The Washington Supreme Court recently adopted the “primary purpose of the purchaser” test to determine whether a transaction should be broken down into its component parts or considered as a whole. In Qualcomm, Inc. v. Department of Revenue, the court overturned the state court of appeals and held that a taxpayer’s vehicle tracking service was subject to buiness and occupation (B&O) tax as an information service, and not as a network telephone service. The court reasoned that the purchaser was buying an integrated management tool that happened to include data transmission, not a telephone service coupled with tracking hardware and software.
Trucking companies were the main purchasers of the taxpayer’s tracking service, which the trucking companies used to track the location and obtain other relevant information about their trucks, such as miles per gallon and operating temperatures. The service involved both the transmission of data (a network telephone service) and the collection, manipulation, and processing of that data (an information service). The taxpayer sought to have the service classified as an information service even though the information service B&O tax rate is higher than the network telephone service rate because the network telephone service is also subject to Washington’s retail sales tax (and the information service is not) resulting in a higher overall rate for network telephone service.
Both the Washington State Department of Revenue (Department) and the taxpayer agreed that when a service involves elements of both a telecommunications and information service, the purchaser’s primary purpose for entering into the transaction determines the taxability of the sale. The parties disagreed, however, as to the proper level of activity upon which to analyze the primary purpose. The Department asserted that the service should be broken down into its component parts, while the taxpayer asserted that the service must be classified based on the entirety of the transaction. The court agreed with the taxpayer and held that the trucking companies’ primary purpose for purchasing the taxpayer’s service was to “acquire specific useful information about the trucks on the road,” and that this purpose could only be accomplished through a combination of all of the component parts of the taxpayer’s service. Simply put, the primary purpose of acquiring useful information does not change simply because the information is delivered by electronic transmission.