Each year the Department of Revenue (DOR) identifies technical and administrative changes to the tax and licensing sections of the Revised Code of Washington (RCW) for consideration by the Legislature. Technical revisions to state law may be required for multiple reasons. Sections of the RCW may be repealed, recodified, or amended in a way that changes their internal or statutory numbering or terminology. The language in these sections, as well as references to these sections in other provisions of the RCW, then become incorrect. Statutes may become obsolete with the passage of time, evolution of technology, improvement of administrative processes, or adoption of state or federal legislation. Administrative agencies occasionally suggest statutory revisions to increase clarity or improve administration, including codifying department guidance.
Shipping or Transporting Tobacco Products.
A person may not ship or transport, cause to be shipped or transported, or provide substantial assistance to a person shipping or transporting any tobacco product ordered or purchased by mail or through the internet to anyone in Washington other than a licensed wholesaler or retailer. Any person found in violation of shipping or transporting any tobacco product ordered or purchased by mail or through the internet is guilty of a Class C felony and a maximum fine up to $5,000.
Tobacco product means a product that contains tobacco and is intended for human use, including cigarettes, cigars, chewing tobacco, and any other product, regardless of form, that:
Business and Occupation Tax.
Washington's major business tax is the business and occupation (B&O) tax. The B&O tax is imposed on the gross receipts of business activities conducted within the state, without any deduction for the costs of doing business. Businesses must pay the B&O tax even though they may not have any profits or may be operating at a loss.
A taxpayer may have more than one B&O tax rate, depending on the types of activities conducted. Major B&O tax rates are 0.471 percent for retailing; 0.484 percent for manufacturing and wholesaling; and 1.5 percent (businesses with taxable income of less than $1 million), 1.75 percent (businesses with taxable income of $1 million to $5 million), and 2.1 percent (businesses with taxable income over $5 million) for services and for activities not classified elsewhere. There are many specialized B&O tax rates and preferential rates that apply to specific business activities.
Small businesses may take a credit against their B&O tax due. The maximum credit equals $55 per month—or $160 per month—depending on whether at least 50 percent of the business's taxable amount is in certain classifications. When tax due is less than or equal to the maximum credit, the credit equals the tax due; otherwise, a reduced credit formula applies.
Beginning January 1, 2027, the rate for certain business activities increases to 0.5 percent, including standard manufacturing, extracting, wholesaling, and retailing.
Business and Occupation Surcharge on High Grossing Businesses.
An additional B&O tax is imposed on businesses with at least $250 million in Washington taxable income. The tax is 0.5 percent of the business's annual Washington taxable income in excess of $250 million and is in addition to the other B&O taxes imposed on the income. This surcharge expires December 31, 2029.
The following income is exempt from the additional B&O tax:
In addition, a person primarily engaged as a farmer or eligible apiarist, as well as financial institutions, are exempt from the additional B&O tax. Taxpayers who pay the advanced computing surcharge are also exempt from this additional B&O tax.
Retail Sales and Use Tax.
Retail sales taxes are imposed on retail sales of most articles of tangible personal property, digital products, and some services. A retail sale is a sale to the final consumer or end user of the property, digital product, or service. If retail sales taxes are not collected when the user acquires the property, digital product, or service, then use tax applies to the value of property, digital product, or service when used in this state. The state, all counties, and all cities levy retail sales and use taxes. The state sales and use tax rate is 6.5 percent; local sales and use tax rates vary, depending on the location.
Retail Services.
Businesses that sell intangible products to customers are generally subject to the B&O tax under the services and other classification. Customers do not pay retail sales and use tax on most services. A select number of services are subject to retail sales and use tax, including construction services, personal training at athletic and fitness facilities, extended warranties and maintenance agreements, alarm monitoring services, and vehicle towing. If the service is taxable as a retail sale, then the business activity is subject to the retailing B&O tax.
Information technology products and services sold as a nonitemized package are generally subject to retail sales and use tax. When the products and services are separately stated on a sales invoice or contract, charges for computer hardware and prewritten computer software are subject to retail sales and use tax. Separately stated charges for custom software and customization of prewritten software are not subject to retail sales and use tax.
Digital Products.
Retail sales and use taxes apply to all digital products, regardless of how they are accessed. Digital products are digital goods and digital automated services. A digital automated service is any service transferred electronically that uses one or more software applications. A digital good is a sound, image, data, fact, or information, or any combination thereof, transferred or accessed electronically.
Newly Enacted Retail Services.
Pursuant to Engrossed Substitute Senate Bill (ESSB) 5814 beginning October 1, 2025, the following select services are classified as retail services and subject to retail sales tax and retailing B&O tax:
The following digital automated services are also classified as retail services and subject to retail sales tax and retailing B&O tax:
The sale of services between members of an affiliated group are not considered a retail service for purposes of retail sales tax and retailing B&O tax.
Multiple Points of Use.
A buyer may claim an exemption from sales tax when purchasing digital goods, digital codes, or digital automated services that are available for multiple points of use inside and outside Washington. Taxpayers claiming the multiple points of use exemption must apportion and report use tax directly to the DOR.
Payment Card Processing.
Beginning January 1, 2026, businesses must report income from payment card processing activities under the payment card processing B&O tax classification. The tax rate for this classification is 3.1 percent.
Workforce Education Investment Surcharge.
A workforce education investment surcharge applies to select advanced computing businesses in addition to the B&O tax on service and other activities and certain royalty income. Beginning January 1, 2026, the workforce education investment surcharge rate is increased for select advanced computing businesses from 1.22 percent to 7.5 percent. The surcharge applies only to income from advanced computing activities and is capped at $75 million annually per affiliated group. The B&O tax surcharge is in addition to all other taxes.
Specified Financial Institution Surcharge.
A specified financial institution is a financial institution that is a member of a consolidated financial institution group that reports an annual net income of at least $1 billion on its consolidated financial statement for the previous calendar year, not including net income attributable to noncontrolling interests. From January 1, 2020, through September 30, 2025, an additional 1.2 percent tax applied to the income of specified financial institutions subject to the service and other activities B&O tax. Beginning October 1, 2025, the additional B&O tax rate on specified institutions is increased from 1.2 percent to 1.5 percent. The B&O tax surcharge is in addition to all other taxes.
State-Chartered Credit Unions.
Federal- and state-charted credit unions are generally exempt from the B&O tax. Legislation passed during the 2025 Legislative Session modified the chartered credit union B&O tax exemption. Beginning October 1, 2025, if a state-chartered credit union merges with or acquires a bank regulated by the Department of Financial Institutions (DFI), the credit union is no longer exempt from the B&O tax. The B&O tax will be 1.2 percent of the gross income of the state-chartered credit union.
Estate Tax.
The estate tax is a tax on the right to transfer property at the time of death. A decedent or a nonresident decedent who owns property in Washington may owe estate tax depending on the value of their estate. An estate tax return is not required to be filed unless the gross estate is equal to or greater than the applicable exclusion amount. The value of a qualified family-owned business interest (QFOBI) may be deducted from the taxable value of an estate as long as certain conditions are met. The applicable deduction amount means:
Incidental Use of Land Classified as Farm and Agricultural Land or Timberland.
Land classified as farm and agricultural or timberland may allow for incidental uses not directly related to farming or timber production. For property classified as timberland, incidental use may not exceed 10 percent of the total classified land. For property classified as farm and agricultural land, incidental use may not exceed 20 percent of the total classified land.
Shipping or Transporting Tobacco Products.
Alternative nicotine products are removed from the definition of tobacco products prohibited to be ordered or purchased by mail or through the internet. "Alternative nicotine product" means any noncombustible product containing nicotine from any source that is intended for human consumption, whether chewed, absorbed, dissolved, or ingested by any other means.
Technical and Administrative Changes to Newly Enacted Retail Services.
The following technical and administrative changes are made to the retail services recently enacted under ESSB 5814:
Exemption.
Kindergarten through grade 12 (K-12) schools, school districts, and educational service districts are exempt from sales and use tax on all services recently enacted by ESSB 5814.
Transition Grace Period.
A transition period is established for taxpayers with qualifying existing contracts for service activities that have been reclassified to retailing activities. The transition period begins October 1, 2025, and ends March 31, 2026. Taxpayers with a qualifying existing contract may elect to treat the amounts received during the transition period as gross income subject to the retailing B&O tax and retail sales tax or the service and other activities B&O tax. If a taxpayer with a qualifying, existing contract makes no election during the transition period, the amounts received will be subject to the retailing B&O tax and retail sales tax.
Multiple Points of Use for Advertising Services.
Advertising services are added to the list of items eligible for the multiple points of use exemption. Businesses that purchase advertising services for both inside and outside Washington may claim the exemption by providing the seller with an exemption certificate.
Effective Date.
The technical and administrative changes related to ESSB 5814, including the transition grace period, apply both prospectively and retroactively to October 1, 2025.
Business and Occupation Surcharge on High Grossing Businesses.
Washington taxable income attributable to wholesale sales of food and food ingredients sold by wholesalers to retailers not under common ownership is exempted from the B&O 0.5 percent surcharge on high grossing businesses.
Payment Card Processing.
Clarifies that the gross income subject to the B&O tax under the payment card processing classification may be subject to the surcharge on specified financial institutions and the workforce education investment surcharge on advanced computing businesses. The clarification to the payment card processing classification applies both prospectively and retroactively to January 1, 2026.
Clarifying the Applicability of the Small Business Credit to Credit Unions.
It is clarified that the small business credit applies to the tax imposed on credit unions merging with a bank regulated by the DFI.
Incidental Use of Land Classified as Farm and Agricultural Land or Timberland.
Incidental use with respect to land classified as farm and agricultural must be compatible with commercial agricultural purposes. Incidental use with respect to land classified as timberland must be compatible with the commercial growing and harvesting of timber. Such incidental use for farm and agricultural land or timberland may include, but is not limited to, wetland preservation, a gravel pit, a farm woodlot, a produce stand, or an unpaved parking area necessary for the safe visiting or viewing of classified land.
Miscellaneous.
The following additional technical and administrative changes are made:
The substitute bill:
(In support) This is a DOR-requested bill that is a follow up to several bills passed last session that needed technical and administrative changes. Many taxpayers express the desire for the DOR's legislative guidance to be codified, and this bill accomplishes that. This bill is revenue neutral.
(Opposed) Section 26 of the bill will rescind the newspaper exemption if the state loses a current lawsuit. If this happens, it will put many newspapers in precarious monetary situations, since many papers lost money last year and things are not looking better this year. Washington should do all it can to save local and community papers. Section 26 of the bill should be stricken. If the state loses the current lawsuit, this will also result in a considerable expansion of the tax on advertising services and will tax entities that were never intended to be taxed.
(Other) There were unintended consequences from Senate Bill (SB) 5814, especially on schools because they rely on contracts. Schools with greater needs are especially affected. Schools are asking for a full exemption from these taxes. Schools requested the Governor veto the bill. Senate Bill 5814 forced arts organizations to charge sales tax on orchestra rehearsals. Section 26 of the bill should be removed. The legislature should allow the lawsuit to conclude and then the legislature should make policy changes, once it knows the outcome of the lawsuit.
Last session's passage of SB 5814 negatively affected counties since they are required to charge sales tax on live presentations, including conferences. This bill takes money away from counties and gives it to the state. Local governments should be exempted from the sales tax on live presentations.
This bill is a first step towards fixing the taxation of education. However, it does not address the taxation of certificate programs. Students enrolled in workforce training are still paying sales tax on their tuition.
(In support) Representative April Berg, prime sponsor; Steve Ewing, Department of Revenue; and Kate Armstrong, Department of Revenue.
Carrie Radcliff; Lloyd Mullen, The Port Townsend and Jefferson County Leader; Keith Shipman, Washington State Association of Broadcasters; Mike Nelson, Washington Society of CPA's; and Jessi Wasson, Inspire Washington.