Court Opinion

ID: 9898015
Source: CourtListenerOpinion
Date Created: 2023-11-14 19:27:49.585749+00
Date Added: 2024-06-11T09:16:08.820011
License: Public Domain

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                                                                                                    Filed
                                                                                              Washington State
                                                                                              Court of Appeals
                                                                                               Division Two

                                                                                              March 28, 2023

           IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

                                               DIVISION II
        LANDIS+GYR MIDWEST, INC.,                                         No. 56877-2-II

                                      Appellant,

               v.

        STATE OF WASHINGTON, DEPARTMENT                              PUBLISHED OPINION
        OF REVENUE,

                                      Respondent.

              GLASGOW, C.J.— Puget Sound Energy (PSE) hired Landis+GYR Midwest, Inc. (Landis)

       to collect data from PSE’s electric and natural gas meters located at each customer’s property,

       convert the data into a usable form, and transmit the usable data to PSE. In 2014, the Department

       of Revenue began auditing Landis. In 2019, the Department told Landis that the services Landis

       provided PSE were digital automated services subject to retail sales tax and no exemption applied.

       Landis paid the tax and then sued for a refund.

              Landis moved for summary judgment, arguing the services it provided to PSE were data

       processing services, which are exempt from the retail sales tax imposed on digital automated

       services. The Department filed a cross motion for summary judgment, arguing Landis’s service

       was not a data processing service because its primary purpose was collecting and transmitting

       PSE’s data. The superior court denied Landis’s motion and granted the Department’s, dismissing

       Landis’s lawsuit.
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       No. 56877-2-II

               Landis appeals. It argues that the trial court erred by denying its summary judgment motion

       and granting the Department’s. Landis contends that because the primary purpose of its service to

       PSE was the extraction and conversion of certain meter data into a readable and usable format, not

       merely the transmission of data, it provided a data processing service that is exempt from retail

       sales tax.

               We agree with Landis and reverse. Landis’s service meets the statutory definition of a data

       processing service and is thus exempt from the retail sales tax. We remand for entry of summary

       judgment in Landis’s favor.

                                                       FACTS

               PSE hired CellNet Data Services in 1997 to perform automated readings of PSE’s electric

       and natural gas meters. In 2004, the Department informed CellNet that the state of Washington did

       not collect retail sales tax on meter reading services.

       A.      Adoption of Tax Code for Digital Services

               In 2009, the legislature expanded the list of transactions subject to retail sales tax to include

       the sale of digital goods, codes, and digital automated services. LAWS OF 2009, ch. 535, §

       301(8)(a); see also RCW 82.04.050(8)(a), .250(1). A digital automated service is “any service

       transferred electronically that uses one or more software applications.” RCW 82.04.192(3)(a). The

       definition of “digital automated service” has 16 exceptions that are digital automated services but

       are not subject to retail sales tax. RCW 82.04.192(3)(b)(i)-(xvi). The legislature added data

       processing services to the list of exceptions in the statute in 2010. LAWS OF 2010, ch. 111, §

       203(3)(b)(xv). The exception was retroactive to July 2009. Id.§ 902(1).

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       No. 56877-2-II

              A data processing service is a “primarily automated service . . . where the primary object

       of the service is the systematic performance of operations by the service provider on data supplied

       in whole or in part by the customer to extract the required information in an appropriate form or

       to convert the data to usable information.” RCW 82.04.192(3)(b)(xv) (emphasis added). The

       definitional statute lists examples of data processing services, such as “check processing, image

       processing, form processing, survey processing, payroll processing, claim processing, and similar

       activities.” RCW 82.04.192(3)(b)(xv). The original draft of the bill that became the statute more

       broadly defined a “data processing service” as a primarily automated service “that involves the

       systematic performance of operations on data” to extract or convert usable information. H.B. 2620,

       at 15, 61st Leg., Reg. Sess. (Wash. 2010) (emphasis added). A bill report explained the change,

       stating that narrowing the definition “clarifies that data processing services are services where the

       primary object . . . relates to data processing, but some incidental services may be involved.” H.B.

       REP. ON SUBSTITUTE H.B. 2620, at 3, 61st Leg. Reg. Sess. (Wash. 2010).

       B.     Landis’s Service

              Shortly after the change in the law, Landis acquired CellNet. In 2011, Landis entered a

       contract with PSE to continue the automated meter reading services.

              The agreement covered approximately 1.2 million electric meters and 800,000 natural gas

       meters. The contract stated that Landis “shall enter and store” data from the meters in a database

       and “shall provide Good Billing Reads” to PSE. Clerk’s Papers (CP) at 414. A “good billing read”

       was defined as “a complete meter read that contain[ed] all requested energy and demand

       information . . . delivered to PSE from a Supported Meter” within a time window that allowed PSE

       to efficiently bill its customers. CP at 406. The data Landis had to provide for electric meters

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       No. 56877-2-II

       included the meter number, information about the cumulative kilowatts per hour used, the date and

       time of that information, and information on whether there had been a power outage or the meter

       showed signs of tampering. For natural gas meters, Landis had to provide the meter number, the

       cumulative cubic feet used, the data and time of that information, and information about possible

       tampering. PSE could also pay for more detailed information, such as when power was used

       throughout the day.

               The individual meters automatically generated data as customers consumed electricity and

       natural gas. Landis owned radio modules that were attached to the meters, which broadcasted that

       raw data to collection devices. The radio modules on the electric meters broadcasted once every

       five minutes and the ones on the natural gas meters broadcasted once every 15 minutes.

               At midnight each day, the collection devices sent all of the individual meters’ data for that

       day to Landis’s data center in Kansas. There, “in a process that [took] several hours, the data [was]

       automatically converted into a format that [could] be read by PSE’s computer systems and

       compiled into a database.” CP at 327. The next morning, Landis sent PSE the converted data in a

       form that PSE could use to calculate the amount of power consumed by a given customer, track

       outages, and identify malfunctioning meters or tampering. If Landis’s system could not provide

       the information automatically, Landis had to send someone to manually read the meters. The

       network could not transmit any other kind of data.

               PSE paid Landis based on the number of “good billing reads” Landis provided. Landis did

       not charge or pay retail sales tax for its service.

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       No. 56877-2-II

                 C.      Audit

                 In 2014, the Department began auditing Landis for the time period beginning in January

       2010. In 2019, the auditor informed Landis that they had forgotten to include the tax due on

       Landis’s meter reading services. The auditor explained that because of the 2009 change in the law,

       Landis’s services were “no longer exempt” because they “qualif[ied] as a digital automated service

       . . . subject to retail sales tax.” CP at 166. The audit result stated that Landis owed approximately

       $17.7 million in unpaid retail sales tax and about $880,000 in unpaid retailing business and

       occupation tax for the audit period.

                 Landis objected to several items in the audit, including the application of the retail sales

       tax to its meter reading services.1 Landis argued its meter reading service was a data processing

       service exempt from the tax because the primary object of the service was “to convert the gas and

       electricity usage data (which [was] extracted via automation from data provided by PSE at the

       meter) to information in an appropriate form” that PSE used to bill its customers. CP at 217. Landis

       compared its service to payroll processing, where a service provider receives hours, pay rates, and

       other information “from its customers and converts this data to useable information each pay

       cycle” so its customers pay their employees correctly. Id.

                 In March 2020, the Department produced a report explaining its belief that Landis’s service

       was not a data processing service exempt from retail sales tax. The Department reasoned that

       Landis’s service included data collection, transmission, processing, storage, real time meter

       information services, and service interruption monitoring, so “the full service contracted for” went

       too far beyond data processing to qualify for the retail sales exemption. CP at 261.

       1
           Landis also challenged additional audit findings, but they are not at issue in this appeal.

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       No. 56877-2-II

               In May 2020, Landis sought review of the audit through the Department’s internal process.

       In September 2020, the Department issued a postaudit report explaining that it believed Landis’s

       service to PSE primarily involved the collection and transmission of data from the meters to PSE,

       not the conversion of that data into a useable format. Therefore, the Department maintained that

       Landis’s service was not a data processing service and was subject to the retail sales tax.

               Before the Department’s internal process finished, Landis paid the assessed back tax.

       Landis then timely sued for a refund of the tax payment on the grounds that Landis’s service was

       primarily a data processing service and the Department had improperly found the service was

       subject to retail sales tax.2

       D.      Superior Court Proceedings

               Both Landis and the Department moved for summary judgment on the issue of whether

       Landis’s meter reading service qualified as a data processing service exempt from retail sales tax.

       Both parties argued that there were no genuine issues of material fact. Landis conceded that the

       service met the broad requirements of an automated digital service that would be subject to retail

       sales tax if it did not meet the claimed exception.

               Landis submitted a declaration from a technician who helped provide the meter reading

       service to PSE. The technician explained how the meter reading system worked and explained the

       purpose of the contract:

               The primary object of the services provided by [Landis] to PSE [was] to extract
               meter data from PSE-owned meters and convert that data to a form usable by PSE.
               There would be no reason for PSE to contract with [Landis] unless [Landis] could
               provide meter data extracted from [PSE’s] meters and returned in a format that

       2
        Landis also asserted causes of action for the improper taxation of temporary worker services and
       a violation of the Washington Taxpayers’ Rights and Responsibilities, chapter 82.32A RCW.
       Landis does not raise either of these arguments on appeal.

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       No. 56877-2-II

              [could] be used in PSE’s customer information systems. The timely and accurate
              delivery of readable meter data to PSE allow[ed] PSE to download the information
              into its billing system so that its customers [could] be billed timely and accurately.

       CP at 327. The technician also described some ancillary services Landis provided, such as outage

       detection services and readings on request.

              Landis submitted two declarations from the person who managed PSE’s meter data

       management system and the receipt of files from Landis. The manager stated, “PSE’s primary

       purpose, in fact only purpose, for entering into the contracts with [Landis], was to obtain meter

       data extracted from PSE gas and electric meters that [was] processed into a format that [could] be

       used by PSE.” CP at 675. The manager also explained that “[w]ithout the conversion of the meter

       data performed at the [Landis] data center, the data would have been unreadable and unintelligible

       by PSE’s computer systems.” CP at 676. Landis also submitted examples of the raw data pulled

       from the meters and contrasted it with the usable format the data was converted into before it was

       loaded into the database.

              The manager explained that for PSE to pay Landis for providing a “good billing read,”

       Landis “was required to successfully extract PSE meter data from a PSE meter, transmit it to

       [Landis]’s data center, convert the meter data into a form usable by PSE, and deliver a complete

       set of meter data for each supported meter back to PSE.” CP at 1217. “In short, a ‘Good Billing

       Read’ as defined in the 2011 [contract] was synonymous with the successful processing of meter

       data from a PSE meter in accordance [with] the terms of that contract.” CP at 1218.

              In a deposition, the manager agreed that, because of the arrangement with Landis, PSE did

       not have to pay employees to manually read its meters. The automated service resulted in “more

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       No. 56877-2-II

       accurate information that . . . was processed properly and sent to PSE, and limited issues that you

       run into in the field, like access issues.” CP at 930.

              Neither party disputed any of the facts as described above. Their disagreement centered on

       how the law should be applied to those facts. The parties applied the “primary purpose” test from

       Qualcomm, Inc. v. Dep’t of Revenue, which evaluates the purpose of the service from the

       perspective of the purchaser or customer. 171 Wn.2d 125, 127-28, 249 P.3d 167 (2011). Landis

       argued that the object “of the service from PSE’s perspective” was to obtain extracted meter data

       processed into a form that could be used in PSE’s customer billing system. CP at 694. The

       Department argued that the primary purpose of Landis’s service was to collect and transmit data

       from individual meters, not process it.

              After a summary judgment hearing, the trial court ruled that the primary purpose of the

       transaction from PSE’s perspective was “to obtain good billing reads,” and while there was data

       processing involved, “that [was] not the primary purpose or object of the service.” Verbatim Rep.

       of Proc. (VRP) at 29. The trial court reasoned that Landis “provides automated meter reading

       services . . . to allow [PSE] to access consumption data from [its] meters. This information is then

       electronically transmitted to a database managed by and owned by [Landis] and then accessed

       remotely by [PSE].” Id. at 27. The trial court also stated that the contract between Landis and PSE

       said that its “primary purpose was to allow PSE to ‘obtain good billing reads’” and that Landis did

       not invoice PSE for data processing. Id. at 28. The trial court granted the Department’s motion for

       summary judgment, denied Landis’s motion for summary judgment, and dismissed Landis’s

       lawsuit. Landis appeals.

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       No. 56877-2-II

                                                   ANALYSIS

              On appeal, the parties identify no disputed issue of fact and they each argue they should

       prevail as a matter of law. The Department reasons that the primary purpose of Landis’s service is

       collecting and transmitting data, “which is an information service, not data processing.” Br. of

       Resp’t at 31. We disagree.

              We review grants of summary judgment de novo. FPR II, LLC v. Dep’t of Revenue, 16

       Wn. App. 2d 706, 713, 482 P.3d 320 (2021). The interpretation of a statute is a question of law

       that we also review de novo. Qualcomm, 171 Wn.2d at 131. Summary judgment is proper when

       the moving party shows “that there is no genuine issue as to any material fact and that the moving

       party is entitled to a judgment as a matter of law.” CR 56(c). If there are no genuine issues of

       material fact and we determine that a party who did not prevail below is entitled to summary

       judgment, we can remand to order the entry of judgment in that party’s favor. See Impecoven v.

       Dep't of Revenue, 120 Wn.2d 357, 365, 841 P.2d 752 (1992).

              The Department argues that we must narrowly construe exemptions to tax statutes. It is

       true that there must be unambiguous legislative intent to make a tax exemption, and we will not

       create tax exemptions by implication. TracFone Wireless, Inc. v. Dep’t of Revenue, 170 Wn.2d

       273, 297, 242 P.3d 810 (2010). And in general, “statutory exceptions are construed narrowly in

       order to give effect to the legislative intent underlying the general provisions.” Foster v. Dep’t of

       Ecology, 184 Wn.2d 465, 473, 362 P.3d 959 (2015). However, “[w]e construe ambiguous tax

       statutes in favor of the taxpayer.” Qualcomm, 171 Wn.2d at 131. A taxpayer claiming to be exempt

       from a tax has “the burden of establishing the exemption” applies. Gartner, Inc. v. Dep’t of

       Revenue, 11 Wn. App. 2d 765, 773, 455 P.3d 1179 (2020). See also RCW 82.32.180.

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       No. 56877-2-II

       A.      Statutes and Regulations

               A digital automated service is “any service transferred electronically that uses one or more

       software applications.” RCW 82.04.192(3)(a). The sale of a digital automated service is a retail

       sale subject to retail sales tax. RCW 82.04.050(8)(a), .250(1).

               The legislature has provided several exceptions to the retail sales tax for digital automated

       services, including one for data processing services. RCW 82.04.192(3)(b)(xv). A data processing

       service must be “primarily automated,” must be “provided to a business or other organization,”

       and “the primary object of the service [must be] the systematic performance of operations by the

       service provider on data supplied in whole or in part by the customer to extract the required

       information in an appropriate form or to convert the data to usable information.” RCW

       82.04.192(3)(b)(xv) (emphasis added). “Data processing services include check processing, image

       processing, form processing, survey processing, payroll processing, claim processing, and similar

       activities.” Id.

               The Department’s excise tax rules restate the statutory definition of a data processing

       service and then provide three examples. WAC 458-20-15503(303)(o). The first example describes

       a product that is a digital automated service but not a data processing service: automated

       technology that searches a computer and gathers documents relevant to a lawsuit. WAC 458-20-

       15503(303)(o) ex. 20. The technology also allows the customer to organize, store, and notate the

       gathered documents. Id.

               The second example describes a product that is a data processing service exempt from the

       retail sales tax: a check processing service that receives check scans from a bank and returns

       “extracted and reformatted data,” including the dollar amount, account number, and verification

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       of signature, for the bank “to reconcile its customer’s accounts.” WAC 458-20-15503(303)(o) ex.

       21. A third example explains that the check processing service is still a data processing service

       even if it receives check images from both the bank and the bank’s customers. WAC 458-20-

       15503(303)(o) ex. 22.

       B.     Other Cases Analyzing Taxation of Information Services

              Both parties in this case apply the “primary purpose” or “true object” test. The Washington

       Supreme Court has used this test to determine whether “the primary purpose [of a service] was

       information processing or information transmission” in a case where information processing

       systems were exempt from a tax applied to network telephone services. Qualcomm, 171 Wn.2d at

       140.

              Qualcomm sold a system that provided trucking companies with information about vehicle

       location and operation. Id. at 128. Mobile terminals in the trucks collected location data, for

       example, and relayed it to Qualcomm’s network management facility, a component that

       Qualcomm referred to as the “service.” Id. The facility processed the data, making it readable for

       customers, and stored the data. Id. Trucking companies could access the data via software on their

       computers. Id. “The service [was] useless without the mobile terminals and software, which in turn

       [were] useless without the service.” Id. at 128-29.

              The Supreme Court made clear that it was analyzing whether “the primary purpose [of

       Qualcomm’s system] was information processing or information transmission.” Id. at 140

       (emphasis added). The statute at issue in Qualcomm, excluded from the definition of

       telecommunications services subject to retail sales tax, “[d]ata processing and information services

       that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an

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       electronic transmission to a purchaser where such purchaser’s primary purpose for the underlying

       transaction is the processed data or information.” RCW 82.04.065(27)(a). The Supreme Court held

       that Qualcomm provided an exempt service in part because “[t]he raw data gathered by the . . .

       system’s hardware would be unintelligible without the calculations performed by Qualcomm.”

       Qualcomm, 171 Wn.2d at 143-44. This court recently summarized Qualcomm, stating that “the

       data processing service component of [Qualcomm’s] service was the true object because

       [Qualcomm’s] customers sought to acquire the specific information, not raw data.” Gartner, 11

       Wn. App. 2d at 783.

              The Supreme Court has considered the manipulation of transmitted information in other

       tax cases. For example, when the City of Seattle taxed Comcast’s high-speed cable Internet service

       as a network telephone service subject to retail sales tax, the Supreme Court disagreed on several

       grounds. Cmty. Telecable of Seattle, Inc. v. City of Seattle, 164 Wn.2d 35, 44, 186 P.3d 1032

       (2008). Importantly, the definition of “network telephone service” expressly excluded the

       provision of Internet service. Id. at 43. And Comcast was “not engaging in the mere ‘provision of

       transmission’” of data described in the network telephone service statute. Id. at 44 (quoting RCW

       82.04.065(2)). Instead, it was “transform[ing] and manipulat[ing] data” that passed through the

       network, which was “an integral and necessary part of the provision of Internet services.” Id.

       (internal quotation marks omitted).

              In sum, the Supreme Court has, in other tax cases, drawn a clear distinction between

       services involving the mere transmission of data and services primarily involving the conversion

       or manipulation of data.

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       C.     Landis’s Automated Meter Reading Service

              Landis’s service collected data from PSE’s meters, transmitted the data to a computing

       center where it was converted into a useable format, and returned the converted data to PSE. Landis

       was paid based on the amount of converted data, or “good billing reads,” it provided PSE. The

       parties do not dispute any facts about how the relevant system works, and it is undisputed that

       PSE’s primary purpose in hiring Landis was to obtain “good billing reads,” but the parties attach

       different connotations to this term.

              The Department maintains that the primary purpose of Landis’s service providing “good

       billing reads” was electronic meter reading, or in other words, collecting and transmitting

       information from PSE’s meters to PSE’s computer system. The Department contends that data

       processing is a necessary but minor component of Landis’s service, not the primary purpose. We

       disagree and conclude that the primary purpose of Landis’s service is data processing.

              The Department is correct that the legislature edited the definition of data processing to

       clarify that the exemption covered “services where the primary object of the service relates to data

       processing, but some incidental services may be involved.” H.B. REP. ON SUBSTITUTE H.B. 2620,

       at 3, 61st Leg. Reg. Sess. (Wash. 2010) (emphasis added). The Department contends that the

       collection of data from the meters is not incidental. But Landis rightly asserts that the full statutory

       definition of data processing is disjunctive, not conjunctive: the service must “extract the required

       information in an appropriate form or convert the data to useable information.” RCW

       82.04.192(3)(b)(xv) (emphasis added).

              Here, Landis owned all of the components of the network except for the utility meters

       themselves. Landis collected data from the meters, extracted the relevant data points PSE wanted,

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       and converted them to an appropriate form (a “good billing read”) in a process that took several

       hours. Landis and PSE employees repeatedly explained that the raw data in PSE’s meters was

       functionally useless because it was not compatible with PSE’s computer system. Landis also

       submitted examples of the raw data from the PSE meters compared with the final product it

       returned to PSE. At the trial court, the person managing this process stated that PSE’s alternative

       to hiring a company like Landis was to manually read the meters. But PSE further explains that in

       the digital era, the company’s only modern alternative would be building its own data processing

       center that could convert the meter data, as well as a transmission network.

              Landis did not merely transmit information from point A to point B, manipulating the data

       only for transportation purposes. Instead, every day, Landis’s radio modules collected data points

       from 1.2 million of PSE’s electrical meters and from 800,000 of PSE’s natural gas meters. Landis’s

       radio modules transmitted those data points to a facility that converted the data points into usable

       information, like the quantity of electricity or gas used, and identified information about outages

       or tampering. Landis then sent the resulting information to PSE in a useable form. A system where

       PSE’s meters generated “good billing reads” each month and Landis’s service merely transmitted

       those files from the meters to PSE’s headquarters would fall outside the data processing exception.

       But it is undisputed that is not the system at issue here. All of these facts establish that the primary

       purpose of Landis’s service was data processing.

              Although the Department characterizes Landis’s service as a system “to collect, transmit

       and electronically transfer” billing information, the service bears more similarity to the check

       processing examples in the Department’s regulation examples, 21 and 22, which depict data

       processing. Br. of Resp’t at 40. Like the check processor in the examples, Landis collects data

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       No. 56877-2-II

       from PSE and individual customers, extracts the needed portions of that data, processes the data

       by converting it into a format that PSE can use, and sends it to PSE. This similarity also shows

       that data processing is the primary object of Landis’s service.

              Finally, the Department argues that like the service at issue in Qualcomm, Landis’s systems

       were “information services” focused on transmitting information for the customer. “Like

       Qualcomm’s trucking customers, [PSE] is interested in timely and reliable information, not the

       mode or method by which that information is created.” Br. of Resp’t at 40-41. But the

       Department’s reliance on Qualcomm is misplaced because this case involves different statutory

       tax classifications. And although Landis’s services would almost certainly qualify as “information

       services” as that term is used in Qualcomm, the processing Qualcomm performed on the data it

       received was a crucial part of what exempted Qualcomm’s service from the definition of

       “telecommunication services.” Qualcomm, 171 Wn.2d at 144. This court has noted that “the data

       processing service component of [Qualcomm’s] service was the true object because [Qualcomm’s]

       customers sought to acquire the specific information, not raw data.” Gartner, 11 Wn. App. 2d at

       783. Thus, Qualcomm tends to support Landis’s position.

              In sum, undisputed evidence in the record shows that the primary purpose of Landis’s

       service was extracting certain data from the raw data points produced by PSE’s meters and

       converting that data into a usable format, meeting the requirements of the data processing

       exception. PSE’s primary purpose for hiring Landis was to have Landis’s technology and network

       extract raw data from PSE’s meters and convert it into usable “good billing reads.” This satisfies

       the definition of a “data processing service” in RCW 82.04.192(3)(b)(xv). The trial court erred by

       granting the Department’s motion for summary judgment and denying Landis’s.

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       No. 56877-2-II

                                              CONCLUSION

              Landis’s service meets the definition of a data processing service under RCW

       82.04.192(3)(b)(xv) and is thus exempt from retail sales tax. We reverse. And because there are

       no issues of material fact, we remand for entry of summary judgment in Landis’s favor.

                                                          Glasgow, C.J.
        We concur:

        Lee, J.

        Cruser, A.C.J.

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