The Washington Department of Revenue has developed a decision tree that illustrates the analysis necessary to determine how an electronically transferred product is taxed. Excise Tax Advisory 9003.2010 (Nov. 30, 2010) summarizes the process by which taxpayers can determine whether a given item is taxable as a digital product (a digital good or a digitally automated service) or remote access software. The decision tree section is intended to “highlight key considerations in the analysis process.”
The decision tree is a five-step process:
- Determine whether the transaction involves the electronic transfer of a product or service according to the definition of digital products found in RCW 82.04.192;
- Determine whether any exclusions from the definition of digital products or remote access software apply (also found in RCW 82.04.192). For instance, payment processing, online educational programs, live presentations, data processing and other products are excluded from the tax imposition statute;
- Apply Washington’s sourcing rules to determine whether the transaction is sourced to Washington;
- Determine whether any exemption from retail sales or use tax applies;
- Determine whether any other issues, such as amnesty, nexus, or royalties, are involved. For instance, Washington provides a nexus “safe harbor” for digital products and software on servers in the state (RCW 82.32.532). Then, repeat as necessary.