The Washington Court of Appeals held that a company’s collection of data from electric and natural gas meters constituted data processing services exempt from the retail sales tax. The taxpayer collected data from meters used by an energy company’s customers, converted the data into a usable form, and transmitted the data to the energy company so that it could be used for customer billing.
Washington law defines data processing services (an exception from taxable digital automated services) as “primarily automated service[s]…where the primary object of the service is the systematic performance of operations by the service provider on data supplied in whole or in part by the customer to extract the required information in an appropriate form or to convert the data to usable information.” The Department contended that the taxpayer’s services did not constitute exempt data processing because the primary purpose or true object of the services was the collection and transmission of data—not its processing. The taxpayer disagreed, arguing that the primary purpose of its services was the manipulation and conversion of the data into information usable for its customers, as opposed to the transmission of the data itself.
Relying on precedent, the Court of Appeals concluded that the company was primarily providing data processing services. The court focused on the distinction between services involving the mere transmission of data, versus those involving manipulation or conversion of the data. Because the company (1) converted the data into an appropriate form in a process that took several hours, (2) quantified the information, (3) identified patterns in the information, and (4) without the company’s conversion the data was useless to the customer, the court held that the manipulation and conversion of the data was the true purpose of the transaction. As a result, the court concluded that the company’s services met the statutory definition of data processing and were therefore exempt from retail sales tax.