Washington Expands Sales Tax to Services

ESSB 5814 which comes into effect on October 1st, 2025, will significantly expand Washington’s retail sales tax to cover a range of services that were previously exempt from sales taxes. This statewide expansion of the retail sales tax means that businesses now must comply with retail sales tax at the county and city level as well as the state level.  

At the core of ESSB 5814 are changes to the definition of retail sales. Retail sales will now include activities such as advertising services, live presentations (whether in person or online), website development services, temporary staffing services, sales of custom software, sales of customized pre-written software, and information technology services like help desk services, data entry and processing services, and network system support services. For example, a marketing agency creating ad campaigns for a local retailer, a firm designing a custom e-commerce website for a client, or an IT provider offering ongoing help desk support will all need to charge sales tax on their services beginning October 1, 2025. 

Another major change is to the definition of “digital automated services.” For years, Washington law excluded services that primarily involved human effort from sales tax if they were delivered digitally. That exclusion is now gone. As a result, if a service is delivered electronically, it will generally be subject to retail sales tax. Exceptions will remain for telehealth and telemedicine services.  

The bill also creates new rules for sourcing taxable services, sourcing rules refer to how a business determines where a sale is considered to take place for tax purposes. Under the new standard, sales are sourced to the location where the customer receives or first uses the service. Businesses must make this determination on a transaction-by-transaction basis, creating potential compliance headaches for companies serving customers in multiple cities or counties within Washington as well as other states. 

If a business does not properly remit retail sales tax, the Department of Revenue may assess penalties along with an interest payment. In addition, the Department of Revenue has other tools to aid in enforcement such as issuing a warrant for all unpaid amounts that can be filed as a lien against the business, business owners and officers can be held personally liable, a business license may be revoked, and criminal charges can be filed. There are no statute of limitations for failing to pay these taxes, which means that the state can pursue these claims indefinitely. 

While the Department of Revenue is still analyzing potential issues with the new bill and will continue to issue implementation guidance, businesses should begin reviewing how the bill will impact them.   

What can you do to prepare? 

1. Determine if you are required to charge sales tax for your previously exempt services. Consider speaking with an attorney or tax professional if you need guidance.  
2. Make sure your business is registered to do business in the state of Washington and report income in the local counties, cities, and towns where your customers are located.  
3. Re-evaluate your own budget to account for the added cost of collecting and remitting sales tax.  

What happens if you do not collect sales tax? 

1. Even if your business does not collect retail sales tax from your customer, you will still remain liable for the full amount of taxes due. You still need to pay quarterly or annual taxes. Just because you don’t collect the tax from your customers does not mean that you do not owe it to the tax authorities!  
2. Failure to pay taxes may result in auditing by the Washington State Department of Revenue.  
3. The Department of Revenue can also issue penalties that may substantially increase the taxes owed. For instance, a company providing IT help desk services under a $10,000 contract that fails to pay the required tax may find itself owing more than $1,000 in taxes, plus penalties up to 29% on the amount owed plus interest. If the Department of Revenue determines that a company intentionally evaded taxes, penalties of  50% can be added. 

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.