If you’re a regular reader of our blogs, you know that we have, for the last few years, featured a different state of the month, and have profiled a number of things about that state. After running through the 50 states at least once, we thought we might try something a little different. We’d still like to feature our fabulous United States, but maybe do some compare and contrast in the areas that many of our readers and clients find to be the most useful. We look forward to your feedback.
This month, we contrast a couple of west coast states – California and Washington – specifically their treatment of technology items for sales tax purposes.
Wait! Already know you need help with California or Washington issues? Please reach out to us at info@milesconsultinggroup.com
Software as a Service (SaaS) in California vs. SaaS in Washington
Software as a Service (SaaS) is subject to sales tax in several jurisdictions across the country. Approximately half of states do tax the SaaS revenue stream. As you’ll see below, despite the fact that both CA and WA consider themselves to be tech-friendly (as homes to companies such as Apple and Microsoft, respectively), they differ in their approaches to the application of sales tax.
In California, there must be a transfer of tangible personal property for a transaction to be subject to tax. Sales and use tax does not apply to software as a service (SaaS) in which a customer gains access to software on a remote network without receiving a copy of the software while the seller retains exclusive possession and control of it. As such in CA, SaaS is not taxable
Washington considers charges made to consumers for the right to access and use prewritten computer software, where possession of the software is maintained by the seller or a third party, to be a taxable service regardless of whether the charge for this service is on a per use, per user, per license, subscription or some other basis. So, in WA, SaaS is taxable.
Software in California vs. Software in Washington
In CA, a prewritten program, otherwise known as a canned program, is a program that is held or existing for general or repeated sale or lease, even if the program was initially developed on a custom basis or for in-house use. The sale of a prewritten program is not taxable if the program is electronically delivered to the customer and the customer does not obtain possession of tangible personal property (e.g., storage) in the transaction. A custom computer program means a computer program prepared to the customer’s special order. CA does not impose sales and use tax upon the sale of “custom computer programs.”
In WA, “Prewritten computer software” means computer software, including prewritten upgrades that is not designed and developed by the creator to the specifications of a specific purchaser. Prewritten computer software, regardless of the method of delivery, is generally subject to sales and use tax when it is used in Washington. “Custom software” means software created for a specific person. The sale of custom software is not subject to sales tax.
Digital Goods
States vary in their treatment of electronically delivered goods including e-books, music, and streaming video. Some states consider all of these types of products to be taxable or not, while others call out specific taxability depending upon the product.
In CA, digital products are products transmitted electronically through “load and leave,” email or file transfer protocol. The sale of digital products is not the sale of tangible personal property and therefore is not taxable. Tax does not apply to the sale of digital products unless the vendor provides the customer with a printed copy of the electronically transferred information as a backup copy or the electronically transmitted data physical disc (like a CD).
In WA, “digital product” means digital goods and automatic services. Washington imposes sales and use tax on digital products transferred electronically to end users. The state has also weighed in on the topic of whether non-fungible tokens (NFTs) are subject to tax. Read more about that here.
Sales Tax Holidays
States often offer tax holidays during specific times of the year. These vary greatly by state. Here’s how CA and WA shake out.
CA does not have any sales tax holidays.
According to Dave Paul, representative for the 10th Legislative District in WA, the state House of Representatives passed a one-time sales tax holiday for consumers. Under this piece of legislation, there won’t be any sales tax from Sept. 3 to Sept. 5 for certain items priced $1,000 or less. These items include clothing, school supplies, computers, and energy-efficient appliances.
Other tax matters
In addition to sales tax, California also imposes a franchise tax, which is really characterized more as an income tax. The state starts with federal taxable income and then makes adjustments to that amount, followed by applying an apportionment rate. In CA, apportionment is based on a sales formula. And sales of services are sourced based upon market-based sourcing (rather than cost of performance).
In contrast, Washington has no corporate level income tax. However, it does impose an excise tax, known as the Business and Occupation tax (or B&O tax). This tax is reported on the same form/filing as the sales tax, so this is often confusing to companies, particularly because the sales tax is a pass-through tax to customer, whereas the B&O is borne by the seller and is not passed through.
Economy
The economy of California is large enough to be compared to that of the largest countries in the world. If it were a country, California would be the 6th largest economy in the world and the 35th most populous. It is also regarded as a global trendsetter in both popular culture and politics, and is the birthplace of the film industry, the hippie counterculture, the internet, and the personal computer. Fifty-eight percent of the state’s economy is centered on finance, government, real estate services, technology, and professional, scientific, and technical business services. The silicon chip was developed in CA and many tech companies reside in Silicon Valley, such as Apple, Google, Facebook, Netflix and many others.
Washington has a relatively strong economy. Significant businesses within the state include the design and manufacture of aircraft (Boeing) automotive (Paccar), computer software development (Microsoft, Bungie, Amazon, Nintendo of America, Valve Corporation, ArenaNet), telecom (T-Mobile US), electronics, biotechnology, aluminum production, lumber and wood products (Weyerhaeuser). Other businesses include mining, beverages (Starbucks, Jones Soda), real estate (John L. Scott, Colliers International, Windermere Real Estate, Kidder Mathews), retail (Nordstrom, Eddie Bauer, Car Toys, Costco, R.E.I.), and tourism.
CA Fun facts:
- The Sierra Nevada Mountains bear Arctic temperatures in winter and are home to several dozen small glaciers, including Palisade Glacier, the southernmost glacier in the United States.
- California contains more forestland than any other state except Alaska.
- Many of the trees in California’s White Mountains are the oldest in the world. The White Mountains are entirely located within the Inyo National Forest. It is on the eastern edge of the Sierra Nevada Mountain Range.
- California is home to the oldest college bowl game, the annual Rose Bowl.
- The state is the only U.S. state to have hosted both the Summer and Winter Olympics.
- Twenty major professional sports league franchises reside in California, far more than any other state.
- California has a border along the Pacific Ocean of nearly 900 miles.
WA fun facts:
- Washington state has more glaciers than the other 48 contiguous states combined.
- Washington state’s capitol building was the last state capitol to be built with a rotunda.
- Spokane was the smallest city in size to host a World’s Fair, which was in 1974.
- The highest point in Washington is Mount Rainier. It was named after Peter Rainier, a British Soldier who fought against the Americans in the Revolutionary War.
- Popular games such as, Pictionary, Pickle-ball, and Cranium were all invented in Washington.
- The forests of the Olympic Peninsula are among the rainiest places in the world and the only rainforests (such as the Hoh Rain Forest) in the continental United States.
- Washington is the birthplace of Jimi Hendrix (Seattle) and Bing Crosby (Tacoma).
- During the Great Depression, a series of hydroelectric dams were constructed along the Columbia River as part of a project to increase the production of electricity. This culminated in 1941 with the completion of the Grand Coulee Dam, the largest dam in the United States.
We invite you to further explore CA and WA in these earlier blogs we crafted over the years. Our team at Miles Consulting Group is always available to discuss the specifics of your situation, whether in Washington, California, or other U.S. States, and help you navigate the complex tax structures arising from multistate operations. Call us to help you achieve the best tax efficiencies.
