Washington Ruling Excludes Content Delivery Network Services from Sales Tax

By: Jess Johannesen, SALT Director

At a glance:

• The main takeaway: A taxpayer’s content delivery network services were not subject to sales tax as a digital automated service because it met the exclusion for the storage of digital content and software. 
• Assess the impact: As states continue to expand their sales tax base, particularly with technology-related services, it’s important to pay attention to new service definitions and sourcing rules since the statutory language is open to interpretation.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help you analyze taxability and sourcing rules and provide interpretive guidance so your business remains in compliance with your sales tax obligations.

Schedule a free consultation today to learn more!

The full story

The Washington Board of Tax Appeals (the Board) issued a ruling concluding that a content delivery network (CDN) services provider’s core service was excluded from “digital automated services” that are otherwise subject to sales tax.[1] The taxpayer was a leading global provider of CDN services whose customers use the services to deliver digital content to internet users.

What are CDN services?

A CDN is a distributed network of servers that cache (or store) and deliver content to users. By storing content on servers in the distributed network that are closer to users, CDNs reduce the distance that data must travel, which leads to improved website loading speeds and overall enhanced online experiences.

A closer look at digital automated services

During the audit, the Washington Department of Revenue (the Department) determined that the taxpayer’s services constituted as a “digital automated service” (DAS) for sales tax purposes, which is a taxable service.[2] DAS is broadly defined as any service transferred electronically that uses one or more software applications.[3] However, there are over 15 exclusions from DAS, and the taxpayer argued that its CDN service was not DAS because it met two specific exclusions.[4]

DAS does not include “the internet and internet access”

The taxpayer argued that its CDN services are not DAS because they meet the exclusion for “the internet and internet access.”[5]  However, the Board rejected this argument since the customers do not use the CDN services to connect to the internet itself. While the CDN is a “backbone” component of the internet, the Board noted that this theory would mean that virtually all services provided over the internet would qualify under this exclusion.

DAS does not include “the mere storage of digital products, digital codes, computer software, or master copies of software”

This exclusion from the definition of digital automated services includes providing space on a server for web hosting or the backing up of data or other information.”[6] The taxpayer argued that its CDN service is fundamentally a “data storage solution” that qualifies for this exclusion. The Department argued that the CDN services go beyond “mere storage” because the software applications allow customers to optimize the quality and speed of content accessed by viewers, but the Board noted that the Department’s interpretation of the exclusion was unreasonably narrow. The Board found that the taxpayer’s core CDN service qualified as an excluded web hosting service since customers pay to replicate and store their digital content on the taxpayer’s network of servers. Therefore, since the CDN service met this exclusion, it was not DAS, and accordingly, was not subject to sales tax.

In addition to its core CDN services, which represented approximately 80% of its revenues, the taxpayer also provided additional services that:

1. Optimize the delivery of content to mobile devices which also allowed for ads to be inserted through the CDN, and
2. Provide customers with a self-service portal where they can access software to manage, analyze, and monetize video content with the insertion of ads. 

The Board held that these additional services were taxable DAS since these services indeed went beyond “mere storage” of digital content.

Washington’s cascading rules four sourced DAS

The taxpayer argued that the Department improperly sourced its sales. Washington sources DAS (and retail sales generally) using a series of cascading rules. If the first rule does not apply to the particular scenario, the taxpayer proceeds to the second rule, and so on. The Department used the state’s second rule, which sources the service to where “receipt by the purchaser” occurs, including “the location indicated by instructions for delivery” that are “known to the seller.”[7] Specifically, the Department determined that the customers first used the CDN services at the point where the CDN’s server was closest to the end users’ location. In other words, the Department developed an attribution percentage based on the portion of CDN traffic delivered from the taxpayer’s server located in Washington. The Department recognized that some of the content delivered from the Washington server was ultimately destined for servers or end users in neighboring states, but the Department assumed this would be offset by content delivered to servers in Washington from outside the state.

The taxpayer’s position was that its taxable sales should be sourced using the state’s third tier (the customer’s address) since there is no defined location where customers take receipt under the second tier’s rule and that the content was delivered to end users’ network providers. However, the Board noted that the taxpayer did not present evidence to show what portion of its revenues were from sales to customers with an out-of-state billing address. In the absence of sufficient evidence, the Board held that the Department reasonably relied on the CDN traffic reports to source the sales of DAS.

The bottom line

As states continue to expand their sales tax base, particularly in the area of technology-related services, it is important to pay close attention to these new service definitions and the sourcing rules, since the statutory language can be ambiguous and open to interpretation. 

Aprio’s SALT team has experience analyzing these rules and available interpretive guidance. Our team can assist your business with taxability decisions for your revenue streams so that you remain in compliance with your sales tax obligations and do not 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.

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[1] Limelight Networks, Inc. v. Washington Department of Revenue, No. 20-129, Wash. Bd. Tax App., 01/08/2025

[2] RCW 82.08.020(1)(b) and 82.08.050(8)

[3] RCW 82.04.192(3)(a)

[4] See RCW 82.04.192(3)(b)(i)-(xvi).  A service will not be considered DAS as long as it meets one of these exclusions.

[5] RCW 82.04.192(3)(b)(vii)

[6] RCW 82.04.192(3)(b)(xiv)

[7] RCW 82.32.730(1)(b)