On May 20, 2025, Washington Gov. Bob Ferguson signed multiple tax bills into law as part of the biennial budget passed by the state legislature on April 28, 2025.  The intent was clear: to balance the budget and help reduce growing projected deficits.  This was done through the adoption of both tax increases and new taxes.  The tax bills broaden the retail sales tax base, increase tax rates for business & occupation (B&O) tax, capital gains excise tax, and estate tax, and add new tax surcharges for certain large businesses and financial institutions. (Senate Bill 5814) (House Bill 2081 and House Bill 2020)

Below is a summary of the key changes:

Sales and Use Tax (Senate Bill 5814)

Expansion of Taxable Services

Effective October 1, 2025, several services that were previously exempt will now be subject to sales and use tax in Washington. Newly taxable services include:

• Advertising services, including both digital and non-digital advertising
  • “Advertising services” is defined as “all digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements including … online referrals, search engine marketing, and lead generation optimization, web campaign planning, the acquisition of advertising space in the internet media, and the monitoring and evaluation of website traffic … .”
  • Advertising services does not include web hosting services and domain name registration, and advertising services rendered in respect newspapers, print, radio, television, and out-of-home advertising such as billboards and other place-based advertising
• Information technology (IT) support and training services
  • including assisting with network operations and support, help desk services, in-person training, and similar services.
• Custom software development
• Data processing
• Website development, including design and support services
• Graphic design
• Temporary staffing services, except for certain hospitals.
• Live presentations (online and in-person) including seminars, workshops, and lectures
• Tattoo services
• Landscaping services
• Investigation, security, security monitoring, and armored car services

These changes to the services listed above will also reclassify them for B&O tax purposes. These newly taxable services will be subject to the Retailing B&O rate rather than the Services and Other Activities rate.

 

Business & Occupation (B&O) Tax Changes

B&O surcharges and rate increases

Effective January 1, 2026 through December 31, 2029, HB 2081 imposes a new 0.5% surcharge on businesses with Washington taxable income exceeding $250 million. The new surcharge is “in addition to all other taxes imposed.” Exemptions from the surcharge include, but are not limited to, the following:

• Taxable income that is subject to the financial institution surcharge
• Income from entities subject to the advanced computing surcharge
• Various specific manufacturing activities
• Sales of food, food ingredients, food stamp purchases, and prescription drugs
• Farmers

HB 2081 also increases:

• The B&O surcharge for financial institutions from 1.2% to 1.5%, effective October 1, 2025
• The advanced computing surcharge from 1.22% to 7.5%, with an annual cap increased from $9 million to $75 million, effective January 1, 2026
• Most standard B&O tax rates for various retail and wholesale activities, from 0.471% and 0.484% to 0.5%, effective January 1, 2027
• The service and other activities B&O tax rate for businesses and their affiliates with gross income of over $5 million taxable under this classification from 1.75% percent to 2.1%, effective October 1, 2025
  • The service and other activities B&O tax rate for businesses with gross income between $1 million and $ 5 million taxable under this classification remains 1.75%.
• The B&O tax rate for operating games of chance from 1.5% to 1.8%, effective January 1, 2027

B&O tax investment income deduction

HB 2081, investment income tax deduction clarifies the meaning of “incidental to the main purpose of the business.” Effective January 1, 2026, “investments” are considered incidental if the total worldwide gross income from the investments is less than 5% of the business’s total worldwide gross income of the business annually.  The legislation clarifies what gross receipts may be deducted by allowing the following persons to deduct amounts derived from investments regardless of whether the investments are incidental to the main purpose of the person’s business: nonprofit organizations, collective investment vehicles, retirement accounts and recipients of distributions from those accounts, and family investment vehicles and recipients of family investment vehicles.  Deductions are not be allowed for amounts (1) derived from investments of persons who are invested in a collective investment vehicle but not themselves a collective investment vehicle; (2) received by persons as compensation for services rendered to the collective investment vehicle and/or the collective investment vehicle’s investors; (3) derived from sources other than investments by a collective investment vehicle; or (4) amounts derived from factoring.

New B&O tax rate for payment card processors

A new 3.1% B&O tax rate for payment card processors has been implemented prospectively, allowing them to deduct certain fees by persons other than the processor from the measure of the B&O tax. These fees include interchange fees, network fees, and portions of fees retained by other processors.

The new tax does not apply to payment card processing activities involving credit, debit, or prepaid card transactions in which:

• The processor also operates the payment network or is affiliated with the operator of the payment network, and makes related payments to an affiliated financial institution, or

• The payment card processing company is also the issuer

Payment card processing activities exempt from the new rate are subject to the rate applicable for the Service and Other Activities B&O tax classification.

For more information or specific tax guidance, connect with our team here.