Many Washington businesses will be affected by new retail sales taxes on previously untaxed services, including sales of custom software, some advertising services, temporary staffing services, and live presentations.
Officials say the changes will generate more than $1 billion for the state over the next two years.
The changes, which go into effect October 1, are part of a new law called Engrossed Substitute Senate Bill (ESSB) 5814, which was passed earlier this year by the 2025 Washington State Legislature and signed into law by Governor Bob Ferguson in May.
It’s important for all business owners to determine if they are affected by this expansion of the state sales tax base and to take steps to ensure compliance with the new regulations.
What Services Are Affected?
According to the Department of Revenue, more than 90,000 businesses may be affected by the upcoming sales tax expansion. Under the law, these business services will fall under the definition of “retail sale” and be subject to retail sales tax:
- Custom website development services; meaning design, development, and support of a website provided by a website developer to a customer
- Temporary staffing services, with the exception of providing workers to hospitals that are licensed under chapter 70.41 or 71.12 RCW
- Advertising services, including digital marketing, online advertising placements, and promotional campaigns. Some advertising services, however, such as newspapers and billboards, are exempt from the sales tax
- Live presentations, which include but are not limited to lectures, seminars, workshops, or courses attended in person or virtually
- Investigation, security, and armored car services, including background checks, personal and event security, security guard services, armored car transport of cash and valuables, and security system services and monitoring.
- Sales of custom software and customization of prewritten software, regardless of the method of delivery.
The bill also expands the definition of taxable information technology services and digital automated services (DAS), which are defined as “any service transferred electronically that uses one or more software application.”
Certain services that previously were not defined as information technology and DAS will be subject to sales tax under the new law. They include:
- Human-centric services, which are those where more than 50% of the work requires human effort
- Data processing services, including data analysis, report generation, database management, and information processing
While removing some services from its list of exemptions of digital services, the state added two new exemptions: telehealth and telemedicine services.
Actions Providers Should Take Right Now
If you’re still preparing for the October 1 changes, there are some things you should be doing now. While these steps are not legally required, taking them now will help you be ready when the changes go into effect.
- If you’re not already registered for a Washington State sales tax permit, doing so should be one of your first steps
- Update your billing system to calculate and collect sales taxes
- Educate and train your employees regarding the new regulations
- Revise customer contracts to address the new taxes
- Examine your existing customer base to pinpoint services that will now be taxed
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Actions Purchasers Should Take Right Now
Again, these steps not legally required, but will help you to prepare for any changes that may affect your business.
- Identify any current vendors who will be imposing newly taxable services
- Contact those vendors and ask how they plan to collect the taxes
- Educate any applicable employees about the new requirements
- Adjust your budget to accommodate new sales taxes
- Review plans for software purchases or other services that may now be taxable
- Review contracts for tax responsibility clauses
- Maintain accurate and complete documentation for tax compliance and any audits that could occur
Actions to Ensure Ongoing Compliance
Staying abreast of new information and making sure your business is following guidelines issued by the state will be critical in maintaining compliance in the future.
- Make sure to keep detailed records of taxable services versus those that are exempt from the sales tax
- Get sound sales tax collection procedures and policies in place
- File sales tax returns on a timely basis with the Washington State Department of Revenue
Some Final Thoughts
The scope of this expanded tax base is broad and has raised issues among business owners across the state of Washington.
While state officials claim the changes make the tax system fairer because it evens out the taxation of products and services, there has been pushback from businesses and groups that say the law will negatively impact certain business sectors.
If your business is affected by ESSB 5814, it’s important to stay up to date with announcements from the Department of Revenue. Interim guidance statements informing businesses how to manage tax collection and reporting for contracts already in place are available on the Department’s website.
Officials are expected to continue providing updates to help businesses understand and prepare for the changes until permanent rules are issued. At this time, there is no deadline for when permanent rules will be announced. You can sign up here to receive updates and additional information.
I strongly encourage you to consult your tax advisor with any questions you have and to prepare for these changes to avoid compliance issues and potential penalties.
