In Det. No. 23-0004, 45 WTD 013 (2026), the Washington Department of Revenue (DOR) concluded that professional implementation services and associated travel reimbursements are subject to retail sales tax when provided exclusively in connection with a Digital Automated Service (DAS).
The taxpayer was a software provider that offered cloud-based solutions to state and local governments. Its primary product was a platform used for public interactions, such as permitting and licensing, supplemented by a payment processing application. Because these applications are transferred electronically and utilize software applications to perform tasks, the Department classified them as Digital Automated Services.
The dispute centered on the taxability of “Time and Materials” (T&M) charges for implementing the product, and “Time and Expense” (T&E) charges for reimbursed costs (e.g., airfare). Under Washington law, services that are provided “exclusively in connection with” the sale of a DAS are considered a retail sale, even if such service would otherwise be non-taxable. RCW 82.04.050(8)(b).
With respect to the time and material charges, the taxpayer argued that its T&M work constituted the “customization of prewritten computer software,” which is specifically excluded from the definition of a retail sale under RCW 82.04.050(6)(b). With respect to the taxability of reimbursed costs, the taxpayer contended that it should not be required to collect sales tax on reimbursements for airfare, lodging, and meals, because it had already paid sales tax to the original vendors when these expenses were incurred.
The Department maintained that because the products was a digital automated service, any services provided “exclusively in connection with” those products are inherently part of the retail sale under RCW 82.04.050(8)(b). The Department further argued that the statutory “sales price” includes the total consideration received by the seller, including cost reimbursements, with no deductions allowed for the seller’s own business expenses.
The Administrative Review and Hearings Division (ARHD) denied the taxpayer’s petition, affirming that both implementation fees and travel reimbursements are taxable. The ARHD found that while the taxpayer’s work involved customization, these services were performed specifically to implement the digital automated services. Since the taxpayer did not demonstrate that these services were sold on a standalone basis independent of the sale of the digital automated service, they were deemed to be provided “exclusively in connection with” a digital automated service. Accordingly, the general exclusion for software customization did not apply.
With respect to the reimbursed costs, the ARHD relied on RCW 82.08.010, which defines the “sales price” as the total amount of consideration for which a product is sold. Because the underlying implementation was a taxable retail service, any reimbursements for business costs incurred during that service – such as travel – are included in the taxable gross income.