Washington’s expansion of retail sales tax to a wide range of services officially took effect Wednesday, forcing companies across technology, marketing, and nonprofit sectors to rethink how they bill for everything from digital advertising to custom software and IT support.
The change stems from Senate Bill 5814, passed in the final days of this year’s legislative session. The law reclassifies a variety of business activities as retail sales, requiring providers to charge sales tax on services including advertising, IT support, website development, live presentations, and the sale or licensing of custom software. Temporary staffing, investigation, and security services are also affected.
The Washington Department of Revenue estimates more than 90,000 businesses will be impacted, a shift tax experts describe as unprecedented. “There is virtually no business that wouldn’t be affected by this in some way,” said Grant Shaver, principal at Seattle-based accounting firm Clark Nuber. “It’s the biggest tax-related change I’ve seen in my career.”
For many businesses, the implications remain unclear. Paul Uhlir, CEO of Seattle-based ad agency Add3, described the new tax as “an unwanted distraction,” while others worry about compliance risks. Joe Fain, CEO of the Bellevue Chamber, cautioned in a blog post that many companies may end up overpaying or misclassifying transactions just to avoid potential audits. “Expect compliance chaos for the next year,” he wrote.
The Department of Revenue has issued interim guidance, but consultants say many gray areas remain, particularly in determining whether services meet new taxable definitions and whether a sale should be considered Washington-based. Taxes are assessed not on where the work is performed, but on where the customer receives the service.
The tax is already impacting client budgets. Scott Foreman, CEO of Seattle ad agency Copacino Fujikado, said that while clients have been understanding, the additional costs weren’t factored into 2025 planning, meaning some businesses may shift budgets to adjust. Although some advertisers with fixed budgets could buy fewer services due to higher costs, Uhlir of Add3 noted that client growth has not slowed.
Not all industries are included in the expansion. Newspapers, radio and TV broadcasting, and out-of-home advertising like billboards are exempt. It remains unclear how the change will affect Seattle-based Amazon, which operates one of the world’s largest advertising businesses. The Department of Revenue has issued specific guidance for contracts signed prior to Oct. 1.
Supporters of the law argue it modernizes Washington’s tax system to reflect an economy increasingly dominated by digital services. “As more and more of our economy happens with computers and technology, this bill is doing the work to modernize the tax code to match,” said Sen. Noel Frame (D-Seattle), who co-sponsored the legislation.
Washington now joins Maryland as one of the few states to tax digital advertising. Maryland’s law, passed in 2021, is still under litigation and applies only to companies generating at least $100 million annually. Washington’s version, by contrast, is much broader.
The Department of Revenue projects SB 5814 will raise about $1.1 billion over the 2025–2027 biennium, with funds going toward education, healthcare, and social services. However, the law is already facing pushback. Comcast filed a lawsuit last month seeking to block the advertising component, arguing it violates the Internet Tax Freedom Act. Striking that piece alone would reduce projected collections by nearly $475 million over four years.
The tax expansion is part of a larger suite of new revenue measures approved by state lawmakers this year to help fill a $16 billion budget shortfall. These include increases to the business and occupation tax for larger companies, higher surcharges on computing power used by tech giants like Microsoft and Amazon, and a hike in the capital gains tax. A wealth tax proposal was not passed.
Washington, one of the few states without personal or corporate income tax, relies heavily on sales, property, and B&O taxes. Critics argue the system disproportionately impacts lower-income residents. Even some tech leaders are sounding alarms. At the Seattle Metropolitan Chamber’s annual meeting last month, Microsoft President Brad Smith warned that relying too heavily on new taxes could undermine the region’s economic foundation.
For now, businesses are left grappling with compliance questions as they adjust to one of the most sweeping tax law changes in Washington’s history.
