During May 2025, the Washington State Legislature passed Engrossed Substitute Senate Bill 5814 which added certain services to the definition of retail sales for purposes of the Washington State sales tax.
Historically, Washington State Sales Taxes have applied only to goods, and there were exceptions to that, such as exempting groceries, medical devices, and pharmaceuticals. Services have never been subject to sales taxes in Washington.
But the legislature has been unable or unwilling to live within the revenues the State collects. First, they were able to convince the Supreme Court that capital gains taxes were not income tax. Then they raised the estate tax. Now they have added some services to the transactions subject to sales taxes.
When the legislation was first introduced, there was a lot of confusion around what services would be subject to sales taxes. The Department of Revenue has now issued “interim guidance,” which sounds a lot like the “interim final” rules we were getting for the PPP loans a few years ago. Why not pause this a bit until the Department can get the final rules in place? Because the legislature is hell bent on getting the new revenue coming in to fill the hole they have dug. Never mind the inconvenience to taxpayers as the rules evolve and change.
For now, the types of services subject to sales taxes are limited. Count on the legislature to expand these services as they get a taste of the extra tax revenue. For now, the services subject to sales taxes include:
Information technology services
Custom website development services
Investigation, security and armored car services
Temporary staffing services
Live presentations
Advertising services
Sales of custom software and the customization of prewritten software
Mostly the industries being singled out include marketing, advertising and IT. If you’re like me, you go down the list of services to be taxed and breathe a sigh of relief. At least, until I got to “Live presentations.” How did that get on the list?
Live presentations were originally part of Digital Automated Services (DAS), one of the main targets under this Bill. But the guidelines restricting Live presentations to DAS were removed during the process of modifying the Bill. It now seems that all Live presentations are subject to sales taxes.
Within the last year I have become a Vistage speaker. A flat fee is paid for these presentations, so that part of my revenue is now taxable. Of course, this will only be for presentations in Washington State. But still…
The other thing, looking at the list, is that it raises so many questions. What are advertising services? Where is the tax nexus for online advertising? Where is tax nexus for a multinational corporation you’re writing custom software for?
Until these and hundreds of other issues are resolved, what are you to do if you’re in one of these gray areas? You can charge sales tax on invoices to your clients, to be safe, but in the eyes of your clients, your prices just went up 10% or so. If your competitors don’t do the same, you’re at a disadvantage.
If you don’t charge sales taxes on invoices to your clients, but later you find you should have, you’ll have to pay the taxes to the State, and then go back to your clients, perhaps years later, to try and recover the taxes. Not a position you want to be in.
While this is an administrative burden, sales tax collection doesn’t raise your expenses, at least not directly. You collect the taxes from your client as a fiduciary of the State and then remit the taxes to the State. Your B&O taxes will actually go down, as the tax rate on retail sales is 0.471% while the B&O tax rate on services is either 1.5% or 1.75%. But all-in-all, it’s a mess.
This is effective October 1, 2025, so right quick! Like two weeks from now! If you’re like many small to medium-sized businesses, you keep your accounting records on accrual and report for taxes on cash basis. That means, collections starting October 1st might be subject to these rules. Meanwhile, your Accounts Receivable at September 30th, could be full of invoices that did not include taxes.
This isn’t going to be the last we hear of this new headache.
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