Beginning July 26, 2009, sales or use tax is due on digital products ranging from downloaded music to streaming video. Engrossed Substitute House Bill (ESHB) 2075 clarifies how taxes apply to products that exist only as computer bits and bytes. Specifically, it:
- Defines digital products as goods and services transferred electronically.
- Includes certain exemptions for businesses and end consumers.
- Requires sellers of digital products to electronically file their tax returns.
- Provides amnesty to those who didn’t collect or pay sales or use tax on digital products that were taxed before July 26, 2009.
What digital products are subject to tax?
While downloaded digital goods (music and movies, etc.) have always been subject to sales or use tax, ESHB 2075 applies sales or use tax to all digital products, regardless of how they are accessed (downloaded, streamed, subscription service, networking, etc.).
Digital products subject to sales or use tax include:
- Downloaded digital goods (music and movies, etc.)
- Streamed and accessed digital goods
- Digital automated services (DAS)
The bill also covers remote access software (e.g. application service providers), which is now subject to sales and use tax too.
It does not matter if the purchaser obtains a permanent or nonpermanent right of use. (See sections 301(8) and 305(1)(e) of the digital products bill).
The Department of Revenue has determined that the Legislature did not intend with Engrossed Substitute House Bill (ESHB) 2075 to change the taxation of the following services:
Web site development or hosting services
"Web site development service" means the design and development of a web site provided by a web site developer to a customer. Gross income received for web site development services in this state is subject to service and other activities B&O tax as a professional service (sales tax does not apply).
Digital data storage
"Digital data storage services" means the service of a provider offering server space to host a customer's web site or a customer's electronic data. Charges for digital data storage services are subject to B&O tax under the service and other activities classification (sales tax does not apply).
Online advertising services
"Advertising services" means all services directly related to the creation, preparation, production, or the dissemination of advertisements. Advertising services include layout, art direction, graphic design, mechanical preparation, production supervision, placement, and rendering advice to a client concerning the best methods of advertising that client's products or services. Advertising services also include search engine optimization, web campaign planning, the acquisition of advertising space in the internet media, and the monitoring and evaluation of web site traffic for purposes of determining the effectiveness of an advertising campaign. Charges for online advertising services are subject to B&O tax under the service and other activities classification (sales tax does not apply).