Washington Tax Law and Cloud Computing

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Washington Tax Law and Cloud Computing

• Caleb Allen (WA DOR)

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Cloud Computing Issues

• WA law addressing cloud computing issues.
• Three important issues around cloud computing
• Taxability
• How WA law addresses cloud computing and other
  digital products transactions.
• Sourcing
• How WA law addresses sourcing of digital products
  transactions including some cloud computing
  services.
• Nexus
• How WA law addresses two specific nexus scenarios
  related to cloud computing.

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Taxability
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Washington Law

• Digital products law addresses items transferred
  electronically
• Digital goods
• Digital codes
• Digital automated services (DAS)
• Remote access software (RAS)

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Digital Goods

• Digital goods
• SSUTA digital books, music, and video.
• Washington sounds, images, data, facts or
  information or any combination thereof
• E.g. digital picture, lawn mower engine diagram
  etc.

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Digital Codes

• Provides purchaser the right to obtain a digital
  good or DAS.
• Example digital code inside bottle cap allows
  the purchaser the right to obtain an MP3 file.

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Remote Access Software

• Washington taxes prewritten software
• Delivered on tangible media
• Digitally delivered
• Remotely accessed.
• Remotely accessed software (RAS)
• Charges for the right to access and use
  prewritten software where possession is
  maintained by seller
• Regardless of whether the charges for the service
  is per user, use, license, subscription or other
  basis.

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Digital Automated Services

• Introduction
• Unique and broad tax category addressing digital
  service transactions including some cloud
  computing.
• Digital automated service (DAS)
• .any service transferred electronically that
  uses one or more software applications
• WA anticipated
• Rapid change in business models
• Rapid change in and technology
• Rapid change could make digital good and remote
  access software categories obsolete.

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Evolution Software into Services

• T1-Gaming software purchased on a CD in a store
• TPP RST
• T2-Gaming software accessed online
• Remote access software RST
• T3 Gaming software accessed online PLUS other
  services
• Real time multiplayer functionality
• Chat rooms
• World wide tournaments, etc
• DAS RST

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Example 2 Digital Good into Services

• T1-Music purchased on CD in store
• TPP RST
• T2-Music accessed/streaming online
• Digital good RST
• T3-Music access PLUS other service
• Ability search information on music group or
  song.
• Ability to chat with other fans.
• Ability to compose songs and create digital files
  using software tools.
• DAS RST

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Digital Automated Services Defined

• Definition
• any service transferred electronically that
  uses one or more software applications
• Definition encompasses many services including
  some cloud services
• E.g. Computers remotely accessed, controlled,
  configured etc by software layer.
• Also includes other services provided in the
  cloud
• E.g. Online searchable database.

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Sample Exclusions from DAS

• Broad imposition makes exclusions from DAS
  important.
• Protect WA business models (e.g. server farms)
• Hosting, storage and back up.
• Preserve existing industry tax treatment
• Data processing.
• Telecommunications internet access.
• Tax neutrality for online and offline activities
• Primarily human effort (e.g. electronic contract
  sent via email)

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How it Fits Together
Digital Automated Services
Remote Access Software
Digital Goods
Software
Service that use software
Books, music, video, data, facts, information
The Cloud
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Sourcing
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Sourcing

• SSUTA general rule in WA applied to DAS/RAS/DG
• Business location
• Store location (not generally relevant for
  DAS/RAS/DG?)
• Place of receipt
• E.g. physical shipping address (available for
  DAS/RAS/DG?)
• Address in business records
• E.g. accounts receivable address, address in
  contract.
• Address from sale
• E.g. Credit card billing address usually
  available and generally works
• blind form of payment (e.g. PayPal) no address?
• Origin sourcing
• Server location may be unknown or movable.

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Nexus Summary
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Nexus Safe Harbors

• These activities do not create nexus in WA for
  out of state seller
• Ownership of software or digital good located on
  server in WA.
• Third party activities (e.g. marketplace
  services) conducted on sellers behalf
• display of advertising,
• order taking or
• payment processing.

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Summary

• Taxability WA has basic framework and
  definitions to address cloud computing and other
  digital product transactions.
• Sourcing SSUTA rule generally works but may
  create challenges for some digital transactions
  where information is lacking.
• Nexus two nexus issues resolved.