Current through Register Vol. 23-24, December 15, 2023
(1) This rule
implements the provisions of chapter 29, Laws of 1991, ex. sess, regarding the
property taxation of computer software for centrally assessed
utilities.
(2)
Computer
software. Computer software is a set of directions or instructions that
exist in the form of machine-readable or human-readable code, is recorded on
physical or electronic medium and directs the operation of a computer system or
other machinery and/or equipment. Computer software includes the associated
documentation which describes the code and/or its use, operation, and
maintenance and typically is delivered with the code to the user. Computer
software does not include data bases, but does include the computer programs
and code which are used to generate data bases. Computer software can be
canned, custom, or a mixture of both.
(a) A
data base is text, data, or other information that may be accessed or managed
with the aid of computer software but that does not itself have the capacity to
direct the operation of a computer system or other machinery and equipment;
and, therefore does not constitute computer software.
(3)
Custom software. Custom
software is computer software that is specially designed for a single person's
or a small group of persons' specific needs. Custom software includes
modifications to canned software and can be developed in-house by the user, by
outside developers, or by both.
(4)
"Person" means any individual, receiver, administrator, executor, assignee,
trustee in bankruptcy, trust, estate, firm, copartnership, joint venture, club,
company, joint stock company, business trust, municipal corporation, political
subdivision of the state of Washington, corporation, association, society, or
any group of individuals acting as a unit, whether mutual, cooperative,
fraternal, nonprofit, or otherwise and the United States or any instrumentality
thereof.
(5) A "small group of
persons" shall consist of less than four persons. A group of four or more
persons shall be presumed not to be a small group of persons for the purposes
of this section unless each of the persons are affiliated through common
control and ownership.
(a) "Persons affiliated
through common control and ownership" means
(i) Corporations qualifying as controlled
group of corporations in 26 USC § 1563; or
(ii) Partnerships or other persons in which
at least 80% of the ownership in the persons claimed to be affiliated is the
same.
(6)
Canned software. Canned software, also referred to as prewritten,
"shrink-wrapped" or standard software, is computer software that is designed
for and distributed "as is" for multiple persons who can use it without
modifying its code and which is not otherwise considered custom software.
(a) Computer software that is a combination
of prewritten or standard components and components specially modified to meet
the needs of a user is a mixture of canned and custom software. The standard or
prewritten components are canned software and the modifications are custom
software.
(b) Canned software that
is "bundled" with or sold with computer hardware retains its identity as canned
software and shall be valued as such. "Bundled" software is canned software
that is sold with hardware and does not have a separately stated price, and can
include operating systems such as DOS, UNIX, OS-2, or System 6.0 as well as
other programs.
(c) An upgrade is
canned software provided by the software developer, author, distributor,
inventor, licensor or sublicensor to improve, enhance or correct the workings
of previously purchased canned software.
(7)
Embedded software. Embedded
software is computer software that resides permanently on some internal memory
device in a computer system or other machinery and equipment, that is not
removable in the ordinary course of operation, and that is of a type necessary
for the routine operation of the computer system or other machinery and
equipment.
(a) Embedded software can be either
canned or custom software which:
(i) Is an
integral part of the computer system or machinery or other equipment in which
it resides;
(ii) Is designed
specifically to be included in or with the computer system or machinery or
other equipment; and
(iii) In its
absence, the computer system or machinery or other equipment is
inoperable.
(b) "Not
removable in the ordinary course of operation" means that the software is not
readily accessible and is not intended to be removed without
(i) Terminating the computer system,
machinery, or equipment's operation; or
(ii) Removal of a computer chip, circuit
board, or other mechanical device, or similar item.
(c) "Necessary for the routine operation"
means that the software is required for the machinery, equipment, or computer
to be able to perform its intended function. In the case of machinery or other
equipment, such embedded software does not have to be a physical part of the
actual machinery or other equipment, but may be part of a separate control or
management panel or cabinet.
(8)
Retained rights. Retained
rights are any and all rights, including intellectual property rights such as
those rights arising from copyright, patent, and/or trade secret laws, that are
owned or held under contract or license by a computer software developer,
author, inventor, publisher or distributor, licensor or sublicensor.
(9)
Golden or master copy. A
golden or master copy of computer software is a copy of computer software from
which a computer software developer, author, inventor, publisher or distributor
makes copies for sale or license.
(10)
Acquisition cost.
(a) The acquisition cost of computer software
shall include the total consideration paid for the software, including money,
credits, rights, or other property expressed in terms of money, actually paid
or accrued. The term also includes freight and installation charges but does
not include charges for modifying software, retail sales tax or training. No
deduction from the acquisition cost of computer software shall be allowed for
any retained rights held by the developer, author, inventor, publisher, or
distributor.
(b) In cases where the
acquisition cost of computer software cannot be specifically identified, it
will be valued at the usual retail selling price of the same or substantially
similar computer software.
(c) In
cases where canned software is specially modified for the user, the canned
component of the computer software retains its identity as canned software; and
the modifications are considered custom software and not taxable.
(11)
Valuation of canned
software.
(a) In the first year in
which it will be subject to assessment, canned software shall be listed and
valued at one hundred percent of acquisition cost as defined in section
(10)(a), above, regardless of whether the software has been expensed or
capitalized on the accounting records of the business.
(b) In the second year in which it will be
subject to assessment, canned software shall be listed at one hundred percent
of acquisition cost and valued at fifty percent of its acquisition
cost.
(c) After the second year in
which canned software has been subject to assessment, it shall be valued at
zero.
(d) Upgrades to canned
software shall be listed and valued at the acquisition cost of the upgrade
package under subsections (11)(a) and (b), above, and not at the value of what
the complete software package would cost as a new item.
(12)
Valuation of customized canned
software. In the case where a person purchases canned software and
subsequently has that canned software customized or modified in-house, by
outside developers, or both, only the canned portion of such computer software
shall be taxable and it shall be valued as described in subsection
(11).
(13)
Valuation of
embedded software. Because embedded software is part of the computer
system, machinery, or other equipment, it has no separate acquisition cost and
shall not be separately valued apart from the computer system, machinery, or
other equipment in which it is housed.
(14)
Taxable person. Canned
software is taxable to the person having the right to use the software,
including a licensee.
(15)
Situs. Canned and custom software with situs in Washington means
software physically located in Washington or installed in or on machinery,
equipment, or computer systems physically located in Washington on the
assessment date.
(16)
Reporting. Each utility/taxpayer defined in chapters 84.12 and
84.16 RCW shall report to the department, using the Annual Report tax form
provided by the department, the following information regarding its software
with situs in Washington in use on the assessment date:
(a) The acquisition cost of expensed canned
computer software which was purchased:
(i) In
the year preceding the assessment date; and
(ii) In the second year prior to the
assessment date; and
(iii) In the
years prior to the second year preceding the assessment date.
(b) The historic cost less
depreciation of capitalized canned computer software which was purchased:
(i) In the year preceding the assessment
date;
(ii) In the second year prior
to the assessment date;
(iii) In
the years prior to the second year preceding the assessment date;
(c) The acquisition cost of
expensed custom computer software which was purchased:
(i) In the year preceding the assessment
date;
(ii) In the second year prior
to the assessment date;
(iii) In
the years prior to the second year preceding the assessment date;
(d) The historic cost less
depreciation of capitalized custom computer software.
(17)
Calculation of computer software
value. The following formulas shall be used for determining the percent
taxable calculation of computer software used by centrally assessed utilities.
(a) For the purpose of determining the
numerator of the percent taxable calculation, the historic cost less
depreciation of all taxable Washington property shall be computed by adjusting
the historic cost less depreciation of property capitalized in the company's
records as follows:
(i) Add the acquisition
cost of expensed canned software acquired in the year preceding the assessment
date; and
(ii) Add 50% of the
acquisition cost of expensed canned software acquired in the second year
preceding the assessment date; and
(iii) Subtract 50% of the historic cost less
depreciation of capitalized canned software acquired in the second year
preceding the assessment date; and
(iv) Subtract the historic cost less
depreciation of capitalized canned software acquired in years prior to the
second year preceding the assessment date; and
(v) Subtract the historic cost less
depreciation of capitalized custom software.
(b) For the purpose of determining the
denominator of the percent taxable calculation, the historic cost less
depreciation of all Washington property shall be computed by adding the
acquisition cost of expensed canned and custom software in use on the
assessment date to the historic cost less depreciation of Washington property
capitalized in the company's records.
(c) The historic cost less depreciation of
all taxable Washington property (calculated as set forth in subsection (a)
above) shall be divided by the historic cost less depreciation of all
Washington property (calculated as set forth in subsection (b) above) to arrive
at the percent taxable calculation.
(d) The portion of the unit value allocated
to Washington state shall be multiplied by the percent taxable calculated as
set forth in subsection (c) above to determine the Washington taxable property
value.
(18)
Exemptions.
(a) All custom
software, except embedded software, shall be exempt from property
taxation;
(b) Retained rights of
the computer software developer, author, inventor, publisher, distributor,
licensor or sublicensor are exempt from property taxation;
(c) Modifications to canned software shall be
exempt from property taxation as custom software; however, the underlying
canned software shall retain its identity as canned software and shall be
valued as prescribed in subsection (11) of this rule;
(d) Master or golden copies of computer
software are exempt from property taxation;
(e) The taxpayer is responsible for
maintaining and providing records sufficient to support any claim of exemption
for either canned or custom software.
Statutory Authority:
RCW
84.08.010 and 1991 c 29. 92-01-132, §
458-50-085, filed 12/19/91, effective
1/19/92.