On May 20, 2025, the Washington State Legislature enacted Senate Bill 5814 (ESSB 5814) which adds new business activities to the state’s definition of a retail sale. Businesses providing digital services such as advertising, information technology (IT), and custom software are now required to collect and remit retail sales tax. This extensive change is part of the state’s response to increase funding for public services and modernize the tax base to the ever-growing digital marketplace.
Sales tax changes in Washington state
Effective Oct. 1, 2025, the following additional services are now subject to tax:
- Advertising services
- Live presentations (lectures, workshops)
- IT services
- Custom website development services
- Investigation, security, and armored car services
- Temporary staffing services
- Sales of custom software and customization of prewritten software
ESSB 5814 also made significant changes to the “digital automated services” (DAS) framework. The bill repealed several existing exemptions, making the following digitally delivered services now taxable under retail sales tax:
- Human effort-based services (more than 50% of the service involved human effort)
- Live presentations
- Advertising services
- Data processing services
At the same time, the bill also introduced a new exemption for “telehealth” and “telemedicine services.” These digitally delivered services will remain nontaxable despite being digitally delivered.
Business and occupation tax changes in Washington state
The expansion of the definition of a retail sale impacts the business and occupation (B&O) tax classification of these services. The additional digital services now considered retail sales will be classified under the “retailing” B&O tax, in addition to being subject to retail sales tax.
ESSB 5814 also included changes affecting businesses in the “service and other activities” B&O classification. Effective Oct. 1, 2025, the “services and other activities” B&O classification has three tax rates based on the prior calendar year’s taxable income:
- Under $1 million: remain at 1.5%
- $1 to $5 million: increase to 1.75%
- Over $5 million: increase to 2.1%
Hospitals and advanced computing businesses are specifically exempt from these rate increases and will remain at the same 1.5% rate.
Additional changes include:
- A 0.5% surcharge on businesses with taxable income in excess of $250 million annually, effective Jan. 1, 2026.
- An increase in the B&O tax rate for financial institutions with annual net income exceeding $1 billion, from 1.2% to 1.5%.
- A drastic increase in the advanced computing business surcharge from 1.22% to 7.5%, paired with an increased combined annual cap from $9 to $75 million, effective Jan. 1, 2026.
- Targeted B&O tax rate increases for a variety of business categories, including “manufacturing,” “wholesaling,” and “retailing” categories will be rising to 0.5% beginning Jan. 1, 2027.
Impact of Washington’s expanded definition of a retail sale
Contracts for affected services that have been signed and paid in full before Oct. 1, 2025, are likely exempt from the new tax rules. However, partial payments or modifications to the contract may subject the contract to the taxability legislation. A deferral option until April 1, 2026, may be available for contracts signed and executed before Oct. 1, 2025, provided no material changes to the contracts occur.
The Washington Department of Revenue issued additional interim guidance statements in September that address the newly taxable services and industry-specific scenarios. Impacted businesses should:
- Examine the interim guidance statements tailored to specific industries.
- Assess existing contracts for transitional tax treatment.
- Update billing systems.
- Review B&O classifications.
- Begin collecting and remitting sales tax on the applicable services.
If you have any questions on how these changes may impact you, your business, or any other state and local tax matters, please feel free to reach out to us.
