What Businesses Need to Know
Big changes are coming with Washington tax updates 2025. Governor Bob Ferguson recently signed major tax legislation—HB 2081 and SB 5814—ushering in sweeping reforms from sales tax expansion to B&O surcharges and rate hikes. Here’s what’s changing.
Sales Tax Expansion: Welcome to the Retail Club
Washington is broadening its definition of what counts as a “retail sale,” and that means more services are now subject to sales tax and the Retailing B&O tax, instead of the Service B&O tax. If your business provides or purchases any of the following, you’re now part of the retail tax world:
- Custom software and software customization
- IT consulting, training, and support
- Website development
- Data processing and entry
- Advertising and digital marketing services
- Security and investigation services
- Temporary staffing (except for hospitals)
- Live presentations (both in-person and online)
This change affects which jurisdiction receives the tax and whether local rates apply. Under Service B&O, sourcing is typically based on where the service is performed or where the benefit is received. Under Retailing B&O and sales tax, sourcing follows retail sales tax rules, which are often destination-based (i.e., where the buyer receives the product or service). That Zoom call with a client in Tacoma? It might be taxed differently than one in Seattle.
Additionally, this change generally increases the total cost to the buyer because sales tax now applies to these services, while reducing the B&O tax liability for the seller because the Retailing B&O Tax has a lower rate than the Service & Other Activities B&O tax classification. When a service becomes a retail transaction in Washington, it’s not just semantics—it’s a shift in tax rates, rules, and responsibilities. Lower B&O tax? Great. But now you’re collecting sales tax, so make sure your invoicing and compliance processes are ready.
Now some good news:
Telehealth services and specified services exchanged between companies within the same corporate group, including IT services, software development, data processing, and certain administrative and support services, won’t be taxed under this expansion.
B&O Tax: Surcharges and Rate Hikes
Effective January 1, 2026 – December 31, 2029, HB 2081 introduces a new 0.5% surcharge on businesses with taxable income apportioned to Washington over $250 million. Washington is also increasing B&O tax rates:
- Retail & wholesale B&O rates increase from 0.471% and 0.484%, respectively, to 0.5% (starting Jan 1, 2027)
- Service businesses earning over $5 million will pay 2.1% instead of 1.75% (starting Oct 1, 2025)
- Financial institutions will see their surcharge rise from 1.2% to 1.5% (starting Oct 1, 2025)
- Advanced computing companies will face a much higher surcharge—7.5%, up from 1.22%, with a cap on the surcharge tax increase from $9M to $75M (starting Jan 1, 2026)
If you are a tech and digital service provider, you should expect broader tax exposure and potential compliance complexity. Whether you’re a startup or a major player, now’s the time to review your tax strategy and prepare for the changes ahead.
Need Help Navigating Washington’s Tax Changes?
From shifting sourcing rules to B&O compliance, Clarus Partners helps businesses adapt to the Washington tax updates 2025, stay compliant, and reduce risk as states evolve their tax laws.
These Washington tax updates in 2025 could significantly impact compliance processes—especially for businesses in tech, SaaS, and professional services.
📚 Related Reading:
➡️ Washington’s Business & Occupation Tax: What You Need to Know
Understand how B&O tax works and why Washington’s 2025 updates matter for your business.
➡️ Sales Tax Nexus: What You Need to Know
Washington’s sourcing changes impact where and how you collect tax—make sure you understand the nexus rules.