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Gartner, Inc. v. State, Department of Revenue

Court of Appeals of Washington, Division 2

January 13, 2020

GARTNER, INC., Appellant,

          CRUSER, J.

         Gartner Inc. is a global information technology (IT) firm that provides its clients with information and services to aid in making IT-related business decisions. Gartner's services include online access to information in its "Research Library," consulting services, and special events. Our legislature imposes different business and occupation (B&O) tax rates and tax consequences depending on the classification of a business activity. Under our tax system, the sale of "digital products" is taxed under the retailing B&O tax rate and is subject to the retail sales tax.

         The Department of Revenue (DOR) assessed Gartner with a retailing B&O tax and the retail sales tax. Gartner paid the assessment and filed a refund lawsuit in Thurston County Superior Court. The superior court granted DOR's summary judgment motion, upholding the assessment. Gartner appeals, arguing that its business activities should instead be subject to the service B&O tax and not the retailing B&O tax.

         We hold that Gartner's business activity of selling online access to information in its Research Library is subject to the retailing B&O tax and the retail sales tax as a sale of a digital automated service. Consequently, we affirm the superior court's order granting DOR's summary judgment motion upholding DOR's assessment.


         I. Gartner Research Inc.

         Gartner is a global IT research and advisory firm that provides proprietary technology-related information and services. Gartner provides "insight, analysis, and hands-on assistance to help clients utilize technology in a way that helps them grow and thrive." Clerk's Papers (CP) at 130. Gartner's client base includes companies, government agencies, and professional services firms. Gartner offers services to its clients in three separate lines of business: (1) research, (2) consulting, and (3) events. At issue on appeal is Gartner's research service titled "Gartner Research." Id. at 131.

         Gartner Research is a "'subscription based-research and related service'" in which Gartner provides clients with a license to use its services and access to Gartner Research content. Id. at 36. Gartner offers its clients various service packages and "[l]evels of [a]ccess" to their research. Id. at 149. A research service package is specifically tailored to different types of organizations as well as different job titles within a client's organization. For example, Gartner offers packages entitled "Gartner for IT Leaders," "Gartner for Business Leaders," and "Gartner for Supply Chain Leaders." CP at 533. Each research service package offers any or all of the following services: (1) online access to proprietary research documents in Gartner's Research Library, (2) analyst inquiries and consulting, (3) webcasts, and (4) summit or symposia tickets.

         Access to Gartner's proprietary research documents comprises the majority of the services Gartner provides to its clients. Gartner's proprietary research documents consist of published "reports, briefings, updates, alerts, newsletters, and other related tools" that cover specific topics (collectively, Research Content). Id. at 696. Gartner continually updates and creates new Research Content to ensure that clients receive current information.

         Gartner delivers its Research Content "directly to the client's desktop" by providing online access to its Research Library. Id. at 533. Gartner sells a "license" or "subscription" to a client-specific "subsite[ ]" or "portal," which permits a user to view Research Content in Gartner's Research Library. Id. at 330. To access Gartner's Research Content, each licensed user must input a client specific username and password into the Gartner website. Once a client logs in, Gartner's general website automatically directs the client to a client-specific portal. Each portal is "designed to provide the information that is most of interest" to the client by targeting information that relates to the specific product purchased by the client. Id.

         After a client is directed to their portal, the client may access Research Content that relates to their service package by using the portal's search function. The search function is not analogous to a regular "Google" search. Instead, the client may search a specific term, and the portal provides an "index" of related terms or search by entering a topic, date, or author to access relevant material. Id. at 350. A client portal also features the ability to view "'trending'" areas of interest from a drop-down menu, which directs the client to a customized search result according to the topic a client selects. Id. at 420. Once a client accesses a published document such as a "Research Report," the client may browse other related reports by clicking on a link located at the end of the previously viewed reports. Id. at 309. A client may also "share" a summary of a research document by clicking "'Email this Summary'" located on each Gartner Research document. Id. at 286.

         Clients access Research Content by searching the Gartner website (30 percent) or by clicking links to documents on previously viewed documents (35 percent). A client may also "opt in" to receive e-mail notifications from a Gartner employee on a publication of a Research Report on specific topics (35 percent). Id. at 331. If a client receives an e-mail notification, the client may click a link in the e-mail that directs them to the Gartner website where the client may log in to view the Research Report.

         A client may pay additional "Research Fees" for a package that provides access to human interaction with Gartner employees. Additional research services that involve human interaction include (1) on-site or telephonic analyst inquiries, (2) access to webcasts or online seminars offered to multiple clients simultaneously, and (3) tickets to live summits or conferences. Roughly 95 percent of Gartner's clients purchase access to the Research Library and either one or a combination of the above interactive services. The remaining 5 percent purchase access to the Research Library alone.

         Each "Service Agreement" lists a single Research Fee. The agreements do not itemize the prices of the services included within each package. Rather, the agreements reference a "Service Description," which provides a detailed description of the purchased services included in the Research Fee. Id. at 277. However, neither the Service Agreements, Service Descriptions, nor any invoices identify the specific price of each component purchased. Clients are not obligated to make any additional payments other than the Research Fee that is due at the time the client enters the Service Agreement.

         All Gartner content remains owned and copyrighted by Gartner. Clients are permitted to access and view content, but a client is generally not permitted to send, download, save, or copy Research Content.

         All research is "commissioned internally by an agenda manager." Id. at 308. An agenda manager identifies topics for research based on broad trends, patterns, or forecasts in the IT industry, as well as client requests in the "aggregate." Id. at 343. Once a topic is identified by an agenda manager, research analysts perform extensive research on the topic and prepare draft findings. The draft findings are then subject to an extensive review process by peers, management, and vendors and are eventually published to Gartner's website as a Research Report.

         Gartner uses software to manage the content that is posted on its website. Gartner's website tracks client activities using the client's "browser[s] and [identification]" and utilizes "Lotus Notes" to manage its Research Library. Id. at 358, 634, 815.

         II. Procedural History

         DOR audited Gartner for the period of January 1, 2007 through December 31, 2011. DOR issued an initial assessment that assessed Gartner in the amount of $3, 118, 461. For the period of January 1, 2011 through December 31, 2011, DOR assessed Gartner with a retailing B&O tax and the retail sales tax on the Research Fees on the grounds that Gartner's service of providing access to the Research Library was a digital automated service subject to the retailing classification of the B&O tax.[1]

         Gartner appealed DOR's retailing B&O tax and the retail sales tax assessment on its Research Fees to DOR's Appeals Division, arguing that the retailing classification does not apply because Gartner creates and constantly updates its own content to the Research Library; therefore, the "'application of human effort'" exception to the definition of digital automated services under former RCW 82.04.192(3)(b) (2010) applied. Id. at 422. The Appeals Division disagreed, and Gartner moved for reconsideration. The Appeals Division again upheld the audit findings, concluding that Gartner's business activity of providing access to the Research Library was a digital automated service, not a digital good and, therefore, subject to the retailing B&O tax and the retail sales tax.

         Gartner paid the assessment and filed a refund lawsuit in Thurston County Superior Court pursuant to RCW 82.32.180. The parties both moved for summary judgment. The superior court granted DOR's motion for summary judgment, upholding the assessment. Gartner appeals.


         I. Legal Principles

         This case presents a review of an order for summary judgment involving the interpretation of an administrative statute. See Sprint Spectrum, LP v. Dep't of Revenue, 174 Wn.App. 645, 657, 302 P.3d 1280 (2013). On review of an order for summary judgment, we perform the same inquiry as the trial court and we "consider only evidence and issues called to the attention of the trial court." RAP 9.12; Solvay Chems., Inc. v. Dep't of Revenue, 4 Wn.App. 2d 918, 922, 424 P.3d 1238 (2018). We review grants of summary judgment and questions of law de novo. Qualcomm, Inc. v. Dep't of Revenue, 171 Wn.2d 125, 131, 249 P.3d 167 (2011). "Summary judgment is appropriate only if the pleadings, affidavits, depositions, and admissions on file demonstrate the absence of any genuine issues of material fact and that the moving party is entitled to judgment as a matter of law." Sheehan v. Cent. Puget Sound Reg'l Transit Auth., 155 Wn.2d 790, 797, 123 P.3d 88 (2005).

         The burden falls on the taxpayer to prove that the tax as paid was incorrect. RCW 82.32.180; Qualcomm, 171 Wn.2d at 131. A taxpayer claiming to be exempt from a tax has the burden of establishing the exemption. Lamtec Corp. v. Dep't of Revenue, 170 Wn.2d 838, 843, 246 P.3d 788 (2011). However, we construe an ambiguous tax statute in favor of the taxpayer. Qualcomm, 171 Wn.2d at 131.

         DOR may prescribe regulations to enforce the tax code. Former RCW 82.32.300 (1997). "The rules of statutory construction apply to agency regulations as well as statutes." Tesoro Ref. & Mktg. Co. v. Dep't of Revenue, 164 Wn.2d 310, 322, 189 P.3d 28 (2008). We give great deference to DOR's interpretation of its own regulations; however, DOR's interpretation is not binding on this court. Dep't of Revenue v. GameStop, Inc., 8 Wn.App. 2d 74, 82, 436 P.3d 435, review denied, 193 Wn.2d 1026 (2019).

         II. Retailing B&O Tax and Retail Sales Tax

         Washington imposes a B&O tax upon persons engaged in the business of making "sales at retail" in this state. RCW 82.04.250(1); Bucoda Trailer Park, Inc. v. State, 17 Wn.App. 79, 81, 561 P.2d 1100 (1977). The retail sales tax is to be collected by the seller on each "retail sale" in this state. RCW 82.08.020(1)(a); Bucoda, 17 Wn.App. at 81. "Sales at retail" and "retail sales" include sales of certain digital goods and digital automated services. RCW 82.04.050(8)(b). Therefore, the sale of digital goods and digital automated services are subject to the retailing B&O tax and the retail sales tax, unless an exception applies. WAC 458-20-15503(202), (203) (Rule 15503).

         Washington's tax system imposes different B&O tax rates depending on the nature of the business. As relevant here, the "retailing B & O" tax rate is lower than the "service B & O" tax rate. Qualcomm, 171 Wn.2d at 127; former RCW 82.04.257 (2010), .290(2). Additionally, the retail sales tax applies to some transactions but not others. "Digital products" as defined by statute, are subject to both the retailing B&O tax and the retail sales tax. However, a "professional service" is subject to the "service B&O" tax rate and generally not the retail sales tax. RCW 82.04.290; WAC 458-20-224.

         III. Digital Products

         There are two distinct types of "digital products"[2] subject to the retail sales tax: "digital automated services" and "digital goods." Former RCW 82.04.192(7) (2010); Rule 15503. A "[d]igital automated service" is defined as "any service transferred electronically that uses one or more software applications." Former RCW 82.04.192(3)(a). "Digital goods" are defined as "sounds, images, data, facts, or information, or any combination thereof, transferred electronically." Former RCW 82.04.192(6)(a) (2010). "[T]ransferred electronically" means "obtained by the purchaser by means other than tangible storage media. It is not necessary that a copy of the product be physically transferred to the purchaser. So long as the purchaser may access the product, it will be considered to have been electronically transferred to the purchaser."[3] Former RCW 82.04.192(8) (2010).

         Digital automated services and digital goods both involve something that is transferred electronically, but differ as to what is transferred electronically. Rule 15503 is DOR's administrative rule regarding taxation of digital products and provides guidance on ...

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