Sales and use tax exemption for companies that purchase standard financial information

Purpose

The Legislature established this preference with the stated purpose to:

• Exempt certain standard financial information purchased by international investment management companies from sales and use tax.
• Provide the exemption with minimal fiscal impact.

Preference provides a sales & use tax exemption to eligible international investment management firms

With the preference, international investment management companies do not pay retail sales or use tax on purchases of standard financial information.

Standard financial information is:

• Financial data, facts or information services (e.g., financial market data, bond ratings, credit ratings, and deposit, loan, or mortgage reports).
• Created for use by multiple customers.
• Provided to the buyer in a tangible format such as paper or a digital format that is transferred electronically.

Use of the preference is limited to $15 million in purchases per business

Each buyer of standard financial information may make up to $15 million in tax-exempt purchases in a calendar year.  Buyers must report the purchases to the Department of Revenue (DOR) using the Buyer Addendum.

Sellers are not responsible for ensuring that buyers comply with the $15 million limit.

Preference scheduled to expire in 2021

The tax preference took effect October 1, 2013.  Its scheduled expiration date is July 1, 2021.

Three legislative efforts to exempt standard financial information from sales and use tax

2007: Legislature passed tax preference for sales of standard financial information

The Legislature created a sales and use tax exemption for electronically delivered standard financial information that is sold to an investment management company or a financial institution.

In comments to the House Finance Committee supporting the tax preference, staff of the Russell Investment Group stated that the company did not currently pay sales and use tax on its purchases of electronic financial information.  The company indicated to JLARC staff that it supported the preference out of concern that the Department of Revenue (DOR) could interpret purchases of electronically transmitted standard financial information as taxable.

Also in 2007, the Legislature directed DOR to study the taxation of electronically delivered products.  DOR worked with legislators, academics, government agencies, and the financial industry.  Its final report, issued in December 2008, identified issues for the Legislature to consider, but made no recommendations.

2009: New legislation repealed the 2007 tax preference but offered broader exemption for digital goods purchased solely for a business purpose

The Legislature passed a bill to address some of the issues identified in DOR’s study.  Among its provisions, this legislation:

• Repealed the 2007 exemption for sales of standard financial information delivered electronically.
• Defined “digital products” (goods and services) and made them subject to sales and use tax.
• Specified that “standard digital information,” is a digital good that is exempt from sales and use tax when purchased solely for a business purpose.
• Defined “digital automated services” as services that are transferred electronically and use one or more software applications.  These services are subject to sales and use tax.

2010: DOR interpretation of law meant online searchable databases were taxable

DOR issued a special notice stating that online searchable databases are digital automated services, not digital goods.  As a result, any standard financial information provided as a searchable database would meet the definition of a digital automated service.  Under the law passed in 2009, it would be subject to sales tax.

2013: Legislature enacted the current preference for sales to international investment management companies

The Legislature created the current preference to exempt sales of standard financial information, including online searchable databases.  Unlike the 2007 preference, it applies only to sales to international investment management companies and not to financial institutions.

The statement of legislative intent noted that the Legislature repealed the initial exemption in 2009 because it believed the broad-based exemptions for digital goods encompassed an exemption for standard financial information.

The Legislature added that electronic transmission of data to investment management companies had evolved over time, and that data providers had begun adding search tools to their web-based data.  As a result, the broad-based exemptions enacted in 2009 might not exempt all sales of standard financial information.

The preference is scheduled to expire on July 1, 2021.

The American investment industry is a major buyer of financial information

The global market data industry is substantial, with global spending on financial news and market analysis totaling $26.6 billion in 2015.  Bloomberg and Thomson-Reuters are the major suppliers, who together represent 58 percent of the market.  Spending in North and South America represents 47 percent the global total, and approximately 30 percent of that market data spending is done by the investment management industry.

The Legislature stated two public policy objectives in its intent statement

The Legislature stated its intent to:

1. Exempt standard financial information purchased by international investment management companies from sales and use tax.
2. Provide the exemption with a minimal fiscal impact.

The Legislature stated that it intended to measure whether the objectives were met by reevaluating the exemption in three years.  It wanted to ensure that the actual fiscal impact on state revenues “reasonably conforms” to the estimate in the fiscal note.

The preference exempts some sales of standard financial information, but it is unclear whether fiscal impact is minimal

This tax preference is achieving one stated objective, but it is unclear if it is meeting the second.

The preference exempts sales of standard financial information

By exempting sales of standard financial information to international investment management companies, the preference is meeting the first stated objective.

Unclear if state revenue impact is minimal

JLARC staff are unable to determine whether the second public policy objective is met for two reasons:

1. There is no metric in statute to evaluate whether the difference between the initial fiscal note and the state revenue impact is minimal.
2. The state revenue impact depends on the share of standard financial information purchases that are online searchable databases, and that share is not known.

State revenue impact depends on the percentage of purchases that would be taxable without the preference

Although JLARC staff estimated the beneficiary savings of the tax preference, that estimate may not reflect the impact on state revenues.  Revenue impact is the amount of forgone revenue that the state does not collect because of the tax preference:

• Standard financial information sold as an online searchable database is a “digital automated service.” It would be taxable if the preference did not exist.
• Conversely, standard financial information that is not a digital automated service would still be exempt under the broader “standard digital information for a business purpose” exemption.
• As the percentage of purchases that are online searchable databases increases, the estimated revenue impact grows.  Three scenarios illustrating how the fiscal impact depends on this percentage are shown below.

The share of standard financial information purchases that are online searchable databases is unknown.  Staff of the Russell Investment Group commented in 2013 committee hearings that most purchased standard financial information was not searchable at the time, but that the percentage would increase as vendors added search capabilities to the standard financial data.  Russell subsequently reported to JLARC staff that it does not estimate the share of its purchases that are online searchable databases.

International investment management companies benefit from the preference

Direct beneficiaries of the tax preference are international investment management companies that purchase standard financial information.  In 2016, three businesses reported tax-exempt purchases to the Department of Revenue (DOR).  Beneficiaries use the data to evaluate performance of investments and managers, to inform investment selection and investment strategy, and to prepare reports.

Since the preference was enacted, no more than four businesses have reported exempt purchases in any year. The 2014 purchases reported by two beneficiaries can be disclosed pursuant to RCW 82.32.808:

• Frank Russell Company: $15,000,000 in purchases.
• Rainier Investment Management, LLC: $154,671 in purchases.

JLARC staff estimate beneficiary savings of $3.1 million in the 2017-19 biennium

JLARC staff estimated beneficiary savings by using the amount of tax-exempt purchases of standard financial information reported to the Department of Revenue (DOR) on Buyer Addenda for calendar years 2014-2016.  JLARC staff cannot confirm whether the data reflects all purchases of standard financial information, as it is possible that some purchasers may not have submitted Buyer Addenda.

Terminating the preference would mean some standard financial information would become taxable

Absent the tax preference, some standard financial information purchases by international investment management companies would become taxable.  Specifically, information provided as an online searchable database would be subject to sales tax as they are considered digital automated services.  Other purchases could remain tax-exempt if they qualify as digital goods purchased for a business purpose.

States with large financial services industries do not tax sale of digital products

In a review of other states’ tax policies, JLARC identified various approaches to taxing digital products, but did not identify specific sales and use tax exemptions for standard financial information.

Rather, assuming financial information is largely purchased in digital format, the tax treatment of financial information in other states appears to depend on whether these states consider digital products to be tangible personal property.  JLARC staff reviewed three states with large financial services industries: New York, California, and Illinois.  None consider digital products to be tangible personal property, so their sale is not subject to sales or use tax.

Findings—Intent—2013 2nd sp.s. c 13 (reviser's note to RCW 82.08.207):

"(1) The legislature finds that in 2007, Engrossed Substitute House Bill No. 1981 was enacted into law, which provided a sales tax exemption for electronically delivered standard financial information if the sales were to an investment management company or financial institution.  The legislature further finds that in 2009 and 2010, Engrossed Substitute House Bill No. 2075 and Substitute House Bill No. 2620 were passed, to address the taxation of electronically delivered products.  The legislature further finds that this legislation imposed sales and use tax on most digital services, goods, and prewritten software, but provided a broad business exemption for digital goods.  The legislature further finds that the sales tax exemption for standard financial information from the 2007 legislation was eliminated because it was believed that the broader business exemption in Engrossed Substitute House Bill No. 2075 covered these transactions.  The legislature further finds that the method of transmission of data by data providers to investment management companies has evolved over time where data providers add search tools to their web-based data, which makes it subject to sales tax.

(2) The legislature's intent under part VII of this act is to conform with a previously determined policy objective of exempting certain standard financial information purchased by international investment management companies from sales and use tax on the understanding that the fiscal impact is minimal.  Therefore, it is the legislature's further intent to reevaluate the exemption in three years to ensure that actual fiscal impact on state revenues reasonably conforms with the fiscal estimate in the fiscal note for this legislation." [ 2013 2nd sp.s. c 13 § 701.]

RCW 82.08.207

Investment data for investment firms.  (Expires July 1, 2021.)

(1) The tax imposed by RCW 82.08.020 does not apply to sales of standard financial information to qualifying international investment management companies.  The exemption provided in this section applies regardless of whether the standard financial information is provided to the buyer in a tangible format or on a tangible storage medium or as a digital product transferred electronically.

(2) Sellers making tax-exempt sales under this section must obtain an exemption certificate from the buyer in a form and manner prescribed by the department.  The seller must retain a copy of the exemption certificate for the seller's files.  In lieu of an exemption certificate, a seller may capture the relevant data elements as allowed under the streamlined sales and use tax agreement.  For sellers who electronically file their taxes, the department must provide a separate tax reporting line for exemption amounts claimed under this section.

(3) A buyer may not continue to claim the exemption under this section once the buyer has purchased standard financial information during the current calendar year with an aggregate total selling price in excess of fifteen million dollars and an exemption has been claimed under this section or RCW 82.12.207 for such standard financial information.  The fifteen million dollar limitation under this subsection does not apply to any other exemption under this chapter that applies to standard financial information.  Sellers are not responsible for ensuring a buyer's compliance with the fifteen million dollar limitation under this subsection.  Sellers may not be assessed for uncollected sales tax on a sale to a buyer claiming an exemption under this section after having exceeded the fifteen million dollar limitation under this subsection, except as provided in RCW 82.08.050 (4) and (5).

(4) The definitions in this subsection apply throughout this section unless the context clearly requires otherwise.

(a)(i) "Qualifying international investment management company" means a person:

(A) Who is primarily engaged in the business of providing investment management services; and

(B) Who has gross income that is at least ten percent derived from providing investment management services to:

(I) Persons or collective investment funds residing outside the United States; or

(II) Collective investment funds with at least ten percent of their investments located outside the United States.

(ii) The definitions in RCW 82.04.293 apply to this subsection (4)(a).

(b)(i) "Standard financial information" means financial data, facts, or information, or financial information services, not generated, compiled, or developed only for a single customer.  Standard financial information includes, but is not limited to, financial market data, bond ratings, credit ratings, and deposit, loan, or mortgage reports.

(ii) For purposes of this subsection (4)(b), "financial market data" means market pricing information, such as for securities, commodities, and derivatives; corporate actions for publicly and privately traded companies, such as dividend schedules and reorganizations; corporate attributes, such as domicile, currencies used, and exchanges where shares are traded; and currency information.

(5) This section expires July 1, 2021.

[ 2013 2nd sp.s. c 13 § 702.]

RCW 82.12.207

Investment date for investment firms. (Expires July 1, 2021.)

(1) The tax imposed by RCW 82.12.020 does not apply to the use of standard financial information by qualifying international investment management companies. The exemption provided in this section applies regardless of whether the standard financial information is in a tangible format or resides on a tangible storage medium or is a digital product transferred electronically to the qualifying international investment management company.

(2) The definitions, conditions, and requirements in RCW 82.08.207 apply to this section.

(3) This section expires July 1, 2021.

[ 2013 2nd sp.s. c 13 § 703.]

Legislative Auditor recommends clarifying the preference

The Legislature should clarify the sales and use tax exemption for standard financial information because, while the preference is meeting the stated objective of exempting sales of standard financial information, it is unclear if the actual fiscal impact reasonably conforms to the 2013 fiscal estimate.

Legislation required: Yes (preference expires on July 1, 2021).

Fiscal impact: Depends on legislative action.

Available December 2017.

The Commission endorses the Legislative Auditor’s recommendation with comment.

Many enterprises, not just international investment management companies (IIMCs), use some form of digital products as described by Washington’s Department of Revenue. Therefore it is unclear why the potential beneficiaries of this preference are so narrowly defined. The Legislature should clarify the rationale for so narrowly restricting this preference to IIMCs.