. On-line information service. XYZ provides an on-line service that uses one or more software applications to facilitate the use of news and information with features such as: Research history, natural and boolean searching, chat forums, chart creation, document and word flagging, information organizing folders, etc. In this example software features facilitate the use of the information. XYZ's service is a digital automated service.

     Example 2. On-line data gathering service. QPR provides a service that uses one or more software applications to "crawl the internet" in order to identify, gather, and categorize digital information according to specified criteria. In this example software facilitates the gathering, identifying and categorizing of information acquired from the internet. The service is a digital automated service.

     Example 3. On-line gaming service. CFC provides an on-line gaming service that allows subscribers to play a game with other subscribers in a real time multiplayer environment using software accessed via the internet. In this example the gaming software is combined with additional capabilities that enable a real time multiplayer environment that is not otherwise available. The service is a digital automated service. The same software purchased in stores for single player use without the multiplayer on-line environment would be prewritten software.

     Example 4. On-line rental facilitation service. BFC provides an on-line service that facilitates apartment building management. The on-line service lists and advertises apartment vacancies, screens applicants, routes maintenance requests, and accepts and processes rental payments. In this example the software based service facilitates and automates various administrative functions and coordinates third-party services for apartment renting. The service is a digital automated service.

     Example 5. Marketplace search engine. Company sells digital music files (i.e., digital goods) on its web site. In order to locate specific digital music files customers may use a free software based search function that is integrated into Company's web site. Customers may also find the digital music file they are seeking by clicking on a series of links to get to the desired music file. Company's software based search function associated with the sale of the digital music file does not transform the sale of the digital music file into a digital automated service. Company is selling a digital good (i.e., music file) and not a digital automated service.

     Example 6. Remotely accessed prewritten software. Company licenses to users prewritten word processing software that it hosts on its computers. The software includes access to clip-art image files that can be inserted into documents created with the word processing software. Company is selling remotely accessed prewritten software and not a digital automated service or digital goods. The addition of the clip art with the software does not transform the remotely accessed software into a digital automated service or a digital good.

     (c) Digital automated service prior to July 26, 2009. The sale of a digital automated service to consumers was not a retail sale before July 26, 2009. Generally, income earned from such sales was subject to B&O tax under the service and other activities classification.

     (204) Digital codes. These are codes that provide a purchaser with the right to obtain one or more digital products, if all of the digital products to be obtained through the use of the code have the same retail sales and use tax treatment. A digital code may be obtained by any means, including e-mail or by tangible media regardless of its designation as song code, video code, book code, or some other term. For example, a soft drink bottle cap has an alphanumeric code that, when entered on-line at the soft drink company's web site, provides the customer with a free digital music file for download. The code is a digital code.

     (a) Products with mixed tax treatment. Codes that provide the right to obtain one or more products that do not have the same retail sales and use tax treatment are not digital codes.

     (b) Codes that represent a stored monetary value, redeemable cards, gift cards, or gift certificates. Codes that represent a stored monetary value that is deducted from a total as it is used by the purchaser or that represent a redeemable card, gift card, or gift certificate that entitles the holder to select digital products of an indicated cash value, are not digital codes.

     Example 7. Calvin purchases a code at his local grocery store for use on Joe Seller's (JS) web site. At check out, Calvin tells the grocery store clerk to put $25.00 in value on the plastic card containing the code. Calvin then goes to JS's web site and inputs the code from the card. The $25.00 value of the card is stored in Calvin's "account" and can be used on any purchase by Calvin from JS's web site. Calvin then purchases five digital songs for $5.00 from JS. At check out from JS's web site, $5.00 is deducted from Calvin's account. When the transaction is complete, Calvin has a $20.00 balance remaining in his account on JS's web site. Because the code represents a stored monetary value, it is not a digital code.

     (302) Exclusions from the definition of digital good are:

     (a) Telecommunications and ancillary services as defined in RCW 82.04.065. These services may be used to distribute digital goods, digital automated services, and digital codes, but are not themselves any of these products.

     (b) Computer software as defined in RCW 82.04.215 and WAC 458-20-15502. These are coded instructions designed to cause a computer or automatic data processing equipment to perform a task. A digital good may have coded instructions, but a digital good's function is to provide content (e.g., the images, sounds, facts, data, or information).

     (c) The internet and internet access as defined in RCW 82.04.297. Internet access refers to a service that allows users to connect to the internet as well as obtain certain services that are incidental to the provision of internet access when furnished to users as part of such service (e.g., e-mail or personal electronic storage capacity, which is furnished with access to the internet).

     (d) Professional or personal services represented in electronic form are not a digital good. This exclusion applies where the service primarily involves the application of human effort by the service provider, and the human effort originated after the customer requested the service. See subsection (2)(a) of this Part III for a discussion of the term "primarily." For example, an electronic engineering report created at the customer's request that reflects an engineer's professional analysis, calculations, and judgment, which is sent to the customer electronically, is considered evidence of a professional service and not a digital good. In contrast, a digital template for a last will and testament that was originally created by an attorney but made accessible to multiple customers on the internet (a "fill-in-the-blank will") is either a digital good or a digital automated service (depending on software functionality) and would not be a representation of a professional service because the fill-in-the-blank will was not created for a specific client.

     (i) Photography. This exclusion for professional or personal services does not apply to photographers in respect to amounts received for the taking of digital photographs that are transferred electronically to the end user/customer. In this respect a digital photographer's transactions are subject to retail sales tax in a similar manner as other photographer's transactions pursuant to WAC 458-20-140.

     (e) Exclusions listed directly below for digital automated services are also exclusions from the definition of digital good.

     (303) Exclusions from the definition of digital automated service are:

     (a) Services that require primarily human effort by the seller and the human effort originated after the customer requested the service. In this context, "primarily" means greater than fifty percent of the effort to perform the service involved human labor. To determine whether the fifty percent or greater threshold is satisfied, the following factors are considered:

     (i) Factors.

     (1) Costs. The relative costs incurred by the service provider to provide the human labor component and the automated component. If the human labor costs are greater than fifty percent of the total costs to perform the service, this is some evidence that the service requires primarily human effort.

     (2) Time. The relative time spent on performing human labor and the automated component. If the time spent performing the human labor component involves greater than fifty percent of the total time spent performing the service, this is some evidence that the service requires primarily human effort.

     (3) Revenue. The extent to which revenue earned may be attributed to human labor or an automated component. If more than fifty percent of the revenue earned is a direct result of the human effort performed, this is some evidence that the service requires primarily human effort.

     (ii) Examples:

     Example 8. Company creates web sites for customers. John requests that Company create a custom web site for John's business. Company creates new digital artwork and performs custom programming after John requests the service. Because everything was custom made (e.g., 100%) after John requested the services, this service was performed with greater than 50% human effort. Company's sale to John is excluded from the definition of digital automated service.

     Example 9. Company has created multiple web site "templates" and sells access to the templates so that customers can create their own web sites. Customers can choose the style and color of their web site by selecting from a series of options contained in check boxes and drop down menus in the templates. Jacob purchases access to the templates and creates his own web site using the template. Company's sale to Jacob is a retail sale because Company did not expend any human effort after Jacob requested the service. Company merely provided Jacob access to its software-driven service. Jacob purchased a digital automated service. The fact that Jacob expended some human effort in completing the web site using the templates is not relevant since this was not human effort expended by Company.

     Example 10. Company contracts to provide services to Peter that generally fit within the definition of digital automated services. The contract term is for two years and includes essential software integration services. The integration services include custom programming and other human effort that will take place intermittently over a period of one month. The contract price states that the integration activities performed in the first month will cost $2,000. After the integration services are completed, there will be a monthly service fee of $2,000 for use of the service during the contract term. Thus, the total cost of the service over the two-year contract term is $48,000 ((23 months x $2,000 = $46,000) + ($2,000 for integration activities in the first month) = $48,000). The human effort component of the integration activities is 1 month of the 24-month contract term. Therefore, the human labor time spent performing the service is 1/24, or approximately 4%, of the total contract term. Additionally, the revenue associated with the human labor is $2,000, of the total contract value of $48,000. Therefore the revenue associated with the human effort is 2/48, or approximately 4%, of the total revenue associated with performing the service. Based on these two factors, the service provided by ABC to EFG does not require primarily human effort (i.e., human effort is approximately 4% for both factors) and is therefore not excluded from the definition of digital automated service.

     (b) Loaning or transferring money or the purchase, sale, or transfer of financial instruments. For purposes of this section, "financial instruments" include cash, accounts receivable and payable, loans and notes receivable and payable, debt securities, equity securities, as well as derivative contracts such as forward contracts, swap contracts, and options. For example, the electronic transfer of money from a savings account to a checking account, whether done for the customer by a bank teller or by an ATM machine, is excluded from the definition of digital automated service.

     (c) Dispensing cash or other physical items from a machine. An ATM is not providing a digital automated service when it dispenses cash to users of the ATM.

     (d) Payment processing services, including services such as electronic credit card processing activities conducted on-line or in physical retail stores via electronic transmission.

     (e) Parimutuel wagering and handicapping contests as authorized by chapter 67.16 RCW.

     (f) Telecommunications services and ancillary services as those terms are defined in RCW 82.04.065. For additional information, refer to the discussion above concerning the comparable exclusion from the definition of digital goods (see Part III section (1)(a)).

     (g) The internet and internet access as those terms are defined in RCW 82.04.065. For additional information, refer to the discussion above concerning the comparable exclusion from the definition of digital goods (see Part III section (1)(c)).

     (h) Remotely accessed prewritten software. Remotely accessed software provided on a standalone basis is excluded from the definition of digital automated service. However, software that is used in connection with a service that is transferred electronically would generally be included in the definition of a digital automated service.

     Example 11. Company sells remotely accessed gaming software that is identical in all substantive respects to the same software available in stores for individual use and installation on home computers. Company's sales to consumers would be treated as a sale of prewritten software remotely accessed and therefore is excluded from the definition of digital automated services.

     Example 12. Same facts as Example 11 except that Company, in addition to selling the remotely accessed software, also sells a monthly subscription service that provides on-line multiplayer capabilities, game rankings, and gaming tournaments. Company is selling a digital automated service. In this case the customers are not merely receiving the individual use of software, but instead an on-line gaming service facilitated by the software. Thus, the monthly subscription service is not excluded from the definition of digital automated service.

     (i) On-line education programs provided by the following:

     (i) Public or private elementary or secondary schools; or

     (ii) An institution of higher education as defined in Sections 1001 or 1002 of the federal Higher Education Act of 1965 (Title 20 U.S.C. Sections 1001 and 1002), as existing on July 1, 2009. This would include most colleges and universities. For the purposes of this section, an on-line educational program must be encompassed within the institution's accreditation.

     Example 13. ABC University, a qualifying institution of higher education under the federal Higher Education Act of 1965, provides an accredited on-line Spanish course for which it charges a quarterly access and use fee to students. The course is remotely accessed by students logging into a web site and accessing a fully interactive program that includes components of video, text, and audio, as well as extensive software code. This service would generally be considered a digital automated service. However, it is specifically excluded from the definition of digital automated service as an on-line educational program.

     (j) Live presentations such as lectures, seminars, workshops, or courses, where participants are connected to other participants and presenters via the internet or other networks, allowing the participants and the presenters to provide, receive, and discuss information together in real time.

     Example 14. Company provides an on-line seminar service for Customer. Company provides a panel of live speakers that make a presentation to Customer's employees listening to and viewing the seminar through an internet connection supplied by a third-party service provider. The seminar allows Customer's employees and panelists to ask and answer questions on a real time basis. Company's on-line seminar service is transferred electronically and uses one or more software applications and therefore would generally be considered a digital automated service. However, this type of service allowing live interaction is specifically excluded from the definition of digital automated service.

     Example 15. Same facts as Example 14 except that Company records the seminar and charges other companies a fee for accessing the seminar from Company's web site. The recorded presentation allows these customers to watch the presentation but it does not allow them to ask questions on a real time basis. Because it was prerecorded there is no live interaction contemporaneous with the live presentation, Company is selling a digital good.

     Example 16. Company provides on-line training courses to Steve for a fee. The training courses provide key interactive elements such as study guides, knowledge testing, and automated help, all facilitated by one or more software applications. Such courses are not live presentations and do not provide human interaction. Accordingly, Company is selling a digital automated service.

     (k) Travel agent services, including on-line travel services, and automated systems used by travel agents to book reservations.

     (l) On-line marketplace related activities, which are services that allow the person receiving the services to make on-line sales of products or services, digital or otherwise, using either:

     (i) The service provider's web site; or

     (ii) The service recipient's web site, but only when the service provider's technology is used either to:

     (1) Create or host the service recipient's web site; or

     (2) Process orders from customers using the service recipient's web site.

     Example 17. Company provides "electronic marketplace listing" services to sellers wishing to sell their products on the internet. Holcomb contracts with Company to "list and sell" his coffee mugs on Company's web site. Holcomb pays Company a service fee based on a percentage of each sales transaction completed on Company's web site. This on-line marketplace service is excluded from the definition of digital automated services.

     Example 18. Same facts as Example 17, except now Holcomb decides he no longer wants to be just another seller on Company's web site. Instead, Holcomb wants his own "retailing presence" on the internet so Holcomb contracts with Company to create and host Holcomb's new coffee mug web site ("Holcomb's Wacky World of Coffee"). This is an on-line marketplace service and excluded from the definition of digital automated services.

     (iii) Exclusion limitation. The services described in this subsection do not include the underlying sale of the products or services, digital or otherwise, by the person receiving the service. For instance, in Example 17, the sale by Holcomb of coffee mugs would still generally be subject to retail sales tax and retailing B&O tax as the sale of tangible personal property.

     (m) Advertising services, which 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 on-line referrals, search engine marketing and lead generation 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. Advertising services do not include web hosting services and domain name registration.

     Example 19. Company provides promotional services to customers wishing to market their products using the internet. Amy sells widgets on the internet and hires Company to provide its promotional services. Company consults with Amy on her marketing needs and then creates a marketing plan for her business. Company also creates and distributes on-line banners, links, and targeted e-mail "blasts" that promote Amy's business. All of the services provided by Company are advertising services excluded from the definition of digital automated services.

     Example 20. Company is paid by Amy for each click on a sponsored link on Company's web sites. The services provided by Company are advertising services excluded from the definition of digital automated services.

     (n) Storage, hosting, and back-up. The mere storage of digital products, digital codes, computer software, or master copies of software is excluded from the definition of digital automated services. This exclusion includes providing space on a server for web hosting or backing-up data or other information.

     Example 21. Company charges Rowe a fee for 25 terabytes of storage space under its "basic storage service" offering. Company also charges Rowe an additional and optional fee for security, web filtering, application firewalls, and load balancing under its "premium service" package offering. The "basic storage" services are mere storage services and excluded from the definition of digital automated services. However, the charges for the optional premium services are more than mere storage or hosting services. As such, the premium services are not excluded from the definition of digital automated services.

     (o) Data processing services means a primarily automated service 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: (1) Extract the required information in an appropriate form; or (2) 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. Data processing does not include remote access software used by the customer to process their own data.

     Example 22. Bango Corp, in preparation for litigation, hires Company, to use its automated technology to search Bango's computers and gather documents relevant to the lawsuit. Company's service also provides software tools that allow Bango to categorize, copy, store, and notate the gathered documents. Company's service is not data processing. The services performed primarily involve gathering data, and providing software tools that allow the customer to categorize, copy, store and notate documents in preparation for litigation. Accordingly, Company is selling a digital automated service.

     Example 23. Company provides check processing services to Wallo Corp, a bank operating in Washington. Company accepts scanned checks provided by Wallo and then uses its software and technology to extract the check dollar amount, account number, and verify the check has been signed. Company then provides this extracted and reformatted data back to Wallo allowing it to reconcile its customer's accounts. Company provides data processing services which are excluded from the definition of digital automated services.

     Example 24. Same facts as Example 23, except that Company accepts checks provided directly by Wallo's customers. Thus, check images come from both Wallo and Wallo's customers. The services provided by Company are still data processing services excluded from the definition of digital automated services even though the data does not come exclusively from Wallo.

     (402) Sourcing retail sales.

     (a) Business location. When a digital product or digital code is received by the buyer at a business location of the seller, the sale is sourced to that business location.

     Example 25. Frank goes to BigBox brick-and-mortar store in Washington and purchases a music file from an electronic kiosk in the store that connects to BigBox's web site using the internet and a computer. Frank purchases and downloads the music file inside BigBox's store by connecting his digital music player to the kiosk in the store. The sale of the music file is sourced to BigBox's store location in Washington.

     (b) Place of receipt. If the first sourcing rule explained above in (1) of this subsection does not apply, the sale is sourced to the location where receipt takes place.

     (i) The digital product or digital code may be received by the buyer at the buyer's location or by the buyer's donee (e.g., a gift recipient) at the donee's location.

     (ii) In the context of digital products and digital codes, "receive" and "receipt" means: (i) Making first use of digital automated services; or (ii) taking possession or making first use of digital goods or digital codes, whichever comes first.

     Example 26. Drogba Inc., located in Olympia, Washington, purchases a digital automated service from Company. Drogba's employees access and make first use of the service at their workstations located in Olympia. Company knows that the digital automated service is received in Olympia, and therefore will source the sale of the digital automated service to that location.

     (c) Address in records. If the first two sourcing rules explained above in (1) and (2) of this subsection do not apply, the sale is sourced to the location indicated by an address for the buyer that is available from the seller's business records maintained in the ordinary course of business, so long as use of this address does not constitute bad faith. For example, any address of the buyer held by the seller that reasonably estimates the receipt location will be sufficient, including an address contained in a relevant service contract, or an address used for accounts receivable purpose.

     Example 27. Nani Corp, located in Olympia, Washington, purchases a digital automated service from Company. The purchase contract between Nani and Company provides that Nani may have 5 users access the digital automated service from any of Nani's multiple locations. In this case, Company does not know where the digital automated service is received. However, Company has Nani's Olympia address in its business records and will therefore source the sales to Nani's Olympia address.

     (d) Address obtained during sale. If the first three sourcing rules explained above in (1), (2), and (3) of this subsection do not apply, the sale is sourced to the location indicated by an address for the buyer obtained during the consummation of the sale. For example, an address obtained during consummation of the sale would include the address of a buyer's payment instrument (e.g., billing address for a credit card), if no other address is available, so long as use of this address does not constitute bad faith.

     (i) Internet protocol (IP) address. The buyer's IP address is acceptable location information obtained at the time of sale if an address cannot otherwise be obtained during consummation of the sale.

     (e) Origin. If the first four sourcing rules explained above in (1), (2), (3), or (4) of this subsection do not apply, including the circumstance where the seller is without sufficient information to apply those provisions, then the sale must be sourced to the location determined by the address from which the digital good or digital code was first available for transmission by the seller, or from which the digital automated service was provided. Any location that merely provided the digital transfer of the product sold shall be disregarded.

     (403) Sourcing for use tax purposes. The sales sourcing rules above in section IV are for sourcing sales subject to retail sales tax under RCW 82.08.020 and RCW 82.32.730. What follows below is a discussion of use tax reporting obligations with respect to digital goods, digital automated services, and digital codes. Generally, use tax applies to the use of a digital product or digital code in Washington if retail sales tax has not already been paid and no exemption otherwise applies.

     (a) Digital good or digital code. "Use" means the first act within this state by which the taxpayer, as a consumer, views, accesses, downloads, possesses, stores, opens, manipulates, or otherwise uses or enjoys the digital good or digital code.

     (b) Digital automated service. "Use" means the first act within this state by which the taxpayer, as a consumer, uses, enjoys, or otherwise receives the benefit of the service.

     Example 28. Company, located in New York, sells a digital automated service to Lampard Inc., located in Washington. Lampard has employees in Washington who use the internet to access Company's services using an internet web browser. Company does not have nexus with Washington and is not required to charge and collect retail sales tax on the sale of its service to Lampard. Lampard has a use tax reporting obligation because it uses, enjoys, or otherwise receives the benefit of Company's service at its location in Washington.

     (502) Resale. The purchase of a digital product or digital code for resale with no intervening use is not subject to retail sales or use tax. Sellers should obtain from buyers a copy of the buyer's reseller permit, a properly completed "Digital Products and Remote Access Software Exemption Certificate," or otherwise comply with RCW 82.04.470 to substantiate the wholesale nature of the sale. See RCW 82.32.780.

     (503) Component of a new product. Generally, persons who purchase, acquire, own, hold, or use any digital product or digital code for purposes of incorporating it into a new product for sale will not be subject to retail sales tax on such a purchase. The digital product or digital code must become a component of the new product for sale. A digital code becomes a component of a new product if the digital good or digital automated service acquired through the use of the digital code becomes incorporated into a new product.

     (a) Product. For purposes of this subsection, "product" means a digital product, an article of tangible personal property, or the service of providing consumers with the right to access prewritten computer software (which is defined as a retail sale). For example, an industrial drill manufacturer and seller combines hardware, software, and data to create a new product, a "smart drill." Software embedded in the drill uses the variance data (also embedded in the drill) to control the hardware during drill operations. The data is a digital good purchased for use as a component of a new product for sale (i.e., the drill). Sellers should obtain from buyers a copy of the buyer's reseller permit, a properly completed "Digital Products and Remote Access Software Exemption Certificate," or otherwise comply with RCW 82.04.470 to substantiate the wholesale nature of the sale.

     (504) Made available free to the general public. Retail sales and use tax does not apply to the purchase or use by a business or other organization of a digital product (including a digital product acquired through the use of a digital code) in order to make that digital product (1) available free of charge for the use or enjoyment of (2) the general public. Buyers claiming this exemption must provide the seller with a properly completed "Digital Products and Remote Access Software Exemption Certificate" or other exemption certificate acceptable to the department.

     (a) Available for free. In order to qualify, the digital product purchased must be made available for free. In this context, "free" means that the recipient of the digital product does not need to provide anything of significant value. If the purchaser requires something of significant value from the recipient in exchange for the digital product, it is not given away for free.

     Example 29. Mauro purchases 1,000 digital audio files from Company to be used for a "give away" to the first 1,000 people to visit Mauro's web site as part of a marketing campaign conducted by Mauro. When people visit Mauro's web site they are required to fill out a marketing survey before they may receive the free digital audio file. The information gathered from the marketing surveys is then sold to a marketing company by Mauro. Thus, Mauro has required that recipients provide something of significant value in exchange for the digital audio file. This is not a "free" transaction and therefore, Mauro's purchase of the digital audio from ABC does not qualify for the exemption. (Compare Example 31.)

     (b) "General public" means all persons and is not limited or restricted to a particular class of persons, except that the general public includes:

     (i) Certain classes of persons defined by their residency or ownership. The general public includes a class of persons residing or owning property within the boundaries of any state (e.g., Washington), political subdivision of a state (e.g., King County), or a municipal corporation (e.g., Seattle).

     Example 30. The City of Evergreen (a municipal corporation) makes satellite images of land parcels available for free only to persons residing in Evergreen. Residents are required to enter their zip code prior to accessing the images and certify that they are a resident of the City. Accordingly, the City of Evergreen can purchase the satellite images exempt from retail sales and use tax.

     (ii) Library customers. With respect to libraries, the term general public includes authorized library patrons.

     (c) Buyer must have the legal rights to provide the digital product to the general public. The exemption provided in this subsection (3) does not apply unless the purchaser has the legal right to broadcast, rebroadcast, transmit, retransmit, license, relicense, distribute, redistribute, or exhibit the digital product, in whole or in part, to the general public.

     Example 31. Same facts as Example 29, except this time people visiting Mauro's web site are provided free access to the digital audio files for download and no survey information is required in exchange as in Example 29. Additionally, Mauro purchased the digital audio files from Company with the right to redistribute them to the general public. Accordingly, Mauro's purchase from Company qualifies for the exemption because he has made the digital audio files available free of charge to the general public pursuant to a contract that gives him rights of redistribution. Mauro only purchased 1,000 files and therefore must limit the distribution to the first 1,000 people. Most "give aways" will have similar quantity limitations but this fact alone will not disqualify such transactions under the "general public" requirement.

     (505) Purchased solely for business purpose.

     (a) Introduction. Retail sales and use tax does not apply to the sale to or use by a business of digital goods (and services rendered in respect to those digital goods), where the digital goods and services rendered in respect to digital goods are purchased solely for business purposes. This exemption only applies to purchases of digital goods and does not apply to the purchase of digital automated services, prewritten software, or remote access software.

     (b) Digital codes. This exemption also applies to the sale to or use by a business of a digital code if all of the digital goods to be obtained through the use of the code will be used solely for business purposes. If the digital code purchased by a business for a business purpose provides access to both digital goods and digital automated services, the purchase of the digital code does not qualify for this exemption.

     (c) "Business purposes" means the digital good is relevant to the buyer's business needs.

     (d) Government entities. This exemption does not apply to the purchase for personal or household purposes or for any activity conducted by a governmental entity.

     (e) Prior periods. For the period July 26, 2009, through June 30, 2010, the "business purpose" exemption applied only to "standard digital information." Standard digital information is a subset of digital goods.

     (i) Standard digital information is a digital good that consists primarily of data, facts, and/or information that is not generated or compiled for a specific client or customer. Standard digital information does not include a digital good that is comprised primarily of sounds or images.

     (506) Multiple points of use. Retail sales tax does not apply to the sale of digital products or digital codes purchased for use concurrently available for use within and outside this state. Note that Washington use tax still applies to the use of the digital product or digital code used in Washington.

     (a) Requirements. A buyer is entitled to claim MPU exemption only if:

     (i) The buyer is a business or other organization.

     (ii) The digital product purchased (or obtained by using the digital code purchased) will be concurrently available for use within and outside this state (not for personal use).

     (iii) The buyer must provide the seller with a valid exemption certificate acceptable to the department claiming multiple points of use (MPU). Buyers may use the department's "Digital Products and Remote Access Software Exemption Certificate" to claim this exemption.

     (b) Concurrently available. "Concurrently available for use within and outside this state" means that employees or other agents of the buyer may use the digital product simultaneously from one or more locations within this state and one or more locations outside this state.

     Example 32. Company sells an on-line patent searching service (digital automated service) to Iniesta Corp for use at Iniesta's headquarters in Washington and its R&D facility in California. Iniesta receives the right for five employees (users) in Washington and five employees (users) in California to use the digital automated service, which may be accessed and used simultaneously by these ten employees. In this case, the digital automated service is concurrently available for use by Iniesta both within Washington and outside Washington, and therefore Iniesta may claim the MPU exemption for its purchase of the digital automated service from Company.

     (c) Apportionment (allocation) of use tax. For purposes of this subsection on multiple points of use, "allocation" and "apportionment" will have the same meaning. A business or other organization subject to use tax on digital products or digital codes that are concurrently available for use within and outside this state is entitled to apportion the amount of tax due this state based on users in this state compared to users everywhere. Additionally, the department may authorize or require an alternative method of allocation supported by the taxpayer's records that fairly reflects the proportion of in-state to out-of-state use by the taxpayer. For example, in the case of Iniesta in Example 32 above, Iniesta would allocate one-half of the purchase price to Washington because five of its ten users are in Washington (e.g., 5/10 = 50%). Thus Iniesta would pay use tax to Washington based on fifty percent of the value of the digital automated service.

     (i) Records requirement. No allocation under this section is allowed unless the allocation method is supported by the taxpayer's records kept in the ordinary course of business.

     (ii) "User" means an employee or agent of the taxpayer who is authorized by the taxpayer to use the digital product purchased in the performance of his or her duties as an employee or other agent of the taxpayer.

     (d) Application to digital codes. A digital code is concurrently available for use within and outside this state if users may use the digital goods or digital automated services to be obtained by the code simultaneously at one or more locations within this state and one or more locations outside this state.

     (e) Reporting. A buyer claiming an exemption under this section must report and pay state and local use tax directly to the department. As explained above in subsection (c), use tax may be reported and paid on an apportioned basis if supported by the buyer's records.

     (507) Machinery and equipment. Generally retail sales and use tax does not apply to sales to or use by a manufacturer or processor for hire of certain machinery and equipment used directly in a manufacturing or research and development operation. This exemption is commonly referred to as the M&E exemption. (See RCW 82.08.02565 and 82.12.02565 and WAC 458-20-13601 for detailed information regarding the M&E exemption.) Included within the definition of "machinery and equipment" for purposes of the M&E exemption are digital goods. Accordingly, digital goods acquired by manufacturers and processors for hire and used directly in a manufacturing or research and development operation are exempt from retail sales and use tax, provided all of the requirements for the M&E exemption are met.

     (508) Audio or video programming. Income received from the sale of regular audio or video programming by a radio or television broadcaster is generally subject to service and other B&O tax and therefore not subject to retail sales tax. However, the sale of audio or video programming sold on a pay per program or subscription on-demand basis is generally subject to retail sales and use tax except as provided in section (d) and (e) below.

     (a) "Radio and television broadcasters" include satellite radio providers, satellite television providers, cable television providers, and providers of subscription internet television.

     (b) "Pay per program or subscription on-demand basis" means programming that the buyer pays for on a per program basis or a service that allows the buyer to access a library of programs at any time for a specific charge.

     (c) "Regular programming" is scheduled programming. The person watching cannot stop, pause, rewind, or otherwise control the broadcast of the scheduled programming, including the time that the scheduled program is broadcast.

     (i) The fact that a customer uses a recording device, such as a VCR or DVR, does not result in the broadcaster's programming being characterized as a digital good.

     (d) Cable television providers paying franchise fees. Cable television providers' sales of programming to consumers on a pay-per-program or subscription on-demand basis are not subject to retail sales and use tax if the cable television provider is subject to a franchise fee (under the authority of Title 47 U.S.C. Sec. 542(a)) on the gross revenue received from such sales. If the cable television provider is not subject to a franchise fee on the income from the sale of programming on a pay-per-program or subscription on-demand basis, then the exemption does not apply and the cable television provider must collect and remit retail sales tax on the retail sale of such programming.

     Example 33. XYZ sells video programming to customers using cable technology. XYZ does not pay a franchise fee. Customers of XYZ are charged a monthly subscription fee to receive video programming. Customers are charged additional fees to view selected movies. XYZ must charge and collect retail sales tax on the additional fees charged to view the selected movies, but not on the monthly subscription fee.

     (e) Satellite television providers do not generally pay franchise fees and therefore do not qualify for the retail sales and use tax exemption based on payment of franchise fees as described in subsection (d) above.

     (509) Newspapers. Generally, retail sales and use tax does not apply to sales of newspapers transferred electronically, provided that the electronic version has a printed counterpart, and the electronic version:

     (a) Shares content with the printed newspaper; and

     (b) Is prominently identified by the same name as the printed newspaper or otherwise conspicuously indicates that it is a complement to the printed newspaper.

     (c) "Printed newspaper" means a publication issued regularly at stated intervals at least twice a month and printed on newsprint in tabloid or broadsheet format folded loosely together without stapling, glue, or any other binding of any kind, including any supplement of a printed newspaper.

     (510) Received for free by end user. Digital products and digital codes obtained by the end user for free are not subject to use tax.

     (a) For example, a person's use of a free search engine is not subject to use tax.

     (b) For example, a person reading an on-line article or viewing an on-line picture for free is not subject to use tax.

     (511) Other use tax exemptions. Use tax does not apply to the use of digital goods that are:

     (a) Noncommercial in nature, such as personal e-mail communications;

     (b) Created solely for an internal audience; or

     (c) Created solely for the business needs of the person who created the digital good and is not the type of digital good that is offered for sale, including business e-mail communications.

     Example 34. Gary, an employee of Kadabbera Corp, creates a digital audio-visual presentation using presentation authoring software and his innate creative capacity. Gary distributes the presentation internally to various divisions within Kadabbera in order to train employees on changes to company tax policies. Gary has created and distributed an item that meets the definition of "digital good." However, the distribution and use of this digital good is not subject to use tax as long as it is used solely "internally" or "solely for the business needs" of Kadabbera.

     (a) Example 35. Company creates a "canned" digital report on Company Q's creditworthiness prepared prior to a customer request for the report. The "canned" report is listed for sale on Company's web site. An employee of InvestCo, Inc. purchases and downloads a digital copy of the "canned" credit report from Company's web site for InvestCo's business purpose. Company is selling a digital good generally subject to retail sales tax. However, the report is purchased by InvestCo solely for a business purpose and transferred electronically and is therefore exempt from retail sales tax.

     (b) Example 36. Company sells credit reports and credit research services delivered in a digital format. EPD Corp requests that Company prepare a credit report for EPD's specialized business purposes. After receiving the request, Company's employee researches and aggregates information from various digital sources to prepare the credit report for EPD. Company then sends the report electronically as a digital file to EPD. Company is not selling a digital good or a digital automated service because the digital item supplied to EPD is merely a representation of a professional service or primarily human effort performed by EPD's employee. Therefore, EPD's services are not a "digital product." However, EPD is still required to charge and collect retail sales tax because EPD is still providing credit bureau services, a retail service, subject to retail sales tax.

     (c) Example 37. Company sells an on-line credit reporting service. The service includes access to searchable data bases, digital data analysis, and digital data reporting tools. ManageCo investigates the credit worthiness of individuals and therefore purchases access to Company's on-line service. Company is selling a digital automated service to be used solely for a business purpose by ManageCo. However, the "used solely for a business purpose" exemption is limited to digital goods and is not applicable to digital automated services. As such, Company is required to charge and collect retail sales tax on its sale of the on-line credit reporting services to ManageCo.

     (602) Royalties and wholesaling B&O tax on digital products. The sale of digital products to "non-end users" may be subject to royalties or wholesaling B&O tax depending on the type of transaction and the intangible rights provided to the purchaser. Transactions which provide the right to resell individual digital files (no copying rights) to consumers will generally be treated as wholesale sales. Additionally, transactions which allow the purchaser the right to incorporate a digital product into a new product for sale will also be treated as wholesale sales. All other non-end user transactions involving digital products or digital codes will generally be treated as royalties transactions.

     (a) Example 38. Media Corp licenses to Rerun, Inc., the right to further broadcast a digital movie file on Rerun's web site for a specified period of time. In this case Media Corp has provided Rerun with the right to further broadcast or exhibit a digital movie. This is a non-end user transaction subject to royalties B&O tax. Media Corp would report its gross receipts from this transaction under the royalties B&O tax classification and not charge and collect retail sales tax on the transaction with Rerun.

     (b) Example 39. Same facts as Example 38 except Rerun purchases individual digital movie files from ABC with the right to resell those individual files to end users at retail instead of rebroadcasting or exhibiting to the public. In this case Company has provided Rerun with the right to resell individual digital movie files to end users. Company would report its gross receipts from this transaction under the wholesaling B&O tax classification.

     (c) Example 40. Same facts as Example 39 except that Rerun purchases a single digital movie file with the right to duplicate and sell that movie file. In this case Company has provided Rerun with the right to duplicate and sell individual digital movie files. Company would report its gross receipts from this transaction under the royalties B&O tax classification. Company would not need to charge and collect retail sales or use tax from Rerun.

     (d) Example 41. LMR licenses to Neagle the right to incorporate a single digital song file into Neagle's on-line game which is sold at retail to individuals. In this respect the song has been used as a component of a new product for sale and thus LMR would report its receipts under the wholesaling classification. ABC would not need to charge retail sales tax to Neagle provided Neagle supplies a properly completed exemption certificate.

     (603) Substantial nexus is not established in Washington if a business's only contact with the state of Washington is ownership of, or rights in, computer software as defined in RCW 82.04.215, including computer software used in providing a digital automated service; master copies of software; a digital goods or digital codes residing on servers in Washington. For purposes of this section, "substantial nexus" means the requisite connection that a person must have with a state to allow the state to subject the person to the state's taxing authority, consistent with the commerce clause of the United States Constitution.

     (604) Amnesty. Before July 26, 2009, retail sales of downloaded digital goods on a permanent or nonpermanent basis were subject to retail sales tax. This did not include accessed or streamed digital goods. However, amnesty is available to those who did not collect or pay retail sales or use tax on digital goods and digital codes during that time. Sales of digital automated services and accessed or streamed digital goods were subject to service and other B&O tax before July 26, 2009, and amnesty does not extend to these transactions because they were not subject to retail sales tax during that time period.

     (a) Refunds and credits of retail sales or use tax. No refund or credit will be given for state and local retail sales and use taxes properly paid on the sale or use, before July 26, 2009, of digital goods or of installing, repairing, altering, or improving digital goods.

     (b) No B&O tax refund or credit unless sales tax was paid. If a taxpayer paid B&O tax under the service and other activities classification prior to July 26, 2009, on income received from retail sales of digital products or digital codes, the taxpayer may not receive a refund or credit for the difference between the B&O tax actually paid and the B&O tax that should have been paid under the retailing classification unless the taxpayer has remitted the retail sales tax for those sales.

     (605) Bundled transactions. A "bundled transaction" is the retail sale of two or more products, which are distinct and identifiable for one nonitemized price. Because retail sales of digital products and digital codes are subject to retail sales tax, the general rules on the taxation of bundled transactions may apply to transactions involving digital products and digital codes. See RCW 82.08.190 and 82.08.195 for more information on the tax treatment of bundled transactions.

     (606) Property tax. The excise tax laws relating to digital products and digital codes do not have any impact in the characterization of digital goods and digital codes as tangible or intangible personal property for purposes of property taxation and may not be used in any way in construing Title 84 RCW. See section 1201, chapter 535, Laws of 2009.

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