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Washington’s advertising services tax: Sourcing rules clear as mud

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 [...]

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Indiana Tax Court Upholds Pharmacy Benefit Management Costs of Performance Approach

The Indiana Tax Court held that a “pharmacy benefit management company” sold services as opposed to tangible personal property for tax years 2011 through 2013. The company’s receipts were properly sourced as revenue from services under the income producing activity/costs of performance rule, which in this case meant that all receipts were sourced outside of Indiana.

The Indiana Department of Revenue (Department) argued that the pharmacy benefit management company’s “receipts from its sale of prescription drugs should have been sourced to Indiana as required for sales of tangible personal property under Indiana Code” because the company’s “primary ‘revenue stream’ was attributable to buying, selling, and delivering prescription drugs in transactions which occurred within [Indiana].”

The court disagreed with the Department, finding “[the pharmacy benefit management company’s] income was derived from providing pharmacy benefit management services and not from selling prescription drugs during the years at issue.” The court looked to the company’s Securities and Exchange Commission (SEC) Form 10-K filing, observing “[n]one of the emphasized words [in the Form] describe a sale of goods, but instead, describe services. Indeed, nowhere in the designated portion of [the company’s] Form 10-K does the text state that the [company’s] revenue is from the sale of prescription drugs, focusing on facilitating delivery as its discrete service, not as a function of selling a good” (emphasis in the original). On May 1, 2019, Indiana switched from its historical cost of performance sourcing methodology to a market-based sourcing for services, retroactive to January 1, 2019.




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