Washington Board of Tax Appeals Orders Use Tax Refund for Software Delivered Electronically to Data Center Maintained at Out-of-State Location

The Washington Board of Tax Appeals (BTA) has recently ruled that a Verizon Wireless affiliate was entitled to a refund of use taxes paid on software downloaded onto company servers located in California. Seattle SMSA LP (dba Verizon Wireless) v. State of Washington Department of Revenue, BTA Docket No. 66729 (June 11, 2008), petition for reconsideration denied (July 24, 2008). The BTA’s ruling sets aside an Administrative Law Judge (ALJ) determination that Verizon Wireless failed to prove that the software was delivered to an out-of-state location.

The company is engaged in providing telecommunications services in Washington. As part of their business, Verizon Wireless and its affiliate employed special “Ceos” call tracking software licensed by Metapath Software International. In October 2000, Verizon Wireless and Metapath entered a Master Sales Agreement (“Agreement”) that standardized the practice of the license and purchase of software and related support services. The Agreement required that Metapath enter a delivery location on each invoice for software or services ordered by Verizon Wireless.

Pointing to this provision, a Washington Department of Revenue (“Department”) ALJ found dispositive a notation on the Metapath invoices showing Bellevue, Washington as the “ship to” address. In so doing, the Department ALJ declined to give any weight to the affidavit of the Verizon Wireless Director of Network Engineering (“Director”), who approved the orders in question, and who testified that the software was in fact delivered to the Verizon Wireless data center in Walnut Creek, California.

The Director testified that Verizon Wireless had operated a data center in Bellevue for many years, but that the facility, including the equipment which hosted the disputed software, was relocated to Walnut Creek in mid-2001—months before Verizon Wireless had ordered the disputed software or support services. He explained in this connection that Metapath delivered the software electronically to servers located at the Verizon Wireless facility in California and that Verizon Wireless did not receive any backup disks or tapes. He testified, moreover, that the notation on the Metapath invoice, showing Bellevue as the “ship to” address, was made in error and that the vendor had simply used that address because it was where he was based and where he received invoices. The Department ALJ declared this testimony insufficient.

On appeal, Verizon Wireless argued that evidence of the actual software delivery protocol should be given more weight than the boilerplate contract language or the rote “ship to” entries on the vendor invoices. Verizon Wireless contended on this point that the Department ALJ erred in dismissing the Director’s un-rebutted testimony that the software was in fact delivered to the Walnut Creek data center, especially given that the Director’s affidavit was corroborated by contemporaneous records showing that the Bellevue facility had closed in the summer of 2001 and that, after the facility closure, Verizon Wireless no longer processed calls using equipment in Washington.

The BTA agreed with Verizon Wireless. In approving the refund claim, the BTA found that the totality of the evidence supported the claim that the software was delivered in California. The BTA affirmed the Verizon Wireless contention that, coupled with the facility closure and relocation documentation, the account of the company’s ongoing business relationship with the software vendor was persuasive evidence that the software was delivered to an out-of-state location, regardless of whether it conformed to the technical terms of the Agreement or the “ship to” entries on the invoices. The Department’s petition for redetermination was summarily denied.

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