A Washington appellate court has ruled against the state Department of Revenue and a lower court’s summary judgement, and ruled in favor of a company that collects and transmits data for Washington-based power companies. In an audit, the Department of Revenue assessed retail sales tax on the company’s sales of data services, arguing that the taxpayer provided digital automated services, which are taxable in the state, and not data processing services, which are exempt.
The arguments made by the taxpayer and the Department of Revenue hinged on the primary purpose of the service provided, with the Department of Revenue arguing that the service was primarily that of collecting and transmitting the data, which they defined as an information service out of the scope of the exemption for data processing. The taxpayer argued that the information collected, without the data processing part of the service, did not provide significant value to their customers.
The court relied on the “primary purpose” or “true object test”, which the Washington Supreme Court has previously used to define the taxability of services. The court concluded that, despite other cases that determined data collection services were subject to tax as another taxable service, the difference in this case came down to a distinction between a service that simply collects data and transmits it to their customer, and a service that manipulates raw data into more usable form of data to be further manipulated by the customer.
The “true object” test is used by many states to determine the taxability of services, and can be tricky to understand and even trickier to try to prove if a state disagrees with your interpretation. Consulting state publications, previous decisions, or even requesting a private letter ruling about the facts of your specific business services can help your business get a better picture of whether or not a state defines your service offering as taxable.
(Landis+GYR Midwest Inc. v. Washington Department of Revenue, case number 56877-2-II, Court of Appeals of the State of Washington, Division II.)