A content delivery network (CDN) services provider appealed the Department’s assessment of retail sales tax in which the Department determined that the taxpayer’s CDN services were “digital automated services” subject to the retailing B&O tax and retail sales tax. The taxpayer disagreed, noting that its CDN is a “backbone” component of the internet that its customers use to transmit their content to end users, and therefore falls within an exclusion for “the internet and internet access.” The taxpayer argued in the alternative that its CDN services qualify for a separate exclusion for “the mere storage of digital products” including “providing space on a server for web hosting.” Finally, the taxpayer contended that the Department improperly sourced its non-excluded retailing revenues to Washington.
The Board found that the exclusion for “the internet and internet access” applies only to the “narrow range of services” the state is prohibited from taxing under the Internet Tax Freedom Act and the Supremacy Clause. The Board further found that while the CDN services that qualified as “web hosting” services were excluded from the definition of digital automated services, the amounts the taxpayer charged for services that enabled customers to modify or enhance their digital content were not excluded from the definition of digital automated services and were therefore subject to the retail sales tax. Finally, the Board found that the Department reasonably relied on the taxpayer’s “traffic reports” to source sales of digital automated services based on the location where the digital content is retrieved by end-users.