UPDATED 5/1/2025
Washington tax legislation update
All three bills noted below have passed the legislature, with some changes, and are awaiting action from the Governor. He has until May 20th to sign or veto these bills (they become law absent a veto).
B&O Rate Increases
Status: Delivered to Governor
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 passed bill 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.
- 1.5% for taxable Service revenues less than $1,000,000
- 1.75% for taxable Service revenues between $1,000,000 and $5,000,000
- 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.
Partial Antio fix
Also in this bill is 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 revenues as noted previously. 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.
Sales tax on Services
Status: Delivered to Governor
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.
In the final version of the bill IT training and support services, software development and customization, security and monitoring services, temporary staffing services, live presentations and advertising services are added to the definition of retail sales. 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”. This exclusion as well as the others mentioned below have been repealed in this legislation.
As noted previously, 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 applies to the lease of storage units
Status: Delivered to Governor
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.
Capital Gains
There are two passed bills pending the Governor’s signature, ESSB 5813 as noted below and SSB 5314 which make changes to the capital gains tax. We’ll provide further details on these changes in a separate article.
Original article from 4/17/2025:
Several new tax proposals were introduced earlier this week and are expected to have moved forward or passed through their respective chamber by the time this article posts. This is not a comprehensive list but, but covers the main tax bills. While some are straightforward to understand, one has the potential to impose sales tax on most services in a hidden way.
Below are highlights of these bills and links to the bill numbers. Through these links you can find the bill language, when these bills will have public hearings and links to submit feedback to legislators on these changes.
Capital gains and estate tax increases
Senate bill 5813 and companion House bill 2082 both raise the capital gains tax rate to 9.9% (from 7%) on taxable gains above $1 million, retroactive to January 1, 2025.
Also retroactive to that date are some changes to Washington’s estate tax. The exclusion amount rises to $3 million. However,ever the tiered tax rates imposed on Washington taxable estates beyond that amount increase with a top rate of 35%.
B&O increases and codifying DOR’s Antio interpretations
Senate bill 5815 and House bill 2081 are large bills with several tax impacts. Part One increases the B&O tax rates on most businesses. Of the common classifications, Retailing, Wholesaling, and Manufacturing all increase to 0.5%. The Services B&O rate for businesses with $1 million or more in prior year taxable revenues increasees to 2.1% (from 1.75%).
Part two imposes an additional B&O surcharge of 0.5% on Washington taxable revenues over $250 million, with limited exceptions. This applies to tax years 2026 – 2030 and is in addition to the regular B&O tax rate. Specified financial institutions also have a surcharge.
Part three increases the tax rate on advanced computing businesses to 5%. While this surcharge only impacts affiliated groups with worldwide revenues above $25 billion, customers may see these taxes in the form of higher prices.
Part four is the Department of Revenue’s language to codify their interpretation of the Antio decision. Investment income is only deductible from B&O if it is less than 5% of the taxpayer’s total revenues, which codifies this as a bright line test rather than a safe harbor. Investment income is not deductible for banking, lending and financial institutions. Non-profits are not subject to this 5% test.
Despite assurances to legislators and practitioners, there is no blanket exemption for individuals, family offices or retirement earnings. The bill directs the DOR to provide interpretive guidance on when these groups may or may not be taxable.
This bill also does not address several key issues with investment income, such as how it is to be sourced for apportionment purposes and how items like stock sales are to be measured (sales price or net gain). It is effective January 1, 2026, so prior period exposure is not addressed. The Washington Society of CPAs has offered extensive comments to both the DOR and legislators on the deficiencies with this language, but no changes have been made at the time of writing.
Imposing Sales Tax on Services
Senate bill 5814 and House bill 2083 may have the biggest impact of all the bills on Washington businesses and individuals. This bill imposes sales tax on broad categories of services which are purchased by Washingtonians, so their costs for these services will increase as sales tax is paid by the purchaser.
Several categories of services are defined as retail sales (sales tax applies). These include IT consulting, training and support services, software development and customization services, data processing services, temporary staffing services, and digital advertising services.
Additionally, the bill makes sweeping changes to exclusions from the definition of Digital Automated Services (DAS). DAS are subject to sales tax and are defined as “any service transferred electronically that uses one of more software applications”. In our current digital economy, where businesses and customers interact via email, video calls, file transfer software and patient portals, most businesses fit under this definition. Add in the current trend towards integrating AI software and that list will only expand.
Traditionally most professional services have not been subject to sales tax because there is an exclusion from the DAS definition for services which are primarily the result of human effort, i.e. what is desired is the legal, medical or accounting knowledge rather than how that knowledge is transmitted. This exclusion is repealed in this bill. This change adds enormous subjectivity to when professional services are subject to sales tax.
Additional exclusions that are repealed from the DAS definition include online live classes, advertising services and data processing services. Given current DOR audit policies, we expect this language to greatly expand the amount of services subject to sales tax.
In Conclusion
These bills are the result of legislative negotiations and are the ‘par baked’ versions that are expected to move quickly through the legislative process before session ends in a week. However, there is still time to submit comments to your legislator, just click on the applicable bill number above to find information and links to submit comments or provide written testimony for any scheduled public hearings.