AOL’s Washington Sales Tax Refund Award Affirmed

by Perkins Coie
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On June 4, 2013, the Thurston County Superior Court issued a written decision affirming the opinion of the Washington State Board of Tax Appeals (Board) in AOL Inc. v. Washington Department of Revenue, No. 11-076 (Wash. B.T.A. May 9, 2012).  Department of Revenue v. AOL, Inc., No. 12-2-01200-5 (Thurston Cnty. Super. Ct. June 4, 2013).  See our May 25, 2012 Update for a description of the Board of Tax Appeals decision.

The case pertains to whether the Department of Revenue (Department) properly assessed retail sales tax on AOL’s purchases of managed modem service between 2002 and 2006.  The managed modem service had been purchased from third-party network service providers to answer members’ calls at access modems, translate the signal, and connect to AOL’s data center and the Internet.  The Department took the position that the managed modem service was a “network telephone service” under RCW 82.04.065 and thus subject to retail sales tax.  The Board concluded that the managed modem service was statutorily excluded from the definition of network telephone service because it satisfied the meaning of an “internet service.”  The Board granted AOL’s motion for summary judgment, and the Department appealed on the record to Thurston County Superior Court.

The Department did not challenge the Board’s Findings of Fact.  The court concluded that AOL needed to meet any one of the three requirements set forth in former RCW 82.04.297(3) and that it met all three:

  1. The service “permits the user to interact with stored information through the internet or a propriety subscriber network.”
  2. The service “includes computer processing applications.”
  3. The service “provides the user with additional or restructured information.” 

Additionally, the court found that exempting the service fit within the legislative intent.

The Department asserted that the exclusion was intended to distinguish between transmission services (those that AOL purchased and that the Department asserted should not be exempt) and those services including the content of the transmission (AOL’s service to its customers).  However, the judge did not find that argument supported by the Washington State Supreme Court’s decision in Community Telecable of Seattle, Inc. v. City of Seattle, 164 Wn.2d 35, 186 P.3d 1032 (2008), or by the clear language of the statute.

The judge has asked for presentation of a proposed order from which the parties could seek reconsideration or appeal to the Court of Appeals.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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