Washington Rules that Sales Tax Applies to Online Account Access Services

By: Tina Chunn, SALT Senior Manager

At a glance

• The main takeaway: A taxpayer’s services provided through an online banking platform were classified as digital automated services by the state of Washington and thus deemed taxable.
• Assess the impact: Accurately classifying services provided via online platforms for sales tax purposes can be complicated due to the ever-evolving nature of digital technology, and seeking a private ruling from the state may be the best option to prevent potential liabilities and penalties.
• Take the next step: Aprio’s State and Local Tax (SALT) Team can help your business analyze how states will address these services and guide you on the current path to comply with your sales tax obligations.

Schedule a free consultation today to learn more!

The full story:

Washington recently published a ruling that a company providing online account access services to credit unions was providing taxable digital automated services (DAS) and not data processing services, which is specifically excluded from taxable DAS.[1]      

The taxpayer, an out-of-state corporation, provides an online banking platform to member credit unions that allow the credit unions to provide a variety of online banking services to its banking customers. The platform retrieves data from a variety of databases to allow the credit union customers to perform transactions through the taxpayer-maintained website, such as paying bills, accessing electronic account statements, making balance transfers, accessing credit card accounts, checking available credit, reviewing account data, requesting replacement cards and PIN numbers, updating account contact info and more. These services are billed monthly to the member credit unions and include a fee per unique user, a custom programming fee, a monthly maintenance fee, separate charges for cardholder statement requests and reporting lost or stolen cards.

The taxpayer also has an automated phone system service to allow customers to make inquiries, access account information and activate credit cards. If the information is not obtained from automated responses, the system routes the call to customer service agents that are employed by the taxpayer. The taxpayer separately charges for card activations services and phone system calls.

The ruling explained

For Washington sales tax purposes, DAS is defined as “any service transferred electronically that uses one or more software applications” and includes any services provided exclusively in connection with the DAS as well as components that are similar to stand-alone digital goods, whether or not a separate charge is made for such services.[2] “For example, an online information service may contain data, facts, or information the use of which is facilitated by one or more software applications that provide search capabilities and other functionality. Thus, digital automated services will include software and may include elements similar to stand-alone digital goods, which operate together in an integrated fashion to provide an electronically transferred service.”[3]

Digital processing services are excluded from DAS. A digital processing service is “a primarily automated service provided to a business or other organization 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.” Examples include the processing of checks, claims, forms, images, payroll and similar activities.

The hearings officer determined that the taxpayer’s online platform constitutes DAS because it “provide[s] access to and select information from a variety of databases containing customer account and transaction information and make that information available to the credit union customers via a website or over the telephone.” It disagreed with the taxpayer’s argument that its platform should be exempt since elements of the service provided by the platform include excluded data processing services.

Regarding the phone system, the taxpayer argued that data processing was the main function of the phone system and not merely one component of the service. The hearings officer disagreed, noting that the phone system is either fully automated or may be routed to a live agent, thereby indicating that the service goes beyond data processing and therefore is properly classified as taxable DAS. 

The bottom line

The classification of a business’s product and service offerings for sales tax purposes is often complicated by the fact that online technologies allow many different products and/or services to be provided in one offering. Aprio’s SALT Team has experience analyzing how states address these types of product services. We can assist your business in addressing these issues, including obtaining a private ruling from the state, so that you can comply with your sales tax obligations, and you don’t incur unexpected liabilities and penalties. 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.

This article was featured in the May 2022 SALT Newsletter.

For more information contact Tina Chunn, SALT Senior Manager at tina.chunn@aprio.com or call 770-353-5334 Jeff Glickman at jeff.glickman@aprio.com or call 770-353-4791.

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[1] Det. No. 19-0284R, 41 WTD 118, April 12, 2022.

[2] RCW 82.04.192(3)(a). RCW 82.04.050(8)(b).

[3] WAC 458-20-15503 (Rule 15503);

Disclosure

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.