Washington recently enacted major tax law changes that will affect many businesses operating in the state. Here’s what you need to know:
Changes to the Definition of Incidental Investment Income
Washington law now permits businesses to deduct only “incidental” investment income from their gross receipts. In 2024, the Washington Supreme Court held in Antio, LLC v. Department of Revenue that investment funds could not claim a deduction for investment income if investments were a significant part of their business. In response to the uncertainty resulting from this decision, the legislature has passed a bright line rule: Investment income is incidental if it is less than 5% of the business’ worldwide income. The new law identifies types of taxpayers who may apply the deduction despite Antio. Further clarifications are anticipated from the Department of Revenue.
Increased B&O Rates and Surcharges
The legislature passed several major business and occupation tax rate increases. These include:
Advanced Computing Surcharge: Starting January 2026, the advanced computing surcharge will rise sharply from 1.22% to 7.5%, with an annual cap of $75 million for all members of an affiliated group. This surcharge began in 2020, and many have not yet fully considered its possible applicability to their businesses. As a result, the tax and potential penalties and interest for those caught unawares may be formidable.
Increased Rates for Manufacturers, Retailers and Wholesalers: Starting in January 2027, rates will increase to 0.5%.
Increased Rate for Services: Starting October 2025, the service and other activities rate will increase to 2.1% for businesses or affiliates with over $5 million in service income.
Surcharge on Financial Institutions: Starting in October 2025, financial institutions will be subject to a new 1.5% surcharge.
Another B&O Tax Surcharge on “High Grossing Businesses and Financial Institutions:” In addition to all the other taxes, businesses with more than $250 million in taxable income will be subject to a temporary 0.5% surcharge from January 2026 through December 2029 (with certain exceptions).
Dramatic Expansion of Services Subject to Sales Tax
Starting October 2025, a broad set of services will be subject to retail sales tax. This includes any service transferred electronically using a software application. There are no longer any exceptions that previously applied for services that are primarily the result of human effort. This law is expected to face several legal challenges.
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