Washington State: Interim guidance on newly taxable services
The state has provided transitional relief for contracts executed before October 1, 2025.
Washington State enacted significant tax changes through Engrossed Substitute Senate Bill 5814 (ESSB 5814), effective October 1, 2025. The new legislation expands the definition of "retail sales" to include a broad range of services, making them subject to the state's retail sales and use tax. Key services that are now taxable include advertising, custom software and website development, various information technology (IT) services, investigation and security services, live presentations, and temporary staffing services. Consequently, the gross receipts from these activities will now generally be classified under the "Retailing" category for the state's business & occupation (B&O) tax.
The Washington Department of Revenue issued interim guidance detailing the application of the new law. As a member of the Streamlined Sales and Use Tax Agreement (SSUTA), Washington will apply a destination-based sourcing framework, generally taxing services where they are received or first used by the purchaser. The guidance provides specific sourcing rules for each new service category, such as sourcing advertising dissemination services to the audience's location and temporary staffing to where the work is supplementing the customer's workforce. The guidance also clarifies the use of the Multiple Points of Use (MPU) exemption, rules for resale, and the tax treatment for intercompany transactions between affiliated members.
The state has provided transitional relief for contracts executed before October 1, 2025. If the contract is paid for before this date, the new sales tax does not apply. For services provided under existing contracts when payment occurs on or after October 1, 2025, businesses may continue to report under the old tax classifications until March 31, 2026. However, any material alteration to an existing contract after the effective date will immediately subject the services to the new retail sales tax.
Read an October 2025 report prepared by KPMG LLP