Washington Passes Largest Tax Increase in State History: What This Means for Your Business

Washington recently approved sweeping changes to its Business & Occupation (B&O) tax system through House Bill 2081. These changes are being called the largest tax increase in state history, and they will impact nearly every business in some way. Whether you run a boutique marketing firm or manage a large statewide retail operation, these new rules will influence how you calculate your taxes and how much you pay, likely affecting your bottom line.  

Higher Rates for Service Businesses Beginning October 1, 2025, service-based businesses with more than $5 million in annual service income will see their B&O rate rise from 1.75% to 2.1%.  

For example, a marketing firm earning $6 million a year in services income previously paying a 1.75% B&O rate would see an annual tax bill of $105,000. Under the new 2.1% rate, the marketing firm would have an annual tax bill of $126,000. With an additional $21,000 in annual costs, the marketing firm would either need to reduce the owner’s profits or raise its fees. 

New Limits on Investment Income Deductions 

Alongside rate hikes, the legislature has tightened the rules on investment income by placing new restrictions on the deduction of investment income. Investment income is any amount derived from income tied to investments. Businesses that earn more than 5% of their worldwide income from investments will no longer be able to deduct that income, unless they are nonprofits, retirement accounts, or certain family or collective investment vehicles. Investment income typically includes dividends, interest, and capital gains. 

Extra Surcharge on the Largest Companies 

Beginning on January 1, 2026, any company with more than $250 million in Washington taxable income will pay an additional 0.5% surcharge on top of its regular B&O tax. While this surcharge will expire at the end of 2029, it is expected to have an immediate impact on the state’s biggest employers.  

Manufacturing and Retail Are Next 

By January 1, 2027, nearly every business in the state will feel the changes. The B&O rate for manufacturing, extracting, and wholesaling will rise from 0.484% to 0.5%, while the retailing rate will rise from 0.471% to 0.5%. These may look like small adjustments, but for high-volume businesses, even a fraction of a percent can result in thousands of dollars in additional taxes.  

Practical Next Steps 

The best way to manage these tax changes is to start planning before they take effect. Talking with a tax professional or attorney before the deadlines will help ensure you’re not caught off guard and give you time to adjust pricing, contracts, or business strategy if needed. 

The details may be technical, but the takeaway is simple: these changes will raise costs and create new compliance traps. Understanding the rules now can save money later. 

To schedule a consultation to see how this bill may affect your business, click here. 

DISCLAIMER: The materials and information contained in this article are for informational purposes only. These materials do not constitute legal advice nor does engaging with this website create an attorney-client relationship. Accordingly, you should seek legal counsel from an attorney knowledgeable about the specifics of your situation before taking or refraining from action. Nazzaro PLLC has attorneys that are licensed to practice law in Washington, Texas, Washington D.C., California, and New York.