Washington Sales Tax Changes: What Business Owners Need to Know
The compliance landscape just shifted. Here’s what you need to know.
Washington State will tax professional services for the first time starting October 1, 2025. Under Engrossed Substitute Senate Bill 5814 (ESSB 5814), IT services, advertising, staffing, security, custom software, and paid presentations become retail sales.
👉 Not sure where you stand? Contact Bugaboo Bookkeeping for a compliance review.
Disclaimer: This article summarizes interim guidance from the Washington Department of Revenue. Rules are still evolving. Every business situation is different. Always consult a tax professional before making decisions.
AI Transparency Notice: This article was drafted with the assistance of artificial intelligence and then fact-checked and edited by a tax professional. All compliance details were verified against official sources, including the Washington Department of Revenue. The final content is human reviewed to ensure accuracy and reliability.
Why Washington Changed the Law
Washington historically taxed goods and certain digital products, not services. Lawmakers argued this left the tax code outdated as modern businesses spend heavily on services instead of tangible goods.
ESSB 5814 expands “retail sale” to include service categories previously exempt. The goal: broaden the tax base and reduce reliance on volatile sectors.
Six Industries Hit Hard
1. Information Technology (IT) Services
Will be taxable:
- Network operations and support
- Help desk and troubleshooting
- Cybersecurity testing and monitoring
- System upgrades, migrations, user onboarding
- Managed IT and project management
Exempt: Web hosting, payment processing, SaaS (already taxed), domain registration
2. Security, Investigation, and Armored Car Services
Will be taxable:
- Security guards, patrol, event security
- Alarm monitoring and system oversight
- Armored car transportation
- Private investigation and background checks
Exempt: Locksmithing, forensic accounting, internal HR investigations, process serving
3. Staffing and Temporary Services
Will be taxable:
- Most temporary staffing services
- Applies to businesses supplying employees to client companies
May be exempt: Certain healthcare staffing depending on context
4. Advertising and Marketing
Will be taxable:
- Digital ad management (Google, Facebook, TikTok, Instagram)
- Creative services and ad placement
- Influencer campaign coordination
Exempt: Print, radio, and TV ads
5. Custom Software and Website Development
Will be taxable:
- Custom website development projects
- Customization of prewritten software
Already taxable: SaaS subscriptions, remote access software, standard software licenses
6. Live Presentations
Will be taxable:
- Webinars, seminars, and workshops offered for a fee
- Continuing education events not accredited by higher education
Exempt: K–12 schools and accredited universities offering courses as part of tuition
Digital Automated Services (DAS): What Stays Exempt
ESSB 5814 narrowed DAS exclusions but some remain:
Still exempt:
- Professional services (law, accounting, architecture, engineering) unless delivered primarily through DIY portals/templates
- Telehealth and telemedicine
- Affiliate transactions between related companies (documentation required)
The trap: The “primarily human effort” DAS exclusion is gone. Just because you personally deliver a service doesn’t exempt it.
Example:
- CPA preparing custom tax returns = Service & Other Activities B&O (not retail sales tax)
- Online tax software with minimal customization = Retail sales tax
If your service sits on the DAS boundary, get classification help now.
Existing Contracts: Your Grace Period
Paid in full before Oct 1, 2025: Not taxable
Signed before Oct 1, billed after: Exempt until March 31, 2026, unless you change terms
Materially altered after Oct 1: Immediately taxable
Strategic move: Invoice long-term contracts before October 1 or early in 2026 to lock in tax-free rates.
Out-of-State Businesses Aren’t Exempt
Economic nexus: $100,000+ in Washington receipts = you must collect sales tax, even with no physical presence
Multi-location sourcing: Services are taxed where received. Document usage across states or Washington assumes 100% taxable.
Misreporting locations to dodge tax triggers penalties.
Nonprofits and Government Pay Too
Both must collect and pay sales tax on taxable services. No general nonprofit exemption exists.
Seven Compliance Challenges
- Billing system reconfiguration – Most need destination-based sales tax automation
- Pricing decisions – Absorb the tax or pass it to clients?
- Client pushback – Customers seeing sales tax for the first time will question it
- Bundled transactions – Mix taxable and non-taxable in one line? Entire bundle gets taxed
- Staff training – Billing errors create audit risk
- Contract updates – Add sales tax clauses now
- DAS classification – Gray zone services need professional review
Your 30-Day Action Plan
Days 1-7:
- Inventory services – identify what becomes taxable
- Register with Washington DOR (if not already done)
- Review DAS exclusions for proper classification
Days 8-14:
- Set up accounting software for sales tax tracking (QuickBooks Online, Xero)
- Audit existing contracts for early invoicing opportunities
- Assess multi-state service allocation
Days 15-21:
- Update invoice templates and contract language
- Train billing and customer service teams
- Document service delivery locations for multi-state clients
Days 22-30:
- Launch client education campaign with FAQs
- Test systems with sample transactions
- Set up compliance monitoring
Running short on time? Book a compliance review with Bugaboo Bookkeeping.
Issues Everyone Overlooks
Reseller permits: Subcontractors may use them, but documentation rules are strict
Multiple Points of Use (MPU): Multi-state digital services may qualify for MPU exemptions with proper allocation
Affiliated groups: Services between affiliates may stay under “service and other activities” instead of retailing if structured correctly
DAS boundaries: IT monitoring, automated reporting, hybrid services create classification challenges
Compliance Checklist
- Register with Department of Revenue
- Update chart of accounts for retailing B&O
- Configure accounting software for destination-based sales tax
- Train billing staff
- Review and update client contracts
- Add sales tax language to invoices
- Renew and organize reseller permits
- Develop client FAQs
- Document multi-state allocation methodology
- Classify services for DAS eligibility
- Monitor DOR updates
FAQs
- Do I Need to Start Collecting Sales Tax in Washington? Yes, starting October 1, 2025, if you provide IT services, advertising, investigation/security, temporary staffing, live presentations, or custom software.
- Are IT Services Taxable in Washington? Yes. Help desk, cybersecurity, network upgrades, managed IT become taxable. Web hosting, domains, payment processing stay separate.
- Are Advertising Services Taxable? Yes. Digital ads, influencer marketing, agency services become taxable. Print, radio, TV ads stay exempt.
- Are Investigation and Security Services Taxable? Yes. Private investigators, background checks, security guards, alarm monitoring, armored car services become taxable. Locksmiths, forensic accounting, process servers stay exempt.
- Are Temporary Staffing Services Taxable? Yes, with possible exemptions for hospital staffing.
- Are Live Presentations Taxable? Yes, unless offered by K-12 or accredited higher education.
- Are Custom Software and Customization Taxable? Yes. Both custom development and customization of prewritten software become taxable. SaaS was already taxable.
- Are Legal, Accounting, or Healthcare Services Taxable? Generally no unless delivered as digital automated services through primarily automated platforms. Professional services with substantial human involvement stay under Service & Other Activities B&O.
- What Happens to Contracts Signed Before October 1, 2025? Paid in full before Oct 1: Not taxable. Unpaid but signed before Oct 1: Exempt until March 31, 2026 if unchanged. Altered after Oct 1: Immediately taxable.
- Do Nonprofits Have to Collect or Pay Sales Tax? Yes. No general nonprofit exemption.
- Do Government Agencies Have to Pay Sales Tax? Yes. State and local government pay sales tax on taxable services.
- What About Out-of-State Businesses? If you exceed $100,000 in annual Washington sales, you must collect sales tax.
- How Do I Handle Multi-State Services? Allocate proportionally by location. Washington portion is taxable. Document everything.
Final Takeaway
Washington’s sales tax expansion hits October 1. If you provide IT, advertising, staffing, software, or security services, prepare now.
👉 Not sure if this affects you? Contact Bugaboo Bookkeeping for a free 15-minute compliance check.
Disclaimer: This article summarizes interim guidance from the Washington Department of Revenue. Rules are still evolving. Every business situation is different. Always consult a tax professional before making decisions.
AI Transparency Notice: This article was drafted with the assistance of artificial intelligence and then fact-checked and edited by a tax professional. All compliance details were verified against official sources, including the Washington Department of Revenue. The final content is human reviewed to ensure accuracy and reliability.
