On Tuesday, Governor Ferguson signed the remaining major tax bills into law. While he acknowledged in his press conference that there were concerns about unintended consequences for businesses, it’s unlikely there will be any technical corrections until next year at the earliest.
Below we’ve included an effective date timeline as well as summaries of the changes. It’s expected the Department of Revenue will issue additional guidance, however it’s unclear how soon they will make tax policy decisions.
Timeline for major tax legislation effective dates
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January 1, 2025
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Capital gains tax – 9.9% rate applies to taxable gains in excess of $1 million
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October 1, 2025
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Service B&O rate increases to 2.1% if affiliated group taxable revenues are $5 million or more in the prior year
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Sales tax applies to many services, DAS exclusions repealed
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Specified financial institution surcharge increases to 1.5%
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January 1, 2026
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B&O surcharge – an additional 0.5% applies to most industries with taxable revenues over $250 million (exceptions for those subject to specified financial institution or workforce education surcharges)
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The deduction for investment income (subject to 5% incidental test from the Antio decision) is now unlimited for most non-profits, retirement accounts, collective investment vehicles and family investment vehicles.
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The Advanced Computing Surcharge increases to 7.5%; maximum tax cap increases to $75 million
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April 1, 2026
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Self Storage rentals become subject to B&O tax
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January 1, 2027
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Most B&O rates increase including manufacturing, retailing and wholesaling to 0.5%; contests of chance to 1.8%
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Capital Gains tax changes
In addition to the rate change noted above, SB 5314 made some modifications to the existing capital gains tax. The most notable changes include codifying some of the Department’s policy preferences including decoupling from the federal treatment for 1256 transactions, narrowing the criteria for the qualified charitable donation deduction, and a restriction to the credit allowed for taxes paid to other states on Washington gains to the lessor of the tax paid or 7%. Additional documentation requirements were also added.
There were a few beneficial changes, including a limited waiver on penalties, exempting foreign pensions and retirement accounts, and clarifying the qualifying family owned small business deduction holding period is not reset for certain non-material restructuring changes.
Sales tax on Services
ESSB 5814 makes sweeping changes to which services may be subject to sales tax. These changes will impact not only which businesses need to start collecting the tax, but also increase costs for Washington businesses purchasing these services (as sales tax will apply). These changes are effective October 1, 2025.
IT training and support services, software development and customization, security and monitoring services, temporary staffing services, most advertising services and live presentations are added to the definition of retail sales. Live presentations may be particularly problematic as trade show and convention attendance becomes subject to sales tax in Washington, which will have a chilling effect on the hotel and hospitality industry supported by these events.
Hospitals have an exception for temporary staffing services and the definition of advertising covers all forms except newspapers and radio/television broadcasters. A limited exception to the sales tax was added for many of these services when reimbursed between affiliated entities.
The bill also repealed several exclusions from the definition of Digital Automated Services (DAS). DAS is defined as “any service transferred electronically that uses one of more software applications”. When this term was originally defined and included in the definition of a retail sale, it was intentionally broad with the expectation that it would cover future technologies. Because of this framework, several exclusions were also included so that services which were not subject to sales tax would retain that treatment.
One of these exclusions from DAS was “any service that primarily involves the application of human effort by the seller, and the human effort originated after the customer requested the service”. With the repeal of this exclusion, this adds enormous subjectivity to whether a professional service meets the definition of a DAS and is therefore a retail sale. Where the line between the two lies will likely be fought in audits and litigation in the coming years.
B&O Tax Increases
ESHB 2081 increases the B&O tax rates for most classifications, including retailing and wholesaling to 0.5% effective January 1, 2027.
The Service classification under the signed law now has three rate tiers, based on the prior year’s taxable revenues for the affiliated group. An affiliated group includes all entities which are under direct or indirect control by a common owner, including all entities related by 80% or more controlling interest. The new tiers are effective October 1, 2025.
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1.5% for taxable Service revenues less than $1,000,000
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1.75% for taxable Service revenues between $1,000,000 and $5,000,000
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2.1% for taxable Service revenues of $5,000,000 or more
These new rate structures don’t apply to Specified Financial Institutions or groups subject to the Workforce Education Surcharge which are both subject to increased surcharges. The workforce education surcharge applies to affiliated groups with worldwide revenues of $25 billion or more.
In addition to these increases, all affiliated groups will be subject to an additional surcharge of 0.5% on taxable revenues over $250 million per year. For this surcharge, affiliated groups include all members with 50% common control. There are limited exceptions for certain B&O classifications such as manufacturing, food, fuel, and prescription drugs. This surcharge is effective January 1, 2026 – December 31, 2029.
Clarification on taxability of Investment Income
Also in ESHB 2081is codification of the Department’s existing policy of investment income only being deductible when it is less than 5% of the taxpayer’s worldwide gross. However additional language creates exceptions to this 5% test for most nonprofit organizations, collective investment vehicles (i.e. mutual funds), retirement accounts, and family investment vehicles. The latter term includes estates, certain trusts, and tuition plans such as 529 and Coverdell savings accounts. The effective date is January 1, 2026.
B&O on Self Storage Rentals
While on its face, SB 5794 seems to just repeal some under used tax preferences, there is a bigger story behind the change to storage units. This bill imposes Service B&O on the rental of storage units, and explicitly excludes these transactions from the existing B&O exemption for sales of real estate, effective April 1, 2026.
Traditionally the long term (30+ days) rental of real estate has been considered exempt from B&O under prior case law as an impermissible tax on property. Court support for this interpretation has been eroding, and this bill has been widely rumored to test whether a wider B&O tax on real estate rentals is permissible.
Together, these laws create some of the most significant changes to Washington taxes that we’ve seen in decades. While the Department is expected to issue guidance, traditionally they have been slow in publicizing policy decisions. Therefore businesses and individuals will need to be proactive in reviewing these changes and their likely impact. Reach out to your Sweeney Conrad client service team to discuss how these changes apply to your specific circumstances and how to plan for them.