The Washington Department of Revenue’s Administrative Review and Hearings Division recently ruled that a company’s account access services provided to credit unions constituted digital automated services subject to sales tax.

The taxpayer provided an online banking platform and an automated phone system to member credit unions, which in turn provided those services to their individual credit union customers. The platform allowed individual customers to access their account and conduct various transactions such as pay bills, transfer money, accessing electronic statements, reviewing account data. The platform does so by retrieving data from several databases hosted and managed by the taxpayer. The automated phone system allows individual customers to make inquiries, access account information, and activate credit cards, and reroutes customers to the appropriate customer service agent.

Washington’s sales tax applies to digital automated services which include “any service transferred electronically that uses one or more software applications” and include services provided exclusively in connection with the digital automated services as well as “elements similar to standalone digital goods.”  RCW 82.04.192(3)(a); Rule 15503(203)(a). Data processing services are excluded from digital automated services.

The company contended that the platform was not a digital automated service because it offered services that were included in the definition of nontaxable data processing services. The hearing officer disagreed with the taxpayer and concluded that the taxpayer was not selling any of the enumerated excluded services or otherwise charging its member credit card unions for specific excluded services; rather these services were component parts of a larger, integrated service, which constitute a retail sale of digital automated services.

Similarly, the taxpayer argued that the phone system’s core function was an exempt data processing service.  Rejecting the taxpayer’s argument, the hearing officer concluded that the phone system goes beyond mere extrapolation or reformatting of data, and instead involves the use of voice recognition software, software to manage variety of requests and calls, and software to store information generated during the call.

The taxpayer also argued that the taxation of its services violated the Internet Tax Freedom Act (“ITFA”)’s bar on “multiple or discriminatory taxes on electronic commerce.”  The hearing officer concluded that the taxpayer did not establish that imposing sales tax on digital automated services violates the ITFA.

Det. No. 19-0284R, 41 WTD 118 (2022)