Washington Broadens Sales, B&O Taxes: Business Impact: CLA
Key insights
- The new tax legislation will impact many companies doing business in Washington state as well as many state residents.
- Many more previously-exempt services are now subject to sales and use taxes.
- There are several increases on transportation related taxes, including car, boat, and airplane sales.
- Changes to the business and occupation tax include rate increases on wholesaling, manufacturing, and retailing, as well as surcharge increases on large businesses, financial institutions, and advanced computing.
Washington state has raised several business and occupation (B&O) taxes and increased the types of services subject to sales taxes to bolster funding for the state’s 2025 – 2027 budget for public services and infrastructure.
Explore the new tax changes to learn how your business and personal taxes may be affected.
B&O tax on investment income
The state codified a recent court decision about B&O taxes on investment income. The legislation says revenue from investments may be deductible from the B&O tax base when such revenue is “incidental” to the taxpayer’s primary business, defined as less than 5% of total revenue.
In addition, the following taxpayers may deduct investment revenue even when such investment revenue doesn’t meet the 5% test:
- Nonprofits
- Collective investment vehicles
- Retirement accounts and their distribution recipients
- Family investment vehicles and their distribution recipients
B&O tax investment income amnesty program
The state has implemented an expanded voluntary disclosure (VDA) program within the 2025 – 2027 budget for entities engaged in investment activities to help decrease compliance costs. This program is more generous than the existing VDA program because all penalties and interest will be waived. Entities being audited by the state can’t use the VDA program.
The program will span two distinct 10-month phases over the next two fiscal years, allowing for structured administration:
- Phase 1: July 1, 2025, through April 30, 2026
- Phase 2: July 1, 2026, through April 30, 2027
B&O tax rate increases
The wholesaling, manufacturing, extracting, and research and development nonprofit B&O tax all increased from 0.484% to 0.5%, and the retailing B&O tax increased from 0.471% to 0.5%.
B&O tax surcharges
Certain businesses face new or higher B&O tax surcharges, including:
- Large businesses — Effective January 1, 2026, there’s a new surcharge of 0.5% on Washington taxable revenue greater than $250 million each year. There are exemptions for certain types of revenue such as manufacturing and certain retail and wholesale sales.
- Financial institutions — The existing surcharge on the largest financial institutions will increase from 1.2% to 1.5% beginning October 1, 2025.
- Advanced computing — Effective January 1, 2026, the existing surcharge on certain advanced computing businesses will increase to 7.5% of revenue, with an annual cap of $75 million.
Sales tax on services
More activities are now subject to sales and use taxes, including:
- Information technology training services, technical support, and services including network operations and support, help desk, data entry, and data processing;
- Custom website development;
- Investigation, security services, security monitoring services, and armored car services, including background checks, security guard/patrol, personal and event security, and security system services and monitoring (this does not include locksmith services);
- Temporary staffing services;
- Advertising, defined as all digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements;
- Examples include online referrals, search engine marketing, lead generation optimization, web campaign planning, acquisition of online ad space, web traffic monitoring and evaluation for ad campaign analysis;
- Doesn’t include web hosting/domain name registration; services related to newspapers, printing/publishing, or radio/TV broadcasting; advertising such as billboards, street furniture, transit ads, place-based ads, in-store ads, signage at live events, naming rights;
- Live presentations, including in-person or virtual lectures and seminars, workshops, and classes that allow audience members and the presenter to interact in real time;
- Custom software and the customization of prewritten software, including the right to access and use such software; and
- Retail digital automated services (DAS) that primarily involve the application of human effort by the seller (there’s an exclusion for telehealth and telemedicine services) for telehealth and telemedicine services, making such services exempt from sales tax. However, this creates uncertainty as to whether certain professional services using software to deliver such services—such as accountants and attorneys—would be subject to sales tax, because there is no similar exclusion for such services. This ambiguity may allow the state to include such services as it enforces the expanded definition of taxable DAS.
Capital gains tax and estate tax:
The capital gains tax rate was increased to 9.9% on annual long-term capital gains more than $1 million. The estate tax was also updated, including adjusting the applicable exclusion amount and increasing the estate tax rates, as follows:
| Estate Value (Millions) | Pre-July 1, 2025 | Post-July 1, 2025 |
|---|---|---|
| $0 to $1 | 10% | 10% |
| $1 to $2 | 14% | 15% |
| $2 to $3 | 15% | 17% |
| $3 to $4 | 16% | 19% |
| $4 to $6 | 18% | 23% |
| $6 to $7 | 19% | 26% |
| $7 to $9 | 19.5% | 30% |
| $9+ | 20% | 35% |
Taxes affecting transportation
There are several tax changes related to the state’s transportation agenda, including:
- New luxury tax on the purchase or use of certain motor vehicles and non-commercial aircraft;
- An additional 8% sales tax on the sale price (or value, when calculating use tax) of motor vehicles exceeding $100,000;
- An additional 10% sales tax on the sale price (or value, when calculating use tax) of noncommercial aircraft exceeding $500,000;
- Recreational vessels subject to the watercraft excise tax will have an additional 0.5% sales tax at purchase or lease;
- The motor vehicle sales tax will increase by 0.5%;
- Increases the rental car sales tax to 11.9% in 2026 and 9.9% in 2027 and thereafter;
- Imposes a new sales tax for peer-to-peer car sharing vehicles, using the same rates as car rentals;
- Increases the fee on the sale of new motor vehicle tires to $5 per tire (previously $1); and
- Creates a new sales tax exemption for purchasing zero emission buses by transit agencies and federally recognized Indian tribes for providing transportation services.
How CLA can help with Washington state tax changes
The new Washington tax changes will impact many companies doing business in Washington state as well as many state residents. The new rules have varying effective dates and complexities — working with an experienced tax advisor can help you determine your impact.
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Learn how Washington’s tax increases impact your business. Complete the form below to connect with CLA.
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