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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 usingsoftware tools.

DAS = RST

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Digital Automated Services Defined

Definition:

any service transferred electronically that uses oneor more software applications

Definition encompasses many services includingsome cloud services:

E.g. Computers remotely accessed, controlled,configured etc by software layer.

Also includes other services provided in thecloud:

E.g. Online searchable database.

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Sample Exclusions from DAS

Broad imposition makes exclusions from DASimportant.

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

Books,

music,

video,

data, facts,

information

Software Service that use software

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.