The Washington Department of Revenue issued proposed guidance limiting the application of the multiple points of use (MPU) sales tax exemption for bundled software maintenance agreements.
The MPU exemption provides a retail sales tax exemption for the purchase of digital goods, prewritten computer software, remotely accessed prewritten computer software, digital automated services, and digital codes (MPU-eligible products) when those products will be concurrently available for use at one or more locations inside and outside of Washington.
The proposed guidance addresses retail sales in which a single nonitemized price is charged for the sale of a software maintenance agreement that provides both retail-taxable products, such as prewritten computer software updates, and non-retail-taxable products, like help desk services. These mixed element software maintenance agreements (MESMAs) are generally subject to retail sales tax, unless the retail-taxable products are a de minimis part of the agreement. The guidance aims to clarify how the MPU exemption applies to these agreements.
Under the proposed guidance, a MESMA that is otherwise subject to retail sales tax is eligible for the MPU if each of the following criteria is met:
- The MESMA includes one or more MPU-eligible products (e.g., prewritten computer software), and each MPU-eligible product is concurrently available for use inside and outside of Washington;
- The non-retail taxable products provided under the MESMA relate to the MPU-eligible product(s) of the MESMA (e.g., customer help desk support for the prewritten computer software); and
- The MESMA does not contain any retail-taxable product other than the MPU-eligible product(s) that are concurrently available for use inside and outside of Washington.
The first of these criteria is particularly notable: if the MESMA includes an MPU-eligible product that is not made available outside of Washington, the entire MESMA is subject to retail sales tax. Take, for example, a MESMA that entitles a company to routine software updates and telephonic help desk support, with 40 of 100 users located in Washington, and to access to an online software self-help platform that is utilized by 5 IT staff in Washington. Because the self-help platform only has users in-state, the first criterion is not met. The third criterion likewise is not met because the self-help platform is not eligible for the MPU exemption. Thus, under the proposed guidance, the entire MESMA is subject to retail sales tax.