1. Page 1©2011 Clark Nuber. All rights reserved Practitioner’s Perspective on Washington Law Bob Heller

2. Page 2 Digital Products Study Committee Practitioner view of the process was generally positive –Most understand the revenue challenges with changing technology –Resistance to DOR efforts to conform existing law to new transactions – not a good fit Make up of committee was very inclusive –Members included legislators, government, scholars & taxpayers –Allowed input from interested parties Broad directive allowed a very comprehensive discussion –No issues off the table

3. Page 3 Specific v. General Application Good in principle How well it works in practice remains to be seen –May be easier to expand exemptions than taxability but budget challenges make enacting exemptions difficult –Some issues can be addressed by rule Increased risk of uncertainty of tax application –Digital automated services prove problematic –Gray areas where the definitions potentially overlap

4. Page 4 Implementation Department has done a good job of engaging taxpayers through a robust stakeholder process –Early published guidance –Town hall style meetings –Accelerated online rulings process –Ongoing rule development –Openness to policy discussion on specific taxpayer facts Openness to request legislative changes as issues come up

5. Page 5 Taxpayer Adoption Many larger in-state taxpayers were aware of changes and got ahead of the curve Midsize to larger technology companies were more plugged into the process Out-of-state companies are still just becoming aware of the changes Ongoing confusion as to digital automated services –Example: challenges around when a service primarily involves human effort

6. Page 6 Enforcement Experience Still too early to tell Some incidents of smaller taxpayers surprised to learn on audit that they buy or sell taxable digital automated services Anecdotal evidence that out-of-state audit unit is actively engaged in targeted tax discovery aimed at digital products noncompliance In the absence of an adopted rule, auditors having to rely heavily on internal policy guidance

7. Page 7 Summary Strong stakeholder input in policy development is vital No matter how much work is done at the front end, there will be unintended consequences The legislation is a starting point – much additional work needs to be done Creating certainty of tax application should be an overriding goal Implementation requires –Robust early communication to taxpayers –Significant taxpayer involvement

8. Page 8 Questions