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Scan for outdated or missing drivers - takes under a minuteDriver Scan →Clear out junk files and repair common Windows errorsFree Scan →Washington Gov. Bob Ferguson signed two major business-tax measures on May 20, 2025: one expanded retail sales-tax treatment to specified services, and the other changed some B&O rates and created a separate surcharge for certain high-grossing businesses. The measures took effect on different dates, and service exemptions changed again on July 1, 2026. A business’s current obligation depends on the particular service, tax classification, income and applicable exceptions—not simply on whether it does business in Washington.
What Ferguson signed on May 20, 2025
The package included ESSB 5814, which added specified services to retail-sale categories, and ESHB 2081, which changed rates in the Service and Other Activities B&O classification and established a separate high-grossing-business surcharge. Lawmakers sought revenue for the state budget. GeekWire reported at the time that ESSB 5814 was projected to raise more than $1.1 billion over the next two years and ESHB 2081 more than $2 billion over the same period. Those were contemporaneous projections, not verified collections or updated fiscal estimates.
At the May 20 signing-day press conference, Ferguson said, “We already know there may be unintended consequences that need to be addressed.” GeekWire also reported him saying, “The business community can expect that I’ll be reaching out to have conversations about the impacts on these taxes.” The remarks acknowledged possible impacts and a need to monitor them; they do not establish that a specific consequence had already occurred. The available reporting does not establish a measured effect of these laws on business formation, relocation, hiring or prices.
How the three taxes differ
| Tax | What it applies to | Measurement and timing |
|---|---|---|
| Retail sales tax under ESSB 5814 | Covered consumer sales of specified services, subject to definitions, exclusions and exemptions. | Generally effective October 1, 2025; later exclusions and exemptions took effect July 1, 2026. |
| Service and Other Activities B&O tax under ESHB 2081 | Taxable income reported in that B&O classification. | Rate tier is based on the classification’s taxable income in the prior calendar year. |
| High-grossing-business surcharge under ESHB 2081 | Some Washington taxable gross income above the statutory threshold, subject to exclusions. | Started January 1, 2026; threshold is measured within the current calendar year. The surcharge is scheduled to expire December 31, 2029. |
These are distinct obligations: sales tax concerns covered consumer transactions, B&O is a tax on business activity, and the surcharge is an additional tax for certain businesses once qualifying gross income exceeds its threshold. Meeting one threshold does not by itself determine whether a business owes either of the other taxes.
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Which services may be subject to retail sales tax?
ESSB 5814 generally brought specified services into retail-sale treatment, which can mean both retail sales tax on a covered consumer sale and retailing B&O reporting for the seller. The law addressed categories including information technology services, custom website development, investigation, security and armored-car services, temporary staffing, live presentations, advertising, and sales of custom software or customization of prewritten software. It also changed exclusions for digital automated services.
This is not a rule that makes every professional service or all digital activity taxable. Definitions, exclusions, exemptions and sourcing rules matter, and the original 2025 list is not a complete guide to current treatment. Washington’s Department of Revenue (DOR) identifies additional service exclusions and exemptions effective July 1, 2026, and says legal proceedings concerning service classifications are ongoing. Consult DOR’s current service-specific guidance for the transaction in question.
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Example: information technology support
DOR says IT support services sold to consumers generally fall under retailing B&O and retail sales-tax treatment from October 1, 2025. Its examples of potentially covered infrastructure support include network assessments, planning, migration, security, upgrades and maintenance. DOR’s interim guidance on ESSB 5814 changes for information technology services explains the service-specific treatment. The example does not determine the tax treatment of every IT contract or transaction.
What are the new Service and Other Activities B&O rates?
DOR lists the following rates for the Service and Other Activities classification, based on taxable income in that classification during the prior calendar year:
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1Scan for outdated or missing drivers - takes under a minute2Repair Windows errors before they cause bigger problems3Fix the driver behind crashes, sound loss and screen glitches| Prior-year taxable income in the classification | Listed B&O rate |
|---|---|
| Less than $1 million | 1.5% |
| $1 million to less than $5 million | 1.75% |
| $5 million or more | 2.1% |
The thresholds refer to taxable income in this B&O classification—not a business’s overall revenue, gross receipts or profit. DOR identifies exceptions, including hospitals, real estate brokers and select advanced-computing businesses in its workforce education guidance. A taxpayer should verify whether an exception applies rather than assume that the general tier determines its rate.
Who may owe the high-grossing-business surcharge?
Beginning January 1, 2026, ESHB 2081 imposes a separate 0.5% surcharge on some Washington taxable gross income above $250 million in a calendar year. It is not a general surcharge on every dollar of a business’s revenue: the law and DOR guidance exclude certain categories, including income subject to specified other classifications. A company should check DOR’s complete current list of included and excluded income before deciding whether it crosses the threshold or owes the surcharge. DOR says the surcharge expires December 31, 2029.
What changed after the original effective dates?
The main dates for businesses to distinguish are:
- May 20, 2025: Ferguson signed the measures.
- October 1, 2025: The specified ESSB 5814 service-tax changes generally took effect.
- January 1, 2026: The high-grossing-business surcharge began. Some other changes in the 2025 tax legislation also had this effective date.
- March 31, 2026, and April 1, 2026: For certain unchanged pre-existing contracts, DOR allowed the prior classification treatment through March 31. Unless a statutory exception applies, the new treatment applies to reporting periods beginning April 1 or later.
- July 1, 2026: DOR identifies new exclusions and exemptions for services effective on this date.
- September 30, 2027: Deadline to apply for DOR’s temporary penalty-relief program for eligible ESSB 5814 reporting periods.
DOR says its ESSB 5814 guidance remains interim while rulemaking incorporates the 2026 legislative changes. It describes the guidance as usable until final guidance is issued, the interim guidance is canceled, or new legislation is enacted. For current reporting, use the department’s current pages, service-specific guidance and special notices rather than relying only on a summary of the original 2025 law.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Does DOR’s penalty relief cancel tax owed?
No. DOR’s temporary relief program concerns penalties for eligible ESSB 5814 reporting periods; it does not erase the underlying tax or interest. Eligibility and covered reporting periods are defined, and an application must be submitted by September 30, 2027. A business considering the program should check DOR’s current instructions for eligibility and how to apply.
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Quick Recap
How businesses can assess their exposure
- Classify each transaction. Identify the actual service or product sold and compare it with the current DOR definition, exclusions and exemptions. Do not infer taxability from a broad label such as “professional services” or “digital service.”
- Separate the tax bases. Determine whether a covered consumer sale triggers retail sales-tax collection and retailing B&O reporting, whether the activity is reported in the Service and Other Activities classification, and whether income could count toward the surcharge.
- Use the right measurement period. For the Service and Other Activities rate tier, check taxable income in that classification in the prior calendar year. For the surcharge, track qualifying Washington taxable gross income during the current calendar year.
- Review contract and timing rules. For an unchanged pre-existing contract, assess DOR’s transition treatment and any statutory exception, as well as changes effective July 1, 2026.
- Check current DOR materials before filing. DOR says service-classification proceedings are ongoing and its ESSB 5814 guidance remains interim. A tax professional can help apply those rules to a business’s contracts and reporting facts.
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