WA: Video Game Hardware and Software not Like-Kind Property

The Washington Court of Appeals recently addressed the scope of the so-called “trade-in exclusion.” Under Washington law, retail sales tax is imposed on the sale of tangible personal property, measured by the sales price of the property. The statutory definition of “sales price” includes everything of value received in payment “except separately stated trade-in property of like kind.” Under a departmental rule, the delivery of the trade-in and the purchase must be components of a single transaction that occurs on the same day; however, they do not need to be simultaneous. The taxpayer at issue was a retailer of video-gaming hardware (consoles, controllers, and accessories) and software (video games). As part of its business, the taxpayer purchased used video game hardware and software from its customers, either for cash or a more generous amount of store credit. Customers could use the trade-in credit for an immediate purchase, or have the credit loaded onto a stored-value card for later use. The taxpayer allowed the trade-in credit from video-gaming hardware to be applied to computer games and vice versa. In addition, the items traded-in were identified on sales documents involving the immediate use of the credit on a subsequent purchase, but not when the trade-in credit was placed on a stored-value card and used subsequently. The taxpayer remitted Washington sales tax based on the sales price of merchandise less any trade-in credit applied to retail purchases regardless of whether the credit was used immediately or subsequently. On audit, the Department asserted that the taxpayer should have collected sales tax on the full sales price of the merchandise sold (without any exclusion for trade-in credits). The Board of Tax Appeals ruled in the taxpayer’s favor, but a superior court subsequently reversed. The taxpayer appealed to the higher court.

The first issue before the appeals court was whether the customers’ video-game hardware and software was trade-in property of a “like kind,” e.g., whether credit from video-gaming hardware could be applied to the purchase of software. The regulatory definition of “property of like kind” generally referred to articles of tangible personal property of the same generic classification. In the court’s view, to determine if the property was of the same generic classification, it was necessary to look to the nature of the property and its function or use. In doing so, the court concluded that video game software and video game hardware were not “property of like kind” because they did not perform the same function or use. Notably, the hardware at issue had many functionalities and could be used independently of the video game software to watch DVDs or stream Internet content. The software, in contrast, while used with the hardware, performed the discrete function of allowing a video game to play. Moreover, the Department’s rule specified that computer hardware and computer software were not like-kind property.

Next, the court considered whether the taxpayer fulfilled the “separately stated” requirement for transactions where a customer traded in goods, received a store credit, and used that credit at a later date. Because receipts from merchandise purchased through store credit at a later date did not state the nature of the traded-in property, the court concluded this requirement was not met and the taxpayer’s record-keeping made it difficult to determine whether the credit used was for “property of like kind.” Finally, the court concluded that the Department’s single transaction rule, which mandated that a trade-in and subsequent purchase be part of a single transaction that occurs on the same day, conflicted with the statute. Importantly, the statute did not contain any timing requirements for when the trade-in property must be delivered or when the purchase of like-kind property must occur. Therefore, while the Department’s regulation was to be given “great deference,” it went beyond the statute and was void. For more information on State of Washington Dep’t of Revenue v. Gamestop, Inc., please contact Michele Baisler at 206-913-4117.