Current through Register Vol. 24-06, March 15, 2024
(1)
What is computer
software?RCW 82.04.215 provides that
"computer software" is a set of coded instructions designed to cause a computer
or automatic data processing equipment to perform a task. All software is
classified as either prewritten or custom. "Computer software" includes only
those sets of coded instructions intended for use by an end user and
specifically excludes retained rights in software and master copies of
software. Computer software does not include data.
(a)
How is computer software
delivered? Computer software may be delivered either by intangible means
such as electronically downloaded or by tangible means such as tangible storage
media.
(b)
What is automatic
data processing equipment? "Automatic data processing equipment"
includes computers used for data processing purposes and their peripheral
equipment.
(c)
What are
retained rights? "Retained rights" means any and all rights, including
intellectual property rights such as those rights arising from copyrights,
patents, and trade secret laws, that are owned or are held under contract or
license by a software developer, author, inventor, publisher, licensor,
sublicensor, or distributor.
RCW
82.04.215.
(d)
What are master copies of
software? "Master copies" of software means copies of software from
which a software developer, author, inventor, publisher, licensor, sublicensor,
or distributor makes copies for sale or license.
RCW
82.04.215.
(i)
Development of a master copy of
software. Development of a master copy of software by a software
developer, or a third party hired by the software developer, that is used to
produce copies of software for sale or commercial or industrial use, is not a
manufacturing activity. A third-party charge for development of a master copy
of software is a charge for custom software development and is subject to
service and other activities B&O tax.
(ii)
Use of prewritten computer
software by software developer. The internal use of prewritten computer
software by the developer of that software is not subject to use tax because
the software developer is not an end user of its own internally developed
software. For example, VV Software, Inc., an in-state software developer,
creates accounting software generally used by small businesses. VV plans to
sell its newly created software to other companies. VV also plans to make a
copy of this software and use it for its accounting operation. The copy of
software used by VV for its accounting operation is not subject to use
tax.
(2)
What is custom software? "Custom software" is computer software
created for a single person.
RCW
82.04.215. The use of library files in
software development does not preclude the developed software from being
characterized as custom software, as long as the software is created for a
single person. The nature of custom software does not change when ownership is
transferred to a person with no rights retained by the transferor.
For purposes of this section, "library files" are a collection
of precompiled and frequently used routines that a software developer can use
in developing the software. The purchase or use of such "library files" may be
subject to retail sales or use tax as the sale of prewritten software.
(a)
Creation of custom software.
Gross income received for creating custom software is subject to service and
other activities B&O tax.
(b)
Duplication of custom software. Duplication of custom software for
the same person, or by the same person for the person's own use, does not
change the character of the custom software.
RCW
82.04.29001. Duplication of custom software
for the same person, or by the same person for its own use, is not subject to
manufacturing B&O tax.
If a person duplicates custom software for sale to or use by
another person other than the original purchaser, the software becomes
prewritten computer software as defined in subsection (3) of this section and
is subject to manufacturing B&O tax if the prewritten computer software is
delivered by tangible storage media.
(c)
Sale of custom software. If
custom software is sold to another person other than the original purchaser,
the software loses its character as custom software and becomes prewritten
computer software as defined in subsection (3) of this section.
(d)
Use of custom software. Use
of custom software is not subject to use tax.
(e) The examples included in this rule
identify a number of facts and then state a general conclusion; they should be
used only as a general guide. Additionally, each fact pattern in each example
is self contained (e.g., "stands on its own") unless otherwise indicated by
reference to another example. The tax consequences of all situations must be
determined after a review of all the facts and circumstances. Examples
requiring that sales tax be collected by the seller assume that the seller has
"tax nexus" with Washington and no exclusions or exemptions apply and the sale
is sourced to Washington.
(f)
Example 1. PFC, Inc., develops software for its client. PFC is not
subject to manufacturing B&O tax because the software is custom software.
PFC's income from the sale of the custom software to the one specific client is
subject to service and other activities B&O tax.
(3)
What is prewritten computer
software?RCW 82.04.215 provides that
"prewritten computer software" is computer software, including prewritten
upgrades, patches, fixes, etc., that is not designed and developed by the
author or other creator to the specifications of a specific purchaser.
The combining of two or more prewritten computer software
programs or prewritten portions thereof does not result in custom software.
Configuration of prewritten computer software to work with other computer
software does constitute customization of prewritten computer software.
Prewritten computer software includes software designed and
developed by the author or other creator to the specifications of a specific
purchaser when it is sold to a person other than such purchaser.
Where a person, who is not the author or creator, modifies or
enhances prewritten computer software, that person is deemed to be the author
or creator only of the modifications or enhancements made. Prewritten computer
software, or a portion thereof, that is modified or enhanced to any degree,
remains prewritten computer software, even though the modification or
enhancement is designed and developed to the specifications of a specific
purchaser. Where there is a reasonable, separately stated charge or an invoice
or other statement of the price given to the purchaser for the modification or
enhancement, the modification or enhancement will not be considered prewritten
computer software.
(a)
Wholesale
sales of prewritten computer software. Gross proceeds from sales of
prewritten computer software to persons other than consumers (e.g., sales for
resale without intervening use) are subject to B&O tax under the
wholesaling classification, whether or not ownership or title passes to the
buyer, and regardless of any express or implied restrictions upon the buyer.
The method of delivery of prewritten computer software does not alter the
wholesale nature of the transaction, whether it is through tangible storage
media or any electronic means. Delivery of software manuals and backup copies
of prewritten computer software does not alter the delivery of the actual copy
of prewritten computer software to be used by the buyer in determining when and
where the sale takes place. To verify the wholesale nature of the sale, the
seller obtains a reseller permit from the buyer as provided by WAC
458-20-102 (Reseller permits).
(i)
Distinction between wholesale sales
of prewritten computer software and royalties received for the licensing of
prewritten computer software. Sales of prewritten computer software
constitute wholesale sales if the reseller, who has no right to reproduce the
software for further sales, sells the same software to its customers. The true
object of the sale to the reseller is the sale of the software. On the other
hand, income received for granting an intangible right to reproduce and
distribute copies of prewritten computer software for sale constitutes
royalties. The true object of the transaction that generates royalty income is
the right to reproduce and relicense the software. See subsection (8) of this
section for more information on royalties.
(ii)
Examples.
(A)
Example 2. UM Computers,
Inc., develops engineering software. UM sells the prewritten computer software
at wholesale to OX Computers, Inc., in shrink-wrapped packages. UM delivers the
software to OX. OX then resells the software to customers in the same
shrink-wrapped packages. Sales of prewritten computer software by UM are
subject to wholesaling B&O tax. Sales by OX to consumers are retail sales
subject to retailing B&O tax and retail sales tax.
(B)
Example 3. GB Computers,
Inc., develops engineering software. GB grants SE Computers, Inc., the right to
reproduce and distribute copies of the prewritten computer software for sale to
end users. GB retains all of its ownership rights to the software and delivers
one copy of the software to SE to reproduce and sell. Amounts received by GB
from SE for granting the right to reproduce and distribute prewritten computer
software are subject to royalties B&O tax. Sales by SE to consumers are
retail sales subject to retailing B&O tax and retail sales tax.
(C)
Example 4. DH Computers,
Inc., develops engineering software. DH grants to WK Computers, Inc., the right
to copy and redistribute its prewritten computer software. DH delivers the
software electronically to WK. WK then sells the software to its customers, who
download a copy of the software from WK. Income to DH from WK is subject to
royalties B&O tax. Sales of prewritten computer software by WK to its
customers are retail sales subject to retail sales tax.
(D)
Example 5. AJ Soft, Inc., is
a software developer of architectural drafting software. AJ Soft enters into an
agreement with DJ Sales, Inc., to sell AJ Soft's drafting software. DJ Sales
must pay a fee for each copy DJ Sales sells through its web site. AJ Soft does
not allow DJ Sales to reproduce the drafting software. Customers download the
software, but are unaware the software is downloaded directly from AJ Soft. AJ
Soft is making a wholesale sale of software to DJ Sales subject to wholesaling
B&O tax. DJ Sales is making a retail sale to its Washington customers
subject to retail sales tax.
(E)
Example 6. Same facts as Example 5, however, instead of customers
downloading the prewritten software, DJ Sales' customers access the prewritten
software remotely on AJ Soft's servers. AJ Soft is still making a wholesale
sale of remotely accessed prewritten software to DJ Sales subject to
wholesaling B&O tax. DJ Sales is making a retail sale of remotely accessed
prewritten software to its Washington customers subject to retail sales
tax.
(b)
Retail sales of prewritten computer software. Gross proceeds of
sales of prewritten computer software to consumers are subject to B&O tax
under the retailing classification, whether or not ownership or title passes to
the buyer, and regardless of any express or implied restrictions upon the
buyer. Regardless of the method of delivery, whether through tangible media or
electronic means, prewritten computer software remains subject to retail sales
tax and retailing B&O tax. Delivery of software manuals and backup copies
of prewritten computer software does not alter the delivery of the actual copy
of prewritten computer software to be used by the buyer in determining when and
where the sale takes place. Persons making retail sales are responsible for
collecting retail sales tax at the time of sale and remitting the tax to the
department, unless the sale is specifically exempt by law.
(c)
Use of prewritten computer
software. Prewritten computer software, regardless of the method of
delivery, is generally subject to use tax upon use in this state if Washington
retail sales tax was not previously paid. However, use of prewritten computer
software is not taxable, if it is provided free of charge, or if it is provided
for temporary use in viewing information, or both.
RCW
82.12.020. This exception from use tax is
limited to prewritten computer software provided free of charge or for
temporary use in viewing information, such as free promotional software,
donated software, free download of software, and software provided in beta
testing to a third-party free of charge.
For purposes of this use tax exception, "beta testing" means
the last stage of testing for prewritten computer software prior to its
commercial release including the release to manufacturing (RTM). Beta testing
may involve sending the software to a third party for the use of the third
party. Beta testing is often preceded by a round of testing called alpha
testing.
(i)
Example 7.
DS Computers, Inc., is a software developer. In order to perform beta testing
of its new accounting software prior to commercial release, DS sends a copy of
the software free of charge to KG Technologies, Inc. DS is not subject to use
tax for the release of the beta software to KG. KG is not subject to use tax
for the use of beta software free of charge.
(ii)
Example 8. DH, Inc.,
provides free card games on-line to its customers. The customers, however, must
download DH's free software in order to be able to play card games on-line at
DH's web site. Wendy downloads the software free of charge. Wendy is not
subject to use tax for the use of the software.
(iii)
Example 9. DW, Inc.,
provides free software to the public for anyone to watch videos on-line. Roger
downloads the software free of charge. Roger is not subject to use tax for the
use of the software.
(d)
Manufacturing of prewritten computer software. Persons engaged in
manufacturing prewritten computer software on tangible storage media are
subject to manufacturing B&O tax upon the value of the products. See WAC
458-20-112 (Value of products)
and WAC 458-20-136 (Manufacturing,
processing for hire, fabricating). Manufacturers of prewritten computer
software who sell their products at retail or wholesale are also subject to
either the retailing or wholesaling B&O tax, as the case may be. In such
cases the manufacturer must report under both the "production" (manufacturing)
and "selling" (wholesaling or retailing) B&O tax classifications and may
claim a multiple activities tax credit (MATC). See WAC
458-20-19301 (Multiple activities
tax credits) for detailed information about the MATC. Income from the sale of
prewritten software electronically delivered or transferred is not subject to
manufacturing B&O tax.
(e)
Duplication of prewritten computer software. Duplication of
prewritten computer software on tangible media for sales to or use by more than
one person is subject to manufacturing B&O tax upon the value of products
which includes both the value of the tangible media and the software.
Duplication of prewritten computer software on tangible media outside this
state is not subject to manufacturing B&O tax regardless of where software
development takes place.
Duplication of prewritten computer software is a manufacturing
activity only if the prewritten computer software is delivered from the seller
to the purchaser by means of tangible storage media which is retained by the
purchaser.
RCW
82.04.120.
When a software developer contracts with a third party to
duplicate prewritten computer software, the parties must take into account the
value of all tangible and intangible materials or ingredients, including the
software code, when determining the relative value of all materials or
ingredients furnished by each party. If the third party furnishes less than
twenty percent of the total value of all materials or ingredients that become a
part of the produced product, then the third party is presumed to be a
processor for hire and the software developer is presumed to be a manufacturer.
See WAC 458-20-136 (Manufacturing,
processing for hire, fabricating) for more information.
(4)
Site license of
prewritten computer software. A site license provides a consumer
acquiring prewritten computer software with the right to duplicate prewritten
computer software for use on its own computers, based on the number of
computers, the number of workers using the computers, or some other criteria. A
site license agreement may cover one site or multiple sites of a purchaser.
(a)
Retail sales of a site
license. Gross proceeds of sales of a site license to a consumer are
subject to B&O tax under the retailing classification, whether or not
ownership or title passes to the consumer, and regardless of any express or
implied restrictions upon the consumer. Delivery occurs when and where the
prewritten computer software subject to the site license is received by the
consumer, whether it is through tangible storage media or any electronic means,
regardless of the method of delivery. See
RCW
82.32.730 for more information on sourcing
prewritten computer software. Delivery of software manuals and backup copies of
prewritten computer software does not alter the delivery of the actual copy of
prewritten computer software to be used by the consumer in determining when and
where the sale takes place. Persons making retail sales are responsible for
collecting retail sales tax at the time of sale and remitting the tax to the
department, unless the sale is specifically exempt by law.
If the prewritten software is hosted by the licensor or a third
party for remote access by the licensee, then see subsection (10) of this
section.
(b)
Duplication of prewritten computer software by a person under a site
license. A seller of a site license is subject to manufacturing B&O
tax for its own duplication of prewritten computer software. Duplication of
prewritten computer software is subject to manufacturing B&O tax only if
the prewritten computer software is delivered from the seller to the purchaser
by means of tangible storage media which is retained by the purchaser.
RCW
82.04.120. Purchaser of a site license is not
subject to manufacturing B&O tax for the duplication of prewritten computer
software for its own use, pursuant to a site license agreement with the
seller.
(c)
Use of a site
license partly in this state and partly outside this state. The part of
the site license used by the person in this state is subject to use tax,
provided Washington state sales tax was not previously paid. For example, a
person purchases and takes delivery of a site license in California. Pursuant
to the multiple site license agreement, this person is licensed to use one
thousand copies of prewritten computer software, of which four hundred copies
will be used in Washington. Use tax is due on the four hundred copies of
prewritten computer software used in this state. If the prewritten software
purchased by the licensee is delivered in Washington, then the entire charge
for the site license is subject to retail sales tax if purchased from a seller
responsible for collecting Washington's sales tax. However, a purchaser can
issue a multiple points of use exemption certificate under certain
circumstances to minimize Washington tax as discussed below in subsection (11)
of this section.
(d)
Sales
and use of additional copies of prewritten computer software under the same
site license. In some cases, the buyer of a site license may
subsequently purchase additional copies of prewritten computer software under
the same site license agreement. The seller may or may not deliver any
additional copy of the software to the buyer, because the original copy of the
software has already been delivered.
(i)
Retail sales of additional copies of prewritten computer software under
the same site license. Retail sales of the additional copies of software
occurs when and where the seller delivers any additional copy of prewritten
computer software to the buyer, whether it is through tangible storage media or
any electronic means, regardless of the method of delivery. If the seller does
not deliver any additional copy of the software to the buyer, then the sales
occur when the sales agreements are made to purchase the additional copies and
where the original copy or copies of prewritten computer software was
delivered. If the original sale of the site license was subject to
manufacturing B&O tax, then the sale of additional licenses are also
subject to manufacturing B&O tax.
Delivery of software manuals and backup copies of prewritten
computer software does not alter the delivery of the actual copy of prewritten
computer software to be used by the buyer in determining when and where the
sale takes place.
(ii)
Use of additional copies of prewritten computer software under the same
site license. Where the use of the additional copies of software is
partly in this state and partly outside this state and was not previously
subject to Washington sales tax, the part of the additional copies of software
used by the person in this state is subject to use tax.
(e)
Examples.
(i)
Example 10. DEF Computers,
Inc., is located in Washington and sells in this state, at retail, a multiple
site license of its prewritten computer software to P's Design, Inc. A copy of
the prewritten computer software is electronically delivered to P's Design in
Washington. P's Design then electronically duplicates the software and
distributes the software in Washington and several other states for its use.
Neither DEF nor P's Design is subject to manufacturing B&O tax. DEF,
however, is subject to retailing B&O tax, and it must collect retail sales
tax from P's Design for the entire sale of the software unless P's Design
provides DEF with a multiple points of use exemption certificate as discussed
in subsection (11) of this section.
(ii)
Example 11. Same facts as
Example 10, except that in addition, DEF delivers a backup copy of the software
to P's Design outside Washington. The backup copy of the software is for
disaster recovery purposes and is not downloaded to any of P's Design's
computers for use. There is no separate charge for the delivery of the backup
prewritten software. The software manuals are mailed to P's Design in
Washington. DEF is still subject to retailing B&O tax, and it must collect
retail sales tax from P's Design for the entire sale of the software unless P's
Design provides DEF with a multiple points of use exemption certificate as
discussed in subsection (11) of this section. Delivery of the software manuals
and the backup copy of the software are not relevant in determining when and
where the sale takes place. This transaction is not subject to manufacturing
B&O tax.
(iii)
Example
12. Same facts as Example 10 of this subsection, except that in
addition, P's Design subsequently purchases 50 additional copies of the
software from DEF under the same site license agreement. P's Design merges with
another company, and the additional copies are needed for the use of its new
employees. No additional copy of the software is delivered to P's Design in
fulfilling this new agreement. Neither DEF nor P's Design is subject to
manufacturing B&O tax. DEF, however, is subject to retailing B&O tax,
and it must collect retail sales tax from P's Design for the subsequent sale of
the 50 additional copies of software because the original copy of the software
was delivered in Washington unless P's Design provides DEF with a multiple
points of use exemption certificate as discussed in subsection (11) of this
section. However, if the original sale of the license had included delivery of
the prewritten software by a tangible storage device (and was therefore subject
to manufacturing B&O tax), then the licensor is also subject to
manufacturing B&O tax based on the value of the additional
licenses.
(iv)
Example
13. GH Computers, Inc., sells at retail a multiple site license of its
prewritten computer software to Quick, Inc. GH is located outside Washington,
while Quick is located in Washington, other states and other countries. The
desktop software is licensed on an unlimited basis, which means that there are
no restrictions of its use by Quick. The software is delivered to Quick outside
Washington. Quick then electronically duplicates the software and distributes
the software to all of its 500 employees, of which 100 employees are located in
Washington. The software is electronically downloaded into the desktop
computers of all employees and is immediately put into use. Use tax is due on
the value of the 100 copies of prewritten computer software used in
Washington.
(v)
Example
14. Same facts as Example 13 of this subsection, except that under the
original site license agreement, Quick is entitled to reproduce, distribute,
and use up to 500 copies of the desktop software. Then Quick merges with
another company, and additional copies are needed for the use of its new
employees. Quick, therefore, subsequently purchases 100 additional copies of
the software from GH under the same site license agreement. No additional copy
of the software is delivered to Quick in fulfilling this new agreement. Quick
distributes the additional copies of the software to its 100 new employees, of
which 50 employees are located in Washington. Use tax is due on the value of
the 50 additional copies of prewritten computer software used in
Washington.
(5)
Key to activate computer
software. A key, or an enabling or activating code, may be required in
some instances to activate computer software and put the software into use, and
the key may be delivered to a purchaser after the software is already delivered
and in possession of the same purchaser. In such instances, the sale of
computer software occurs when both the key and the software are delivered to
the purchaser. The sale takes place where the software is received by the
purchaser in accordance with
RCW
82.32.730. However, if the place of receipt
for the software is unavailable to the vendor because the software was
delivered by a third party, then the sale takes place where the key is received
in accordance with
RCW
82.32.730. There is no separate sale of the
key from the software, regardless of how such sale may be characterized by the
vendor or by the purchaser.
See subsection (4) of this section for more information if a
site license of prewritten computer software is involved. If the sale of the
prewritten software is subject to manufacturing B&O tax, then the sale of
the key required by that prewritten software is also subject to manufacturing
B&O tax. The income from the sale of a key is part of a sale of prewritten
computer software, whether the sales transactions are together or
separate.
(a)
Example 15.
JKL Computers, Inc., an in-state business, sells at retail prewritten computer
software to Rebecca. JKL delivers the software to Rebecca in this state. The
prewritten computer software, however, cannot be activated without a key. JKL
subsequently delivers the key in this state to Rebecca for a separate price.
JKL is subject to retailing B&O tax, and it must collect retail sales tax
from Rebecca on the entire sale of the software including the separate charge
for the key. The entire sale takes place in this state (where the software is
delivered) when both the software and the key are delivered to Rebecca. There
is no separate sale of the key, regardless of the fact that JKL delivers the
key to Rebecca for a separate charge.
(b)
Example 16. Same facts as
Example 15 of this subsection, except that JKL subsequently delivers the key
outside this state to Rebecca for a separate price. JKL is subject to retailing
B&O tax, and it must collect retail sales tax from Rebecca on the entire
sale of the software including the separate charge for the key. The entire sale
takes place in this state (where the software is delivered) when both the
software and the key are delivered to Rebecca. There is no separate sale of the
key, regardless of the fact that JKL delivers the key to Rebecca for a separate
charge.
(c)
Example
17. MNO Computers, Inc., is an in-state software developer. TKO
Computers, Inc., an out-of-state original equipment manufacturer of computers
(OEM), agrees in contract with MNO to distribute MNO's prewritten computer
software on its computers. TKO delivers MNO's inoperable software to Sally as
part of the sale of the computer system. Sally, however, must purchase a key
directly from MNO in order to activate and use the software. MNO has no
knowledge of where the software was initially delivered to Sally, but MNO knows
that the key is delivered to Sally in this state. MNO is subject to retailing
B&O tax, and it must collect retail sales tax from Sally on the entire sale
of the key and the inoperable software. The entire sale takes place in this
state because the key is delivered in this state and MNO has no knowledge of
where the inoperable software was initially delivered by TKO.
(6)
Client access license
and server license for the server software. A server license, paid for
at the time the server software is purchased, grants the buyer the right to
install the server software on the buyer's server. A client access license
(CAL) grants the buyer the right to access the server software.
Charges for server licenses and CAL are a part of the sale of
the server software, even if the charges are separately stated. The sales take
place where the server software is delivered to the buyer.
In cases where server software is delivered to the buyer and
used in multiple locations, see subsection (4) of this section on site licenses
for more information.
(a)
Example 18. ZZ Computers, Inc., an in-state business, sells at
retail server software to Jack. ZZ delivers the server software to Jack in
Washington. ZZ also provides Jack with client access licenses for free allowing
Jack the right to access the server software from his personal computers. The
sale of server software to Jack is subject to retailing B&O tax, and ZZ
must collect retail sales tax from Jack for the same sale.
(b)
Example 19. Same facts as
Example 18 of this subsection, except that ZZ makes two separate sales at
retail of two types of prewritten computer software to Jack. One is server
software, and the other is client software (which is different from client
access licenses). ZZ delivers the server software to Jack in Washington where
Jack's server is located. ZZ delivers the client software to Jack outside
Washington where all of Jack's personal computers are located. Only the sale of
server software to Jack is subject to retailing B&O tax, and ZZ must
collect retail sales tax from Jack for the same sale. Jack may use a multiple
points of use exemption certificate for the server software. See subsection
(11) of this section for more detail on multiple points of use.
(7)
Other activities
associated with computer software.
(a)
Customizing prewritten computer software. Gross income received
for customizing prewritten computer software is subject to service and other
activities B&O tax.
RCW
82.04.29001.
(i)
What is customizing prewritten
computer software?RCW
82.04.215 provides that "customization of
prewritten computer software" is any alteration, modification, or development
of applications using or incorporating prewritten computer software for a
specific person.
"Customization of prewritten computer software" includes
individualized configuration of software to work with other software and
computer hardware but does not include routine installation. Customization of
prewritten computer software does not change the underlying character or
taxability of the original prewritten computer software.
(ii)
One nonitemized price for
prewritten computer software, customization, and routine installation.
If prewritten computer software, customization of prewritten computer software,
and routine installation are sold for a one nonitemized price, the entire
charge is considered to be subject to retail sales tax. See (a)(iv) of this
subsection for more information on routine installation.
(iii)
Separately stated charge for
customization of prewritten computer software. Where there is a
reasonable separately stated charge on an invoice or other statement of the
price given to the purchaser for customization of prewritten computer software
(including installation that is not routine, see (a)(i) of this subsection),
such customization is subject to service and other activities B&O tax. If a
charge for customization of prewritten computer software is not separately
stated from a sale of prewritten computer software, the entire charge is
considered a retail sale subject to retail sales tax.
(iv)
Customization of prewritten
computer software versus routine installation. Customization of
prewritten computer software includes custom installations but does not include
routine installation. "Routine installation" means the process of loading
program files and installation files onto a computer. Routine installation
includes the process of "clicking through" dialog boxes to install prewritten
software. Routine installation does not require any specialized knowledge or
skills. Custom installation generally requires programming by a programmer to
integrate customized elements of prewritten computer software.
(v)
Separately stated charge for
routine installation from customization of prewritten computer software.
Where there is a reasonable separately stated charge on an invoice or other
statement of the price given to the purchaser for routine installation from
customization of prewritten computer software, routine installation is subject
to retailing B&O tax and retail sales tax. If a charge for routine
installation is not separately stated from customization of prewritten computer
software and is de minimis, the transaction would not be subject to retail
sales tax, but instead subject to service and other activities B&O
tax.
(vi)
Examples.
(A)
Example 20. Tee, Inc., needs
financial modeling software that can tie into its existing computer systems.
Because of its unique business, however, Tee needs the industry-wide computer
software offered by PQR Computers, Inc., to be modified to meet the needs of
Tee. Both Tee and PQR are in-state corporations, and the software is delivered
in this state. PQR provides a separately stated charge to Tee for customization
of prewritten computer software performed in this state that is supported by
the terms of the sales agreement. PQR is subject to retailing B&O tax, and
it must collect retail sales tax from Tee for the sale of prewritten computer
software in Washington. PQR, in addition, is subject to service and other
activities B&O tax for the customization of prewritten computer software in
Washington.
(B)
Example
21. Same facts as Example 20 of this subsection, except that, in
addition, PQR provides a separately stated charge to Tee for routine
installation of prewritten computer software in this state. This charge
represents installation of only the prewritten portion of the software. In
addition to the tax treatments in Example 20 of this subsection, PQR is subject
to retailing B&O tax and it must collect retail sales tax from Tee for the
routine installation in Washington.
(b)
Installing or uninstalling computer
software.(i) Gross income received
from installing or uninstalling custom software is subject to service and other
activities B&O tax.
(ii) Gross
proceeds of sales for routine installation of prewritten computer software are
subject to retailing B&O tax and retail sales tax. See (a)(iv) of this
subsection for more information on routine installation. Routine installation
of prewritten computer software includes charges for labor and services in
respect to the installation, such as travel costs for the routine installation
of the software. As of July 1, 2008, if the routine installation occurs through
remote access by someone outside the state of Washington, then the installation
is sourced pursuant to
RCW
82.32.730.
Example 22. XYZ Computers, Inc., is hired by Dan
for routine installation of prewritten software onto Dan's computers. XYZ's
out-of-state employee remotely accesses Dan's computers in Washington to
install the prewritten software on his computers. If XYZ has nexus with
Washington, then it must collect and remit the sales tax. If XYZ does not have
nexus, then Dan must pay use tax.
Gross proceeds of sales from uninstalling prewritten computer
software are subject to retailing B&O tax and retail sales tax.
Example 23. XYZ Computers, Inc., is hired by Dan
to remove prewritten computer software from his computers. Removal of the
prewritten computer software requires uninstalling the software from the
computer. XYZ sends an employee to Dan's location to remove the software from
his computers. Charges for removal of the prewritten computer software are
subject to retailing B&O tax and retail sales tax.
(c)
Repairing, altering, or
modifying computer software. Repair of prewritten computer software for
more than one person may be distributed as a fix or patch by tangible storage
media or electronically in the nature of software upgrades and updates. The
sale of prewritten computer software upgrades and updates is a sale of
prewritten computer software subject to retailing B&O tax and retail sales
tax.
Alteration or modification of prewritten computer software
performed for a specific person is subject to the service and other activities
B&O tax. Such alteration or modification of prewritten computer software
for a specific person constitutes customization of prewritten computer
software. See
RCW
82.04.215.
(i)
Example 24. STU Computers,
Inc., a Washington company, is hired by Betty to perform repairs (using
primarily human effort) via remote access on her prewritten computer software
in Washington. STU is performing alteration or modification of prewritten
computer software for a specific person and is subject to service and other
activities B&O tax.
(ii)
Example 25. VW Computers, Inc., an out-of-state service provider,
is hired by Clyde to perform alterations or modifications (using primarily
human effort) via remote access on his prewritten computer software located in
this state. VW's facility is located outside this state. VW may be subject to
service and other activities B&O tax if it has nexus with
Washington.
(d)
Maintaining computer software. Computer software maintenance
agreements typically include, but are not limited to, support activities such
as telephone consulting, help desk services, remote diagnostic services, and
software upgrades and updates.
(i)
Tax
treatment of computer software maintenance agreements in general. Sales
of stand-alone computer software maintenance agreements that include telephone
consulting, help desk services, remote diagnostic services, and other
professional services only, are taxable under the service and other activities
B&O tax. However, if the services are part of a sale of an extended
warranty on or after July 1, 2005, then the sale is subject to retailing
B&O tax and retail sales tax. See WAC
458-20-257 (Warranties and
maintenance agreements) for information about extended warranties.
Stand-alone sales of updates or upgrades to prewritten computer
software are retail sales of tangible personal property subject to retailing
B&O tax and retail sales tax.
(ii)
Prewritten computer software
maintenance agreement with mixed elements. The sale of a prewritten
computer software maintenance agreement for a single nonitemized price that
includes professional service components such as telephone consulting and
retail components such as upgrades and updates of prewritten computer software
is generally considered a retail sale subject to retailing B&O tax and
retail sales tax unless charges for the upgrades and updates are de minimis.
In cases where the charges for the professional service
component(s) and the retail component(s) are separately stated within a
prewritten computer software maintenance agreement and invoice, then each
activity is taxed according to the nature of the activity.
(iii)
Duplication of prewritten
computer software upgrades and updates. Duplication of prewritten
computer software upgrades and updates is subject to manufacturing B&O tax
upon the value of products, if the software upgrades and updates are delivered
by means of tangible storage media which is retained by the purchaser. This is
the case regardless of any maintenance agreement with mixed elements involved.
The measure of tax is presumed to be the contract price of the maintenance
agreement, unless the person can prove otherwise. See WAC
458-20-112 (Value of products)
for more information.
If the software upgrades and updates are delivered from the
seller by means other than tangible storage media which is retained by the
purchaser, then the software upgrades and updates are not subject to
manufacturing B&O tax.
(iv)
Maintenance agreement on custom
software and customized elements of prewritten computer software. Sales
of maintenance or support services relating to custom software or the
customized elements of prewritten computer software are subject to the service
and other activities B&O tax. Such services, including upgrades and
updates, are rendered in respect to the custom or customized software and take
on the underlying character and taxability of the custom or customized
software.
(v)
Examples.(A)
Example
26. On December 15, 2005, CBA Computers, Inc., sells at retail a
prewritten computer software maintenance agreement to Frank for his prewritten
software. The software maintenance agreement includes an extended warranty for
the software, software upgrades and updates, and telephone consulting services
for a single nonitemized price. The consulting services are not offered
exclusively in connection with the software, nor are they essential to use of
the software. CBA delivers the software upgrades and updates electronically.
CBA is subject to retailing B&O tax, and it must collect retail sales tax
from Frank for the sale of the mixed agreement.
(B)
Example 27. Same facts as
Example 26 of this subsection, except that CBA delivers the software upgrades
and updates on compact disks. CBA is subject to retailing B&O tax, and it
must collect retail sales tax from Frank for the sale of the mixed agreement.
In addition, CBA is subject to manufacturing B&O tax on duplication of
software upgrades and updates. The measure of tax is presumed to be the
contract price of the maintenance agreement, unless CBA can prove
otherwise.
(C)
Example
28. Same facts as Example 26 of this subsection, except that CBA
provides a separately stated charge for each component of the maintenance
agreement. CBA is subject to retailing B&O tax, and it must collect retail
sales tax from Frank for the charges on prewritten software upgrades and
updates and on the extended warranty purchased after July 1, 2005. CBA is
subject to service and other activities B&O tax for the charge on telephone
consulting services.
(D)
Example 29. FED Computers, Inc., sells at retail a computer
software maintenance agreement to Greta for her software. The maintenance
agreement covers only software upgrades and updates. Greta's software is
prewritten computer software with customized elements. FED provides the
maintenance services to Greta at one nonitemized charge. FED is subject to
retailing B&O tax, and it must collect retail sales tax from Greta for the
sale of the entire maintenance agreement of the prewritten computer
software.
(E)
Example
30. Same facts as Example 29 of this subsection, except that FED
provides a separately stated charge for maintaining the customized elements.
FED is subject to service and other activities B&O tax on the charges for
maintaining the customized elements. FED is subject to retailing B&O tax,
and it must collect retail sales tax from Greta for the charge on maintaining
prewritten computer software.
(e)
Computer software training.
Gross income received for training on the use of custom software is subject to
service and other activities B&O tax. Gross income received for training on
the use of prewritten computer software is subject to service and other
activities B&O tax, if the charge for such training is separately stated
from the sale of prewritten computer software. If the charge for software
training is not separately stated from the sale of prewritten computer software
and the prewritten software value is more than de minimis, the entire charge is
considered to be a retail sale subject to retailing B&O tax and retail
sales tax.
(8)
Licensing computer software - Royalties. Income received from
charges in the nature of royalties for certain licensing of computer software
is taxable under the royalties B&O tax classification.
(a)
What are
royalties?RCW 82.04.2907 provides that
"royalties" means compensation for the use of intangible property, such as
copyrights, patents, licenses, franchises, trademarks, trade names, and similar
items. The true object of a transaction involving royalties is to grant an
intangible right to reproduce and distribute copies of computer software for
sale. It does not, however, include compensation for the licensing of
prewritten computer software to the end user. The manner in which computer
software is sold (e.g., volume of transactions, subscription license, term
license, or perpetual license) or the manner in which payment amount is
determined (e.g., fixed fee per copy, percentage of receipts, lump sum, etc.)
does not alter the royalty nature of the transaction.
(b)
Royalties versus site
license. Regarding royalties, the true object of the transaction is to
grant an intangible right to reproduce and distribute copies of computer
software for sale. In contrast, the true object of a site license is the sale
to an end user of prewritten computer software for use on its computers. See
subsection (4) of this section for more information on site licenses.
(c)
Royalties versus wholesale sales of
prewritten computer software. See subsection (3)(a) of this section for
more information.
(d)
Examples.
(i)
Example
31. HG Computers, Inc., an original equipment manufacturer (OEM),
acquires prewritten computer software from LL Software, Inc., under a license
to reproduce and distribute the prewritten computer software as part of a
bundled computer hardware and software package HG sells to end users. LL
retains all of its ownership rights to the software. The gross income received
by LL from granting intangible rights to reproduce and distribute prewritten
computer software to HG is subject to royalties B&O tax.
(ii)
Example 32. Same facts as
Example 31 of this subsection, except that, in addition, HG acquires a site
license from LL for the purposes of copying and using the prewritten computer
software as an end user. LL delivers the software to HG. Amounts received by LL
for the sale of a site license are subject to retailing B&O tax and retail
sales tax.
(9)
Special use tax exemption for
computer hardware and computer software donated to certain schools or
colleges. Use tax does not apply to the use of computer hardware and
prewritten software irrevocably donated to any public or private nonprofit
school or college, as defined under
chapter
84.36 RCW.
RCW
82.12.0284.
(10)
Sales of remote access
software.
(a)
Remote access
custom software. Sales of remote access custom software on the seller's
(or a third-party's) servers are subject to service and other B&O
tax.
(b)
Remote access
prewritten software. Sales of remote access prewritten software on the
seller's (or a third-party's) servers are subject to retail sales tax, when the
sale is sourced to Washington pursuant to
RCW
82.32.730. Sale of remote access prewritten
software prior to July 26, 2009, were subject to service and other activities
B&O tax.
Example 33. BE Software, Inc., a Washington
corporation, offers a variety of prewritten software products on-line, but not
for download, to its customers for a monthly subscription fee. BE Software must
charge Washington customers retail sales tax and is subject to retailing
B&O tax for the subscription fees received from its Washington
customers.
(c)
Exemptions from retail sales or use tax for remote access prewritten
software. The following exemptions only apply to remote access
prewritten software, and not other types of prewritten software sold.
(i)
Offered free. Purchases of
prewritten software that will be offered remotely by the purchaser to its own
customers is exempt from retail sales tax.
RCW
82.04.190(2)(f). The
purchaser of the prewritten software must provide an exemption certificate to
the seller in order to receive the exemption. The income from the sale of the
prewritten software is subject to retailing B&O tax.
Example 34. BE Software, a Washington company,
purchases prewritten software from Joe's Software Developer Co., that BE will
provide remotely to its customers. BE provides an exemption certificate to
Joe's for the purchase of prewritten software. Joe's does not collect or remit
retail sales tax, but does pay retailing B&O tax on the income from the
sale. BE would generally charge and collect retail sales tax and pay retailing
B&O tax on income received from the sale of the prewritten software
remotely accessed by consumers.
(ii)
Made available free to the general
public. Retail sales and use taxes do not apply to the purchase or use
by a business or other organization of remote access prewritten software in
order to make that remote access prewritten software available free of charge
for the use or enjoyment of the general public. Buyers claiming this exemption
must provide the seller with a properly completed "Digital Products and Remote
Access Software Exemption Certificate" or other exemption certificate
acceptable to the department.
(A)
Available for free. In order to qualify, the remote access prewritten
software purchased must be made available for free. In this context,
"free" means that the recipient of the remote access prewritten software does
not need to provide anything of significant value. If the purchaser requires
something of significant value from the recipient in exchange for the remote
access prewritten software, it is not given away for free.
(B)
"General public" means all
persons and is not limited or restricted to a particular class of persons,
except that the general public includes:
(I)
Certain classes of persons defined by their residency or ownership: The general
public includes a class of persons residing or owning property within the
boundaries of any state (e.g., Washington), political subdivision of a state
(e.g., King County), or a municipal corporation (e.g., Seattle).
(II) Library customers. With respect to
libraries, the term general public includes authorized library
patrons.
(C)
Purchaser must have the legal rights to provide the remote access
prewritten software to the general public: The exemption provided in
subsection (3) of this section does not apply unless the purchaser has the
legal right to broadcast, rebroadcast, transmit, retransmit, license,
relicense, distribute, redistribute, or exhibit the remote access prewritten
software, in whole or in part, to the general public.
(11)
Multiple
points of use (MPU) exemptions.
(a) The
retail sales tax does not apply to the sale of prewritten computer software or
remote access prewritten software if the buyer correctly provides the seller
with an exemption certificate claiming multiple points of use.
(b) If the sale of the prewritten software or
the remote access prewritten software (including retail sales of licenses to
prewritten software and remote access prewritten software) is sourced to
Washington and the purchaser does not provide an exemption certificate, then
the entire charge is subject to retail sales tax. Buyers may use the
department's "Digital Products and Remote Access Software Exemption
Certificate" to claim this exemption.
(i)
Requirements. A buyer is entitled to use an exemption certificate
claiming MPU only if the buyer is a business or other organization and the
prewritten software or remote access prewritten software purchased will be
concurrently available for use within and outside Washington. A buyer is not
entitled to use an exemption certificate claiming MPU for prewritten software
purchased for personal use.
(ii)
Concurrently available. "Concurrently for use within and outside
this state" means that employees or other agents of the buyer may use the
prewritten software or remote access prewritten software simultaneously from
one or more locations within this state and one or more locations outside this
state.
(iii)
Apportionment
(allocation) of use tax. For purposes of this subsection on MPU,
"allocation" and "apportionment" will have the same meaning. A business or
other organization subject to use tax on prewritten software or remote access
prewritten software that is concurrently available for use within and outside
this state is entitled to apportion the amount of tax due this state based on
users in this state compared to users everywhere. Additionally, the department
may authorize or require an alternative method of apportionment supported by
the taxpayer's records that fairly reflects the proportion of in-state to
out-of-state use by the taxpayer.
(c)
Records requirement. No
allocation under this section is allowed unless the allocation method is
supported by the taxpayer's records kept in the ordinary course of business.
(i)
"User" means an employee or
agent of the taxpayer who is authorized by the taxpayer to use the prewritten
software or remote access prewritten software purchased in the performance of
his or her duties as an employee or other agent of the taxpayer.
(ii)
Example 35. Neymar operates
an accounting firm headquartered in Seattle. Neymar purchases from Lionel
prewritten software which Neymar installs on a server in Seattle. The software
is accessed and used concurrently by 5 employees at his Seattle office and 5
employees at his California office. Neymar provides Lionel with a sales tax
exemption certificate claiming multiple points of use. Neymar is only required
to pay use tax for the value attributed to his employee's use at the Seattle
office (i.e., 50%). Neymar does not pay use tax to Washington for the value of
the software used in his California offices even though the software resides on
servers in Seattle.
Statutory Authority:
RCW
82.32.200 and
82.01.060. 13-06-015, §
458-20-15502, filed 2/25/13, effective
3/28/13.