The Washington State Legislature passed a new law, sponsored by Rep. Ross Hunter (D-King County) which imposes sales tax on the retail sale of digital products, effective July 26, 2009.

This far-reaching law is one of the most aggressive digital sales tax initiatives currently in force in any state at this time. There has been some concern that the law could be interpreted to extend to the digital “sale” of advertising services by advertising agencies and marketing groups.

Moreover, the new law also is being studied as a model for legislation in a number of other states which are considering taxation of digital “goods.” For this reason, the business and marketing community has undertaken a strong effort to clarify the terms of the Washington State legislation.

Rep. Hunter and other legislators have said that they did not intend to expand the sales tax to advertising services. While there are a number of other specified exemptions that would certainly remove most advertising services from this sales tax liability, Rep. Hunter has said he will introduce legislation during the 2010 legislative session that will ensure that advertising services not taxed under the new statute. This “clean-up” legislation is expected to include a provision that specifically excludes “advertising services” from the definition of “digital automated services.”

The definition of advertising services endorsed by the legislature includes all of the traditional functions provided by advertising and marketing agencies, including, in this case, Web campaign planning, placement of online media and data collection. The Washington State ad services definition, however, does not include Web hosting services and domain name registration.

Agencies doing business in Washington may want to consult counsel to be sure that their billing practices conform to the new digital sales tax regulations.