On May 20, 2025, the last day for bill signing, Washington Governor Ferguson signed two key tax bills that expand the sales tax to include additional services and increase the rates of the (awful) business and occupation (B&O) tax. Some of these increases are targeted at certain industries and will incite litigation. A projected budget deficit of approximately $15 billion over the next four years led to these tax increases.
Following is a summary of the relevant changes.
Senate Bill 5814
Senate Bill 5814 is the more controversial of the two bills. It is expected to generate between $1.1 to $1.5 billion of additional revenue in each of the next two fiscal years. The bill expands: (1) the sales tax to additional enumerated services, and (2) the nicotine products tax to nicotine, whether derived from tobacco or created synthetically.
Effective October 1, 2025, the bill imposes sales tax on the following new services:
- Advertising services, including online referrals, search engine marketing, lead generation, the acquisition of advertising space on the internet and evaluating of advertising campaigns. It also includes advertising preparation services graphic design, layout and art direction. It does not include advertising in newspapers, printing or publishing , radio and broadcasting, billboards and live events;
- Information technology training services, technical support and other services, including help desk services, data processing services, data entry services, in-person training related to hardware or software;
- Custom website development services;
- Temporary staffing services;
- Investigation, security, security monitoring services and armored car services; and
- Custom software and customization of prewritten computer software.
The expansion of the sales tax to advertising services is particularly questionable because the tax is imposed on advertising services but effectively excludes non-digital advertising services, leaving only online digital advertising services subject to sales tax. This discriminatory treatment arguably violates the Internet Tax Freedom Act.
The tax does not apply to certain sales of these newly-taxed services between members of an affiliated group. Specifically, for advertising, investigation, security services, security monitoring services, armored car services, and temporary staffing services, the sales tax is not imposed on the sale between members of an affiliated group.
The bill also expands the definition of a taxable “digital automated service.” This tax increase is accomplished by eliminating an exclusion from the definition of “digital automated service” applicable to a service that primarily involves the application of human effort by the seller. In other words, the amount of human effort to provide a digital service is no longer a relevant consideration in determining whether it is a “digital automated service.”
House Bill 2081
House Bill 2081 is projected to generate between $2 to 3.5 billion over the next four years. The bill substantially increases several B&O tax rates, including the following:
- Increase from 0.484% to 0.5% for standard manufacturing, extracting, and wholesaling (effective January 1, 2027);
- Increase from 0.471% to 0.5% for retail sales (effective January 1, 2027);
- Increase from 1.2% to 1.5% for specified financial institutions (effective October 1, 2025);
- Increase from 1.75% to 2.10% for service and other activities businesses with a gross income of over $5 million (effective October 1, 2025), and
- Increase from 1.22% to ….. (wait for it) 7.5%!!! for the advanced computing surcharge (effective January 1, 2026)
The bill also adds a 0.5% surcharge for taxpayers with Washington taxable income over $250 million (effective January 1, 2026 with an expiration date of December 31, 2029), but excludes persons subject to the advanced computing surcharge, among others. The bill also raises the advanced computing surcharge cap (which limits the tax on advanced computing) from $9 million to $75 million.
The Eversheds Sutherland SALT Team will monitor the implementation of these tax changes and the inevitable litigation that will ensue.
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