Washington State Sales Tax Expansion: Critical Changes for Businesses Effective October 1, 2025

Washington State has significantly expanded its sales tax base through the passage of Engrossed Substitute Senate Bill 5814, which will impact how businesses handle taxation of digital services and custom software. These changes take effect October 1, 2025, and require immediate attention from business owners, finance teams, and tax professionals.

The legislation introduces sales tax obligations for advertising services, live presentations, custom website development services, investigation, security, and armored car services, temporary staffing services, and custom software access and use, while expanding the definition of taxable information technology services and digital automated services (DAS). Further, it creates an explicit exemption from sales tax for telehealth and telemedicine services. Businesses must evaluate their current service offerings, vendor relationships, and tax compliance procedures before the October 1st effective date.

Expanded Taxable Services

Information Technology Services and Digital Automated Services

Information technology services and DAS are broadly defined as “any service transferred electronically that uses one or more software applications.”  Prior to October 1, 2025, information technology services and DAS do not include:

• Any service that primarily (more than 50%) uses human effort and human effort occurs after the service has been requested
• Loaning or transferring money
• The purchase, sale, or transfer of financial instruments
• Dispensing cash
• Payment processing
• Telecommunication services
• Internet and internet access
• The right access and use of prewritten software
• Online education programs
• Live presentations
• Travel agent services
• Advertising
• Marketplace facilitation
• Storage of digital products, digital codes, computer software, or copies of software on a computer server
• Data processing services
• Digital goods

The state has narrowed the list of exempt digital services. Previously excluded services that will now be subject to sales tax include:

• Human-centric services: Any service where more than 50% of the work involves human effort performed after the service request
• Advertising services: Digital marketing, online advertising placements, and promotional campaigns
• Data processing services: Data analysis, report generation, database management, and information processing
• Live presentations: Virtual conferences, webinars, training sessions, and real-time demonstrations

Custom Software Taxation

Historically, the sale of custom software or prewritten software that has been customized has not been subject to sales tax in Washington State. However, Engrossed Substitute Senate Bill 5814 represents a fundamental shift in Washington's approach to software taxation. The new law expands Washington State’s definition of “retail sale” to include “custom software, and customization of prewritten computer software to a consumer, regardless of the method of delivery,” including:

• Software-as-a-Service (SaaS): Custom applications delivered via cloud platforms
• Licensing arrangements: Per-user, per-license, or subscription-based access to custom software
• Software customization: Modifications to existing software to meet specific business requirements
• Access rights: Any arrangement granting rights to use custom software, whether owned by the vendor or third parties

Business Impact Analysis

For Service Providers

Immediate Actions Required

• Register for Washington State sales tax permits if not already registered
• Update billing systems to calculate and collect appropriate sales tax rates
• Modify customer contracts to address tax responsibilities
• Train sales and accounting teams on new taxability rules
• Review existing customer base to identify newly taxable services

Ongoing Compliance

• Implement proper sales tax collection procedures
• Maintain detailed records of taxable versus exempt services
• File regular sales tax returns with the Washington State Department of Revenue
• For Service Purchasers

Cost Planning

• Identify current vendors providing newly taxable services
• Budget for sales tax on custom software and digital services (rates vary by location, typically 6.5-10.4%)
• Evaluate whether to accelerate software purchases before October 1st
• Review contracts for tax responsibility clauses

Use Tax Considerations

• Assess whether use tax obligations apply to out-of-state vendors
• Implement procedures for self-assessing use tax when vendors don't collect sales tax
• Maintain documentation for tax compliance and potential audits

Industry-Specific Implications

Technology Companies

Software development firms must restructure pricing models and sales processes to accommodate tax collection requirements. Companies providing custom development, SaaS platforms, or IT consulting services face the most significant impact.

Professional Services

Consulting firms, marketing agencies, and data analytics companies need to evaluate which services now fall under the expanded tax definitions, particularly those involving human effort and data processing.

Manufacturing and Retail

Companies using custom software for inventory management, customer relationship management, or specialized business processes should budget for increased technology costs.

Recommended Action Steps

1. Immediate Assessment: Conduct a comprehensive review of all digital service contracts and software arrangements
2. Vendor Communication: Contact key technology vendors to understand their tax collection plans
3. Internal Training: Educate procurement, finance, and legal teams on the new requirements
4. System Updates: Modify accounting systems to track and report sales tax on affected services properly
5. Professional Consultation: Engage tax professionals familiar with Washington State regulations for complex situations

Compliance Timeline

• Now through September 30, 2025: Preparation period for system updates and process changes
• October 1, 2025: New tax requirements take effect
• October 31, 2025: First potential filing deadline for businesses with monthly reporting requirements

Next Steps

The breadth of these changes requires careful planning and may significantly impact technology budgets and vendor relationships. Businesses should prioritize reviewing their digital service portfolio and consulting with tax professionals to ensure full compliance. The state has issued general guidance as well as Frequently Asked Questions about Engrossed Substitute Senate Bill 5814.

For detailed guidance on specific situations, the EisnerAmper State and Local Tax team is here to support you.