United States

Washington: Taxpayer’s Automated Email and Fax Services Not Data Processing

Mar 07, 2016
From KPMG TaxWatch

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Recently, a Washington State ALJ addressed whether a taxpayer was providing telecommunications and digital automated services subject to retail sales tax, or whether the taxpayer was providing data processing services, which are not subject to Washington State retail sales tax. The taxpayer offered cloud-based services that automated the creation and delivery of customized faxes and emails to large numbers of recipients. Generally, customers sent the taxpayer data files or digital files, and the taxpayer personalized and customized the email or fax to meet its client’s specifications. Except for certain subscription fees, customers were charged a transaction fee based on the number of pages faxed or emails sent.

Under Washington law, “data processing services” are excluded from the definition of taxable telecommunications services. Data processing services are also excluded from the definition of taxable digital automated services, which are services transferred electronically using software applications. Although the Department had previously held that fax services were taxable telecommunications services, the taxpayer argued that under the true object test it was providing data processing services, not telecom services or digital automated services. The ALJ disagreed and said that applying the true object test favored the Department’s position. In his view, customers primarily engaged the taxpayer to help generate and send personalized transmissions and manipulation of raw data was not an integral and necessary part of the service. If any data was extracted or processed, it was solely for the purpose of inclusion in the email or fax transmission. The ALJ also determined that the Internet Tax Freedom Act, which prohibits taxes on Internet access and certain incidental services, such as electronic mail, did not bar Washington State from imposing retail sales tax on the taxpayer’s services. The taxpayer provided email-related services, but the emails the taxpayer helped develop and customize were sent by third-party providers. For more information on this Washington ALJ ruling, please contact Michele Baisler at (206) 913-4117.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.