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Wednesday, March 27, 2013

Evolution of Sales and Use Taxation of the Cloud - Washington State


Similar to the taxation of downloaded software 15 years ago, states are adapting or altering their taxing regimes to keep up with the evolution in cloud services, including software-as-a-service (SaaS) and other Cloud Service Providers (CSPs). Of the approximately 15 states currently taxing hosted software or SaaS, these services most often are taxed as software, data processing services, electronic information services, or communication services, or as part of taxable “gross receipts.”

The state of Washington recently released new regulations related to computer hardware, software and digital products which clarify legislation passed in 2009 and 2010:

  • 458-20-155 Information and computer services (repealed)
  • 458-20-15501 Computer hardware
  • 458-20-15502 Computer software
  • 458-20-15503 Digital products

Interestingly, CSPs may be taxed under either the Computer Software or the Digital Products regulations. Traditional “hosted software” is taxed, effective July 26, 2009, as “remote access software,” which will include many SaaS providers.

However, other CSPs who have components of SaaS and are also offering additional services, or who may be using their proprietary software to provide other “Cloud Services” (the customer is not the “user” of the software) may be providing taxable “Digital Automated Services.”

There are several exclusions from the definition of a taxable “Digital Automated Service,” including online education programs, online marketplace-related activities, advertising services, storage/hosting/backup, telecommunication services, and services requiring primarily human effort, among others.

It is easy to see how many CSP business models may fall under one of these exclusions. Therefore, it is important that SaaS and other CSPs understand how these new Washington regulations/definitions align with their business models. In fact, as the evolution of sales/use taxation of the Cloud accelerates, it is critical to stay abreast of each state’s changes, which is not an easy task.


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