Washington Denies “Human Effort” Exclusion to Online Research Service

Washington-Court-of-AppealsThe Washington Court of Appeals held that Gartner, Inc.’s online research service was a digital automated service subject to the state’s retail sales tax and retailing Business and Occupation (B&O) Tax. Gartner, Inc. v. Washington Department of Revenue, No. 51637-3-II (Wash. App. Div. 2 Jan. 13, 2020). This decision addressed the scope of Washington’s “human effort” exclusion from the retail sales tax, the applicability of the “bundled transaction” and “true object” tests to offerings that contain taxable and nontaxable components, and the Internet Tax Freedom Act.

In this case, the Washington Court of Appeals concluded that Gartner’s service of providing access to its online research library was a digital automated service based on the detailed factual analysis of the “human effort” exclusion. The court concluded that Gartner’s service did not qualify for the “human effort” exclusion because Gartner created its research library prior to selling access to its customers. Sales of “digital automated services” are subject to Washington’s retail sales tax and B&O tax (at the B&O “retailing” tax rate) unless an exception applies. Washington defines a digital automated service as “any service transferred electronically that uses one or more software applications.” RCW 82.04.192(3)(a). However, Washington excludes an electronically transferred service from the retail sales tax if the service “primarily involves the application of human effort by the seller, and the human effort originated after the customer requested the service.” RCW 82.04.192(3)(b)(i). Gartner did not create research libraries in response to a specific customer’s request. Therefore, the human effort occurred before, not after, the customer purchased the service. Accordingly, the court concluded that Gartner’s service was subject to both the retail sales tax and the B&O tax (at the “retailing” tax rate).

Gartner argued that the court should apply the “true object” test to conclude that its offerings, when viewed as a whole, constituted a professional service and not a digital automated service (citing Qualcomm, Inc. v. Department of Revenue, 171 Wash.2d 125 (2011). Gartner pointed out that its online research library sales were inseparable from its sales of various interactive services, such as analyst inquiries, analyst consulting, and online webcasts. In Qualcomm, the Washington Supreme Court held that the company’s activities were professional service not subject to the retail sales tax based on the true object test. The Washington Court of Appeals rejected Gartner’s argument and concluded that the “true object” test does not apply in this case because the online research library sales were separable from the interactive services. The Court of Appeals acknowledged that Gartner sold its services for a single nonitemized price (a “bundled transaction”), but concluded that the online research library had value as a standalone service, and a customer could choose to access the online research library without purchasing the additional interactive services. Therefore, the Court of Appeals concluded that the online research library was a separable service and should be classified as a digital automated service.

Finally, Gartner argued that the application of retail sales tax to its service violated the Internet Tax Freedom Act (ITFA) because Washington would not apply the retail sales tax if Gartner delivered its research reports by mail or CD, as it once did. The Washington Court of Appeals rejected Gartner’s argument, concluding that Gartner’s online research service is distinguishable from the mere delivery of a research report because the online research service involves one or more software applications.