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,ver 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.