AN ACT
Relating to the taxation of computer software; amending RCW 84.36.815; amending
1990 c 255 s 2 (uncodified); adding a new section to chapter 84.04 RCW; adding
a new section to chapter 84.36 RCW; adding a new section to chapter 84.40 RCW;
creating new sections; and declaring an emergency.
BE IT
ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:
NEW
SECTION. Sec. 1. (1)
The legislature finds that:
(a)
Computer software is a class of personal property that is itself comprised of
several different subclasses of personal property which can be distinguished by
their use, development, distribution, and relationship to hardware, and
includes custom software, canned software, and embedded software;
(b)
Because different classes of software serve different needs, may be used by
different taxpayers, and present different administrative burdens on both the
state and the citizens of the state of Washington, the different classes of
software should be treated differently for tax purposes;
(c)
Canned software should continue to be subject to property tax, but, because of
its rapid obsolescence, should be subject to tax for only two years; and the
taxable interest should reside with the end user;
(d)
Canned software that has been modified should continue to be taxable on the
canned portion of the software;
(e)
Embedded software should continue to be taxed as part of the machinery or
equipment of which it is a part;
(f)
Custom software should be exempt from taxation, in part because of the
difficulty in accurately and uniformly determining the value of such software;
(g)
Retained rights in computer software should be exempt from the property tax in
part because of the difficulty in accurately and uniformly determining the
value of such software, the difficulty in determining the scope and situs of
such rights, and the adverse economic consequences to the state of taxing such
rights; and
(h) So‑called
"golden" or "master" copies of software should be exempt
from property tax like business inventory.
(2) It
is the intent of the legislature that:
(a)
The voluntary compliance nature of the personal property tax system should be
preserved and nothing in this act shall be construed to reduce the taxpayer's
obligation to fully and accurately list all taxable computer software;
(b)
Computer software should be listed and assessed for property taxes payable in
1991 and 1992 in the same manner and to the same extent as computer software
was listed and assessed for taxes due in 1989;
(c)
The definition of custom software, golden or master copies, and retained rights
shall be liberally construed in accordance with the purposes of this act;
(d)
This act shall provide fairness, equity, and uniformity in the property tax
treatment of each class of computer software in the state of Washington; and
(e) No
inference should be taken from this act regarding the application of the
property tax to data bases.
NEW
SECTION. Sec. 2. A new
section is added to chapter 84.04 RCW to read as follows:
(1)
"Computer software" is a set of directions or instructions that exist
in the form of machine‑readable or human-readable code, is recorded on
physical or electronic medium, and directs the operation of a computer system
or other machinery or equipment. "Computer software" includes the
associated documentation that describes the code and its use, operation, and
maintenance and typically is delivered with the code to the user.
"Computer software" does not include data bases.
A
"data base" is text, data, or other information that may be accessed
or managed with the aid of computer software but that does not itself have the
capacity to direct the operation of a computer system or other machinery or
equipment.
(2)
"Custom computer software" is computer software that is designed for
a single person's or a small group of persons' specific needs. "Custom
computer software" includes modifications to canned computer software and
can be developed in‑house by the user, by outside developers, or by both.
A
group of four or more persons is presumed not to be a small group of persons
for the purposes of this subsection unless each of the persons is affiliated
through common control and ownership. The department may by rule provide a
definition of small group and affiliates consistent with this subsection.
For
purposes of this subsection, "person" has the meaning given in RCW
82.04.030.
(3)
"Canned computer software," occasionally known as prewritten or
standard software, is computer software that is designed for and distributed
"as is" for multiple persons who can use it without modifying its
code and that is not otherwise considered custom computer software.
(4)
"Embedded software" is computer software that resides permanently on
some internal memory device in a computer system or other machinery or
equipment, that is not removable in the ordinary course of operation, and that
is of a type necessary for the routine operation of the computer system or
other machinery or equipment. "Embedded software" may be either
canned or custom computer software.
(5)
"Retained rights" are any and all rights, including intellectual
property rights such as those rights arising from copyrights, patents, and
trade secret laws, that are owned or are held under contract or license by a
computer software developer, author, inventor, publisher, licensor,
sublicensor, or distributor.
(6) A
"golden" or "master" copy of computer software is a copy of
computer software from which a computer software developer, author, inventor,
publisher, licensor, sublicensor, or distributor makes copies for sale or
license.
NEW
SECTION. Sec. 3. A new
section is added to chapter 84.36 RCW to read as follows:
(1)
All custom computer software, except embedded software, is exempt from property
taxation.
(2)
Retained rights in computer software are exempt from property taxation.
(3)
Modifications to canned software are exempt from property taxation, but the underlying
canned software remains subject to taxation as provided in section 4 of this
act.
(4)
Master or golden copies of computer software are exempt from property taxation.
NEW
SECTION. Sec. 4. A new
section is added to chapter 84.40 RCW to read as follows:
(1)
Computer software, except embedded software, shall be valued in the first year
of taxation at one hundred percent of the acquisition cost of the software and
in the second year at fifty percent of the acquisition cost. Computer
software, other than embedded software, shall have no value for purposes of
property taxation after the second year.
(2)
Embedded software is a part of the computer system or other machinery or
equipment in which it is housed and shall be valued in the same manner as the
machinery or equipment.
NEW
SECTION. Sec. 5. (1)
The department of revenue shall conduct a study of the property tax exemptions
and valuation rules provided for computer software in sections 3 and 4 of this
act. In the study, the department shall determine whether the exemptions and
valuation rules are reasonably necessary and appropriate to achieve fairness,
equity, and uniformity in the property tax treatment of computer software. The
study shall also include a review of computer software taxation in other
states, techniques for valuing computer software, and the effects of changing
technology upon the appropriate application of property taxation to computer
software.
(2) To
assist in the performance of the study, the department shall form an advisory
committee with appropriate representation from businesses and county assessors.
(3)
The department shall report the findings of the study to the committees of the
legislature that deal with revenue matters no later than November 30, 1998.
Sec.
6. RCW
84.36.815 and 1988 c 131 s 1 are each amended to read as follows:
In
order to qualify for exempt status for any real or personal property ((pursuant
to the provisions of chapter 84.36 RCW, as now or hereafter amended)) under
this chapter except personal property under section 3 of this act, all
foreign national governments, churches, cemeteries, nongovernmental nonprofit
corporations, organizations, and associations, private schools or colleges, and
soil and water conservation districts shall file an initial application on or
before March 31 with the state department of revenue. All applications shall
be filed on forms prescribed by the department and shall be signed by an
authorized agent of the applicant.
In
order to requalify for exempt status, such applicants except nonprofit
cemeteries shall file a renewal application on or before March 31 of the fourth
year following the date of such initial application and on or before March 31
of every fourth year thereafter. An applicant previously granted exemption
shall annually file, on forms prescribed by the department, an affidavit
certifying the exempt status of the real or personal property owned by the
exempt organization. When an organization acquires real property qualified for
exemption or converts real property to exempt status, such organization shall
file an initial application for the property within sixty days following the
acquisition or conversion. If the application is filed after the expiration of
the sixty-day period a late filing penalty shall be imposed pursuant to RCW
84.36.825, as now or hereafter amended.
When
organizations acquire real property qualified for exemption or convert real
property to an exempt use, the property, upon approval of the application for
exemption, is entitled to a property tax exemption for property taxes due and
payable the following year. If the owner has paid taxes for the year following
the year the property qualified for exemption, the owner is entitled to a
refund of the amount paid on the property so acquired or converted.
Sec.
7. 1990 c
255 s 2 (uncodified) is amended to read as follows:
(1)
For property taxes due in 1991, a county assessor shall list and assess
computer software in the same manner and to the same extent as computer
software was listed and assessed for taxes due in 1989. If the assessor adds
an item of computer software to the assessment list for any taxpayer for 1991
taxes, and that item was not listed and assessed for 1989 taxes for that
taxpayer, the assessor shall have the burden of proving the item of computer
software is taxable within the intent of this act.
(2)
For property taxes due in 1992, a county assessor shall list and assess
computer software in the same manner and to the same extent as computer
software was listed and assessed for taxes due in 1989. If the assessor adds
an item of computer software to the assessment list for any taxpayer for 1992
taxes, and that item was not listed and assessed for 1989 taxes for that
taxpayer, the assessor shall have the burden of proving the item of computer
software is taxable within the intent of this act.
NEW
SECTION. Sec. 8. If
any provision of this act or its application to any person or circumstance is
held invalid, the remainder of the act or the application of the provision to
other persons or circumstances is not affected.
NEW
SECTION. Sec. 9. Sections
2 through 4 and 6 of this act apply to taxes levied for collection in 1993, and
thereafter.
NEW
SECTION. Sec. 10. This
act is necessary for the immediate preservation of the public peace, health, or
safety, or support of the state government and its existing public
institutions, and shall take effect immediately.
