Washington’s sales tax on advertising services takes effect October 1, 2025, and comes in two forms: a tax on digital automated services and a tax on retail sales of advertising services. Both impositions apply to digital advertising services delivered using the internet. This makes Washington an outlier as currently only two other states impose a tax on sales of advertising services: Hawaii and New Mexico.
Washington State is a member of the Streamlined Sales Tax (SST) Governing Board. As an SST member state, it is required to follow – and does follow – the Streamlined Sales and Use Tax Agreement’s (SSUTA) sourcing regime.[1] This sourcing regime uses the familiar hierarchical approach:
- If the buyer receives the product at the seller’s business location, the sale is sourced to the seller’s business location.
- If the product is not received at the seller’s business location, the sale is sourced to the location where receipt by the purchaser (or the purchaser’s donee, designated as such by the purchaser) occurs, including the location indicated by instructions for delivery to the purchaser (or donee) known to the seller.
- If neither apply, the sale is sourced to the location indicated by an address for the purchaser that is available from the seller’s business records (typically the purchaser’s billing address).
As applied to sales of services, the terms “receive” and “receipt,” as used in the sourcing hierarchy, mean “making first use of services.”[2]
As applied to sales of advertising services delivered using the internet, the first rung of the sourcing hierarchy generally would not apply because the first use of the advertising service would not occur at a business location of the purchaser.
The Washington Department of Revenue (DOR) is in the process of developing interim guidance on how sellers are to source sales of advertising services. DOR representatives told us they are taking a close look at whether it is appropriate to source these sales to the location where the advertisement is viewed. They said they are focusing on how to interpret the phrases “receipt by the purchaser” and “known to the seller” in the second rung of the sourcing hierarchy.
In the context of internet advertising, how and where does a purchaser “make first use of” the service?
Internet advertising is a largely automated function capable of serving up millions of advertisements to millions of viewers per minute. Typically, the technology serving the ads is not connected to the service provider’s billing system. Does the second rung of the sourcing hierarchy require such granularity that the sale of the advertising service be sourced to the locations of the myriad ad viewers? Does the supply of each internet ad constitute a separate sale that must be individually sourced? Or does the purchaser make first use of the advertising service at its headquarters? If the answers to the first two questions are “yes,” it would put unbelievable complexity and administrative burden on the seller, make audits unnecessarily time-consuming, and undermine SSUTA’s fundamental purpose of reducing compliance burdens.[3] If the answers to the first two questions are “no” and the answer to the third question is “yes,” then there is little to no difference in the sourcing result between the second and third rungs of the sourcing hierarchy.
One could suggest that the references to “purchaser’s donee” in the sourcing rule indicate that ad viewers might be “donees” of the advertising service purchaser, requiring sourcing to the ad viewer’s location. However, the issue paper developed by the Streamlined Sales Tax Project (SSTP) drafters of the sourcing hierarchy reveals the purpose of the reference to “purchaser’s donee” in the second rung of the sourcing hierarchy:
The parenthetical language referring to a donee is intended to apply a destination rule to gifts involving shipment. It is a condition of applying this sourcing principle to gifts that the seller know both that a gift is occurring and the address of delivery. If the product is being shipped to someone other than the purchaser who is not known by the seller to be a donee, this rule does not apply. In these circumstances the seller does not know a location for receipt by the purchaser.[4]
That same issue paper supports sourcing internet advertising services to the purchaser’s billing address under the third rung of the sourcing hierarchy. The issue paper discusses sourcing “digital goods” (a term not defined in the SSUTA) and how advertising services delivered via the internet are in the nature of digital goods:
We believe subsections (a) and (b) will apply to most sales of tangible personal property and services, because usually either the sale will occur at the seller’s store or the seller will know the location to which to send the property that she is selling or servicing to the purchaser. But there still will be some instances involving tangible personal property where this knowledge will be missing, to say nothing of the potential for not having the pertinent information for some sales of digital goods. The potential for subsections (a) and (b) not to apply undoubtedly increases when the digital product is not sold on tangible media but is delivered electronically. Subsections (c), (d) and (e) are essentially intended to cover sales where the seller does not know the location at which receipt by the purchaser occurs.[5]
Regardless of whether the purchaser of internet-delivered advertising services is considered to make first use of the service at its location (justifying sourcing to that location), or the seller lacks sufficient information as to the location of receipt (justifying sourcing to the purchaser’s billing address), there are bases under both rules for not requiring these services be sourced to the ad viewer’s location.
___________________________________________________________________________________
[1] SSUTA §§ 310.A, 311, RCW § 82.32.730(1), (9)(f).
[2] SSUTA § 311.B, RCW § 82.32.730(9)(f).
[3] SSUTA § 102.
[4] SSTP, Sourcing Issue Paper, January 2002, Page 9.
[5] Id.
