Is Software Taxable in Washington State?
Understanding Washington's software tax hinges on nuanced distinctions in product development, delivery method, and how related services are sold.
Washington State’s tax obligations for software change based on the product’s nature and its delivery method. These distinctions have direct financial consequences for both developers and consumers. Understanding these classifications is important for anyone buying or selling software or related services within the state to ensure proper tax collection and payment.
Taxation of Prewritten Software
Washington’s Department of Revenue defines prewritten software as a product created for general sale or lease, not for a single specific customer. This category, also called “canned” or “commercial off-the-shelf” software, includes programs like office productivity suites and mobile applications. The state considers prewritten software to be tangible personal property for tax purposes, regardless of how it is delivered to the end user.
The sale of prewritten software is subject to retail sales tax. This applies whether the software is provided on physical media like a CD, transferred via digital download, or installed by a technician who leaves no physical product. Access to prewritten software that is used remotely without being downloaded is also a taxable sale.
Updates, upgrades, or patches for prewritten software are also subject to retail sales tax. If a program is sold to more than one person or entity, it falls under the prewritten category. The seller is responsible for collecting retail sales tax from the buyer on the total sales price.
Rules for Custom Software and Modifications
Custom software, defined as a program developed for a single client, was historically treated as a non-taxable professional service. However, a change will take effect on October 1, 2025.
Beginning on that date, charges for creating new custom software will be subject to retail sales tax. Charges for the modification or customization of existing prewritten software will also become taxable, even if they are billed separately from the initial software purchase.
Cloud Computing and Digital Services
Software as a Service (SaaS) provides users with remote access to prewritten software hosted on the provider’s servers. Washington classifies most SaaS offerings as “remotely accessed software” (RAS), which is considered a retail sale and is subject to retail sales tax. The buyer pays for the right to use the software, making it equivalent to purchasing a prewritten product.
The state also defines Digital Automated Services (DAS), which are services provided electronically. Historically, a service was only a taxable DAS if it involved minimal human intervention, but this distinction is being eliminated. Effective October 1, 2025, services delivered digitally will be considered taxable DAS even if they rely on human effort to perform.
Differentiating between a taxable DAS and a non-taxable service depends on the function being provided. Services that involve advertising, payment processing, or certain telehealth applications may be exempt from the DAS classification. The factor is whether the service provides a distinct, automated function beyond simple data manipulation or retrieval.
Tax Treatment of Related Services
The taxability of services sold with software can vary. Software maintenance agreements, for example, may include technical support and future software updates. If a maintenance agreement provides for updates or upgrades to prewritten software, the entire charge for that agreement is subject to retail sales tax.
Installation of prewritten software is taxable, but the tax treatment of training is changing. Beginning October 1, 2025, charges for information technology services, including training and live webinars on how to use software, will be subject to retail sales tax, even if billed separately.
Sellers should state charges for non-taxable services separately on the invoice. If taxable and non-taxable items are sold together for a single, non-itemized price, the entire amount is subject to retail sales tax in what is known as a “bundled transaction.”
Understanding Applicable Washington Taxes
Two primary taxes apply to software transactions in Washington: the Retail Sales Tax and the Business & Occupancy (B&O) Tax. The Retail Sales Tax is a consumer tax that sellers collect from the buyer. The state rate is 6.5%, but local jurisdictions add their own sales tax, which can result in a total rate exceeding 10% in some areas.
Sellers are also responsible for paying the B&O tax on their gross receipts. The B&O tax rate and classification depend on the business activity. For sales of taxable prewritten software, SaaS, or other taxable digital products, the income is reported under the “Retailing” B&O classification.
For activities considered professional services, such as non-taxable consulting, the income is reported under the “Service and Other Activities” B&O classification. This classification has a different tax rate than the Retailing classification.