BILL REQ. #:  H-1297.1 

Read first time 02/06/2003.   Referred to Committee on Finance.

     AN ACT Relating to uniform local business license taxes on software businesses; adding a new section to chapter 35.21 RCW; creating a new section; and providing an effective date.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION.  Sec. 1   The legislature finds that certainty and uniformity of tax treatment of the software industry is important to the industry and consumers. The intent of this act is to make the tax treatment of software clear and certain for local governments, developers, programmers, and consumers.

NEW SECTION.  Sec. 2   A new section is added to chapter 35.21 RCW to read as follows:
     (1) Any city that imposes a license fee or tax for the privilege of doing business measured by rates against gross receipts shall impose the tax upon persons engaged in the business of creating, producing, or selling or licensing software only in accordance with this section.
     (2) The following definitions apply.
     (a) "Canned software" means software that is created for sale to more than one person.
     (b) "Custom software" means software created for a single person.
     (c) "Customization of canned software" means any alteration, modification, or development of applications using or incorporating canned computer software for a specific person. "Customization of canned software" includes individualized configuration of software to work with other software and computer hardware, but does not include routine installation. Customization of canned software does not change the underlying character or taxability of the original canned software.
     (d) "Master copies" of software means copies of software from which a software developer, author, inventor, publisher, licensor, sublicensor, or distributor makes copies for sale or license.
     (e) "Retained rights" means 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 software developer, author, inventor, publisher, licensor, sublicensor, or distributor.
     (f) "Software" means any information, program, or routine, or any set of one or more programs, routines, or collections of information used, or intended for use, to convey information that causes one or more computers or pieces of computer-related peripheral equipment, or any combination thereof, to perform a task or set of tasks. "Software" includes only those copies of information, programs, or routines intended for use by an end user and specifically excludes retained rights in software and master copies of software. "Software" includes the associated documentation that describes the code and its use, operation, and maintenance and typically is delivered with the code to the consumer. All software is classified as either canned or custom.
     (3) The sale of canned software, other than a sale to a person who presents a resale certificate under RCW 82.04.470, regardless of the method of delivery to the end user, shall be taxed as a retail sale. Any sale of canned software which is not a sale at retail shall be taxed as a wholesale sale. The licensing of canned software to an end user shall be taxed as a sale, not as a royalty or otherwise as compensation for the use of intangible property. The sale of custom software, or the customization of canned software, shall be taxed as a service, not a sale.
     (4) The production of canned software in a city shall be taxed as manufacturing.
     (5) The creation and distribution of custom software is taxable as a service activity. Duplication of the software for the same person, or by the same person for its own use, does not change the character of the software. The customization of canned software is taxable as a service activity.

NEW SECTION.  Sec. 3   This act takes effect January 1, 2004.