Is developing a master copy of software subject to Washington sales tax?

DOR's Oct 7, 2026 interim guidance says master copies "are not classified as either prewritten or as custom software" (see RCW 82.04.215(2)). It treats third-party developer charges as Service and Other Activities B&O income (RCW 82.04.290(2)), or as royalties B&O income (RCW 82.04.2907) when the developer is paid for retained rights.

When are master-copy development charges taxed as royalties in Washington?

DOR says they fall under the royalties B&O classification "when the developer receives compensation in the form of gross income from royalties related to retained rights in intangible property used in the purchaser's 'master copies' of software."

How does DOR treat a master-copy charge if I can't show it's a royalty?

DOR says: "Unless the taxpayer provides documentation that such service is not a royalty, the department may presume the service is a professional service subject to the service and other B&O classification."

Does DOR's master copies guidance cover selling master copies of software?

No. DOR says: "This guidance does not address the taxability of sales of master copies of software."

Will DOR update WAC 458-20-15502 for master copies?

DOR says the interim statement "will clarify the proper tax treatment of these charges relating to the development of master copies as the department creates permanent guidance in its updates to WAC 458-20-15502." The current rule still calls a third-party master-copy development charge "a charge for custom software development."

DOR Interim Guidance: How Third-Party Work on Master Copies of Software Is Taxed

What's new

DOR's interim guidance statement (IGS), dated October 7, 2026, covers "third-party developer charges for the development of master copies of software and compensation for retained rights that constitute royalties".

DOR says taxpayers can rely on it "while the Department of Revenue (department) develops permanent guidance."

The IGS does not state an effective date or say which past periods it applies to. It says it "will remain in effect until the department issues final guidance, cancels this interim statement, or new legislation is enacted."

Master copies are not "computer software"

Software is either prewritten or custom. But RCW 82.04.215(2) says "computer software" "includes only those sets of coded instructions intended for use by an end user and specifically excludes retained rights in software and master copies of software."

RCW 82.04.215(5) defines master copies as "copies of software from which a software developer, author, inventor, publisher, licensor, sublicensor, or distributor makes copies for sale or license."

DOR concludes that “master copies” of software "are not classified as either prewritten or as custom software."

Source: RCW 82.04.215

Service & Other or royalties?

DOR's main rule:

"The third-party developer charge will generally be taxable as a service under the service & other activities B&O tax rate (RCW 82.04.290(2)), unless the charge represents gross income from royalties in which case the royalties B&O tax rate (RCW 82.04.2907) would apply."

The IGS draws the line this way:

Service & Other. Use this when "the development activities are directly incorporated into the purchaser’s master copy rather than licensed by the developer to the purchaser in the nature of a royalty." In DOR's Example 1, the developer works directly on the buyer's code, and the buyer "will fully own the final product."
Royalties. Use this when the developer receives "gross income from royalties related to retained rights in intangible property used in the purchaser’s “master copies” of software." In DOR's Example 3, the developer uses its own proprietary programs and grants the buyer an exclusive license, "receiving compensation for the use of the copyright."

In Example 2, a developer also sold a separate prewritten program, separately stated on one invoice. DOR treated that program as a retail sale: the developer "must collect and remit retail sales tax if the sale is sourced to Washington."

Where receipts are attributed

DOR says both service income and royalty income are apportionable under RCW 82.04.460 and 82.04.462.

Services: WAC 458-20-19402. DOR "expects that most taxpayers will be able to attribute receipts based on where the customer receives the benefit of the professional service, under subsection 301(a)."
Royalties: WAC 458-20-19403. DOR expects most taxpayers can attribute royalty receipts "under subsection 201(a)(i) based on where the customer uses the intangible property".

Documentation and DOR's default

DOR says developers "should request further information from the purchaser of their services as to whether the services are directly applied to the master copy of software." It names the contract as helpful documentation, especially terms that "identify what the development work will be used for and whether retained rights are being compensated."

Two reporting rules stand out:

"taxpayers should classify the service based on the information available at the time the contract is executed."
"Unless the taxpayer provides documentation that such service is not a royalty, the department may presume the service is a professional service subject to the service and other B&O classification."

How this relates to ESSB 5814 custom software

This section is Washington Tax Desk's own comparison, not DOR's.

The master copies IGS does not mention ESSB 5814. Its only reference to retail sales tax is the prewritten software sale in Example 2.

DOR's separate ESSB 5814 custom software IGS (September 26, 2025) says that starting October 1, 2025, custom software and customization of prewritten software are retail sales. That IGS does not discuss master copies.

The new IGS treats master copies as neither, and classifies the development charges under Service & Other or royalties B&O. It does not separately say whether retail sales tax applies to them.

Under ESSB 6346 (ch. 238, Laws of 2026, §1001), custom software is scheduled to leave the retail sale definition on Jan. 1, 2029; that change depends on the bill's new income tax surviving court review (§1202). Neither IGS addresses how that change would affect master copy charges.

Who should check what

Developers working on publishers' master copies: Is the work built into the buyer's master copy, or is it a license of IP you keep? Do the contract and invoices say which?
Publishers buying that work: Does the contract separate development from any license of the developer's retained rights?
Both: Keep records of what was known when the contract was signed.

What this guidance does not cover / open questions

Sales of master copies. DOR says: "This guidance does not address the taxability of sales of master copies of software."
Effective date and past periods. The IGS does not say when it starts to apply or whether it reaches earlier periods.
WAC 458-20-15502. The current rule says "[a] third-party charge for development of a master copy of software is a charge for custom software development and is subject to service and other activities B&O tax." DOR says the IGS "will clarify the proper tax treatment of these charges" "as the department creates permanent guidance in its updates to WAC 458-20-15502." It gives no timeline or draft language.
Bifurcation. DOR says splitting one charge across B&O rates is "beyond the scope" of the IGS and points to binding rulings.
Mixed or unclear facts. DOR says its examples are "only as a general guide" and that other situations need "a review of all facts and circumstances."

Primary sources

General information, not individualized tax advice. Results depend on the facts and applicable law. Washington Tax Desk is independent of Washington DOR.