Washington SaaS Sales Tax: SaaS and Prewritten Software Are Taxable
Washington treats prewritten computer software broadly as a retail sale.
Under RCW 82.04.050, retail sale includes:
- the sale of prewritten computer software to a consumer;
- regardless of the method of delivery;
- charges for the right to access and use prewritten software;
- where possession of the software is maintained by the seller or a third party.
For SaaS businesses, the key rule is:
Charges for access to and use of prewritten software are generally taxable, even when the software is hosted by the provider or a third party.
Prewritten Computer Software Is Taxable
Washington includes the sale of prewritten computer software in the definition of retail sale.
This applies regardless of delivery method.
Example:
Standard software license USD 1,000
The software may be delivered by:
- physical media;
- download;
- electronic transfer;
- another method.
If it is prewritten computer software, the transaction is generally taxable.
SaaS and Remote Access Software Are Taxable
Washington specifically includes charges for the right to access and use prewritten software where the software remains in the possession of the seller or a third party.
Example:
Cloud CRM subscription USD 500/month
Customer:
- logs into software online;
- uses hosted functionality;
- does not receive a software copy;
- software remains hosted by the provider or a third party.
This SaaS subscription is generally treated as a taxable retail sale.
Billing Method Does Not Change Taxability
Washington’s rule applies regardless of how the charge is structured.
Charges may be based on:
- per use;
- per user;
- per license;
- subscription;
- another basis.
Examples:
Monthly SaaS subscription USD 300/month
Annual software access fee USD 3,000/year
Per-user platform fee USD 50/user/month
These charges should be analyzed under Washington’s prewritten software access rules.
Activation Codes Are Treated as Part of Software Sales
Washington also provides that a key, enabling code, or activation code required to activate prewritten software is treated as part of the prewritten software sale.
Example:
Software activation code USD 200
If the code is required to activate prewritten software and put it into use, it is not treated as a separate sale from the software.
The vendor’s or purchaser’s characterization does not change the tax treatment.
Custom Software and Customization Are Excluded
Washington excludes the following from retail sale:
- custom software;
- customization of prewritten computer software.
Example:
Custom software development USD 50,000
If the software is developed specifically for one customer, or the charge relates to customization of prewritten software, separate analysis is required.
Businesses should maintain:
- development agreements;
- customization scopes;
- invoices;
- customer requirement documents.
Common Washington SaaS Compliance Issues
Assuming remote SaaS is exempt
Washington specifically taxes access to and use of prewritten software.
Focusing only on software delivery
Taxability does not depend only on whether software is downloaded or physically delivered.
Hosted access can still be taxable.
Separating activation codes incorrectly
Activation codes required to use prewritten software are generally treated as part of the software sale.
Confusing prewritten and custom software
Standardized software is generally taxable, while custom software and customization are treated differently.
Compliance Tips for SaaS Businesses
Businesses selling SaaS or software products in Washington should:
- Determine whether the product is prewritten computer software;
- Identify whether customers receive access and use rights;
- Apply rules consistently across subscription, per-user, and per-license fees;
- Separate prewritten software from custom software and customization;
- Maintain contracts, product descriptions, and invoices.
Conclusion
Washington clearly taxes SaaS and prewritten software access.
Key rules:
- Prewritten computer software: Taxable;
- Delivery method does not control taxability;
- SaaS access to prewritten software: Taxable;
- Activation codes are generally treated as part of the software sale;
- Custom software and customization are excluded from retail sale.
For SaaS providers, the key question is whether customers pay for access to and use of prewritten software.
Sources
Washington State Legislature — RCW 82.04.050: “Retail sale,” “sale at retail” https://app.leg.wa.gov/rcw/default.aspx?cite=82.04.050