Addressing substantial budget deficits forecasted over the next four years, Washington State Gov. Bob Ferguson has signed Senate Bill 5814 and House Bill 2081 into law on May 20, 2025. The new laws broaden the base of services subject to sales and use tax and increase gross receipts tax rates on certain types of businesses.
Senate Bill 5814
The state of Washington has a rather broad sales tax base with numerous taxable categories of services. Effective Oct. 1, 2025, Senate Bill 5814 adds services to the list, so sellers of these services must begin collecting sales tax on them in the fourth quarter of this year. The following services will now be subject to Washington’s sales and use tax (note that this list is not exhaustive and may be subject to interpretation):
- Information technology training services, technical assistance, and support; help desk services; network support services; and in-person hardware and software training
- Data entry and processing services
- Customized website development services including design, development, and support
- Investigation services including background checks
- Security and monitoring services, armored car services, security patrol services, and event security; note that locksmith services are not regarded as part of these taxable services
- Temporary staffing services for all business types except for overnight care and psychiatric hospitals
- Advertising services in digital form such as online referrals, search engine marketing, lead generation, online advertising space sales, and review of advertising campaigns
- Other specific services for both digital and nondigital advertising, including layout, art direction, graphic design, mechanical preparation, production supervision, placement, referrals, acquisition of advertising space, and advice on best methods for advertising
It should be noted that the legislation does not affect charges for traditional advertising formats, (e.g., newspapers, radio, and television broadcasts, billboards, and other advertising in physical or broadcast form). The new taxes on digital advertising services may be challenged in court, given that non-digital advertising services will not be taxed and the surrounding questions as to whether this violates the Federal Internet Tax Freedom Act.
Digital automated services subject to taxation in Washington state now fall under a potentially broader definition of what is taxable, where the human effort used to provide digital automated services is no longer a criterion in determining whether such services are taxable.
The law also broadens sales tax on nicotine; synthetically created nicotine is now taxable, in addition to nicotine derived from tobacco.
House Bill 2081
House Bill 2081 imposes a number of tax rate increases to Washington’s gross receipts tax, known as the Business & Occupations (B&O) Tax. The increases take effect on different dates, depending on the type of taxpayer, as follows:
- Manufacturers, wholesalers, and extractors currently pay a gross receipts tax rate of 0.484%, while taxpayers selling retail goods and government contractors who clean up military and radioactive waste currently pay 0.471%; effective Jan. 1, 2027, these taxpayers will pay a tax rate of 0.5% on their gross receipts.
- “Specified financial institutions” (generally those in a consolidated financial institution group with $1 billion or more of net income) that presently pay a tax equal to 1.2% of gross income will see that tax rate increase to 1.5%, effective Oct. 1, 2025.
- Gross income from gambling and other games of chance is taxed at 1.5% for operations with income under $50,000 annually and 1.76% for income of $50,000 or more annually; beginning Jan. 1, 2027, all gross income in this category will be taxed at 1.8%.
- For gross income from most other service providers, a new tiered structure will be effective Oct. 1, 2025 – taxpayers whose annual gross income is below $1 million will be subject to the standard 1.5% rate; taxpayers with annual gross income between $1 million and $5 million will be subject to a 1.75% rate; and those taxpayers whose annual gross income exceeds $5 million will be subject to a 2.1% rate.
- Companies belonging to an affiliated group with over $25 billion in worldwide revenue that are engaged in designing, developing or modifying computer software or hardware, or engaged in cloud computing services, online search engines, or online social networking platform functions as well as marketplace facilitators currently pay an additional surcharge of 1.22% of gross revenue in addition to the standard 1.5% gross receipts rate; beginning Jan. 1, 2026, this surcharge increases to 7.5%. Furthermore, the maximum amount of this tax paid annually increases from $9 million to $75 million annually.
- Any gross income over $250 million annually is subject to an additional 0.5% surcharge, effective Jan. 1, 2026; this tax is set to expire on Dec. 31, 2029.
- Previously, most business taxpayers could deduct investment income from the total income used to calculate their B&O tax liability if such investment income is considered “incidental” to their business. In light of a recent Washington Supreme Court decision, this deduction will be limited to those situations where investment income constitutes less than 5% of a taxpayer’s total worldwide gross annual income.
If your company generates more than $100,000 in gross business in Washington state or has a physical presence there, it is recommended that you contact a CBIZ tax professional to understand how these changes to the tax laws affect your business.