Washington Court Holds that Fees for Access to Online Research Library are Taxable as a Digital Automated Service

February 27, 2020

As businesses provide more products/services using technology, determining the proper sales/use tax treatment is more difficult given varying state classifications as to what is and is not taxable.

By Betsy Tuck, SALT Manager

As technology takes over both the retail product and service economies, states and taxpayers must figure out how to characterize these new technologies and determine their taxability within the existing set of laws, regulations and other guidance. Characterizing these technologies as fitting – or not fitting – within a state’s particular taxable classification is difficult given the potential subjectivity involved to make that determination.  For example, in a recently issued Washington Court of Appeals opinion, the court shed light onto what Washington defines as a taxable “Digital Automated Service.”[1]

The taxpayer in the case, Gartner Inc., is a research and advisory firm in the information technology space. The taxpayer offered an online research tool (“Gartner Research”) to clients on a subscription basis which granted its users access to view its proprietary research content, but generally not the right to download or save the content.

The Washington Department of Revenue assessed the taxpayer over $3 million in retail sales and retailing Business & Occupation (“B&O”) taxes for the 2011 calendar year on Gartner’s Research fees for its service of providing access to Gartner Research by characterizing this service as a “digital automated service.”

But what really is a digital automated service? A digital automated service is a subset of what Washington considers a digital product. A digital product can either be a digital good OR a digital automated service.[2]  A digital good means “sounds, images, data, factors, or information, or any combination thereof, transferred electronically,” and digital automated service means “any service transferred electronically that uses one or more software applications.”[3] Digital products are subject to both the retailing B&O and retail sales tax in Washington.

Thus, as explained by the guidance in Washington Admin. Code 458-20-15503 (“Rule 15503”), a digital product is taxable if it is:

  • Delivered Electronically; and
  • Meets the general definition of a digital product or a digital automated service.

In this case, the court determined that Gartner Research qualified as a digital automated service since, as set forth in Rule 15503, it “involves the electronic transfer of a service, which includes access to digital goods that is facilitated by one or more software applications that provide search capabilities and other functionality.”[4] Specifically, the court found that Gartner Research contained content, a digital good, operated in an integrated fashion with the search software to provide an electronically transferred service.

The taxpayer argued that Gartner Research met the “human effort” exclusion because it “primarily involves the application of human effort, and the human effort originated after the customer requested the service.”[5]

Specifically, Gartner claims that the research content available on Gartner Research is created by its analysts.  With regard to Gartner Research, the court notes that while there is human interaction occurring whereby Gartner employees identify and prepare content for the research library based on trends and forecasts or “aggregate” or “common” user requests, this work is not performed for a client specific request.  In other words, at the moment a customer signs up for Gartner Research, the content available already exists. Any additional content added after signing up is not done in response to a specific client request.

Therefore, the court ultimately concluded that Gartner’s Research is a taxable digital product and that revenues derived from that service are subject to the retail sales and retailing B&O tax.

As technology evolves, it becomes more difficult to categorize a business products/services as taxable or nontaxable.  In particular, the intersection of services and technology has transformed services that used to be provided by humans (i.e., nontaxable) into automated services or software that may now be taxable.

Aprio’s SALT team has experience helping clients understand the potential characterization of their technology and the resulting sales and use tax consequences.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Betsy Tuck, SALT manager, at betsy.tuck@aprio.com or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the February 2020 SALT Newsletter.

[1] Gartner, Inc. v. State of Washington, Department of Revenue, No. 51637-3-II, (Wash. Ct. of App., Jan. 13, 2020).

[2] Washington Rev. Code §82.04.192

[3] Id.

[4] Rule 15503(203)(a).

[5] Rule 15503(303)(a).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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