Custom software
Custom software is defined as "software created for a single person.” Customization of prewritten computer software is defined as “any alteration, modification, or development of applications using or incorporating prewritten computer software for a specific person.” This includes “individual configuration of software to work with other software and computer hardware.”
Certain services are explicitly excluded from the classification of customization of prewritten computer software, such as routine installation. The guidance provides examples to clarify what is and is not considered custom software, including the treatment of bundled services. A program written entirely from scratch for one client is custom software. Similarly, modifying a software package with substantial changes to suit a specific client’s needs qualifies as customization.
For sourcing purposes, sales of custom software and customized prewritten computer software are subject to tax based on the location where the services are received by the purchaser. If the location of use is unknown, sourcing defaults to the purchaser’s address in the seller’s records, the billing address, or, as a last resort, where the retail service was provided by the seller. If the purchaser uses the software in multiple locations and the locations are known, the sale must be allocated, either proportionally or equally, among those jurisdictions. If the multiple locations of the services are unknown, the guidance provides a method for how such services should be sourced, including detailed examples.
Certain exemptions from retail sales tax may still apply. Transactions between members of an affiliated group may not be considered retail sales if the statutory requirements are met. In some cases, a reseller permit may be used when customized prewritten software is resold by a third-party subcontractor, though certain conditions must be met, and the DOR acknowledges that such cases are uncommon. The MPU exemption can also apply when customized software is deployed concurrently inside and outside of Washington, provided that statutory requirements are satisfied.
See the DOR’s full interim guidance on custom software, including detailed examples.
DAS exclusions
Effective Oct. 1, 2025, the Bill repealed several exclusions that previously applied to DAS. As such, the DOR issued interim guidance which clarifies that while DAS are generally taxable, certain exclusions remain, such as for affiliated transactions and telehealth services.
Notably, the Bill eliminated the DAS exclusion for services that involve “primarily human effort.” Due to this repeal, the DOR addressed concerns around whether professional services that may meet the definition of DAS are under the retailing classification and therefore subject to retail sales tax. Specifically, professional services like legal, accounting, and engineering remain primarily subject to the service and other B&O tax classification and are not automatically taxed as DAS unless the service involves substantial automation of services. The guidance also provides detailed examples to illustrate the distinction between taxable DAS and non-taxable professional services.
For instance, a company providing accounting services that uses digital tools internally — such as databases or spreadsheet software — to perform its work but delivers results in paper form is not selling DAS and thus is not subject to retail sales tax on those services. Similarly, if the service results are delivered via email or a non-marketed digital portal without additional charges, the transaction remains a professional service, and the taxpayer is the consumer of the digital products used to transmit service deliverables. However, if the professional service includes providing clients access to an interactive digital platform, such as a legal document drafting portal, for a fee, that service is considered DAS and subject to retail sales tax.
Regarding data processing, the Bill removes the previous exclusion for data processing services, making them taxable under the retail sales tax and B&O tax regimes unless purchased for resale. Data processing is defined as the systematic performance of operations on data supplied by the customer to extract or convert information, including payroll processing, claims processing, and survey processing. While data processing is broadly taxable, the guidance notes that custom software development and prewritten software customization remain distinct and subject to separate rules.
For sourcing purposes, DAS sales are sourced to the location where the customer receives the service, determined by a hierarchy: the seller’s business location if the service is received there; otherwise, the customer’s known address or the address where the service is first made available. Proper documentation of customer locations and usage is essential for compliance and audit defense.
See the DOR’s full interim guidance on DAS, including additional detailed examples.
What’s next?
The DOR has indicated that it will continue to publish guidance for Washington taxpayers on the impacted areas of the Bill. Taxpayers should review the guidance issued to understand the potential impact, if any, on their Washington sales tax filings.
If a taxpayer has previously sold services impacted by the Bill, the DOR has issued additional guidance on the impact to existing contracts.
