On January 13, 2020, the Washington Court of Appeals upheld the Washington Department of Revenue’s retailing characterization of taxpayer’s provision of online access to information in a digital research library. Therefore the taxpayer’s service was subject to Washington sales tax and the higher business and occupation (B&O) tax rate. Gartner, Inc. v. Washington Department of Revenue, No. 51637-3-II (Wash. Ct. App. Jan. 13, 2020).

The taxpayer is a global information technology firm that sells online subscriptions to its research library. For purposes of Washington sales tax, the Department took the position that the taxpayer’s research service was subject to sales tax as a “digital automated service” and subject to the higher B&O tax rate as “retailing.” The court analyzed the taxpayer’s digital library and related services and found that, although the files, data and other information in the library constituted digital goods, because a subscriber’s access or use of a digital good is facilitated by software, the product is a digital automated service. The court thus held that the search functions, recommendations of “trending” news and the taxpayer’s customized client portal subsite rendered access to the library a digital automated service.

The court also rejected the taxpayer’s argument that the taxpayer’s product should be excluded from the definition of a digital automated service due to the application of “human effort.” The court found the exclusion inapplicable because the human effort used to create the product did not occur in response to a customer’s request for the service. Customers were not permitted to request taxpayer’s employees to conduct specific research requests. Instead, employees of the taxpayer identified topics for research and create content for customers based on trends, forecasts and “client requests in the aggregate.”

Further, the court rejected the taxpayer’s arguments under the “true object” test and the Internet Tax Freedom Act (ITFA). The court rejected the taxpayer’s true object argument on the basis that digital library access and related services can be purchased separately from other consulting and advisory services that are provided by the taxpayer to its customers. Under ITFA, the taxpayer argued that its services would be subject to the service B&O tax if it sent its research reports by mail or CD and that the Department’s characterization violated ITFA because it resulted in a higher tax rate on services that were “electronically delivered.” The court disagreed, finding that reports sent via tangible format to be a significantly different service than the taxpayer’s online research portal.