Upcoming Sales Tax Changes in Washington State: ESSB 5814 Effective October 1, 2025

Overview

On May 20, 2025, Governor Bob Ferguson signed ESSB 5814 into law. Beginning October 1, 2025, Washington State will significantly expand its retail sales tax to include a range of services previously exempt—this includes many services widely used by businesses in the digital, advertising, IT, and events sectors.

The Washington Department of Revenue (DOR) has confirmed that services newly subject to retail sales tax include:

• Advertising services

• Live presentations (in-person or virtual)

• Information technology services

• Custom website development

• Custom software and customization of prewritten software

• Temporary staffing

• Investigation, security, and armored car services

Moreover, ESSB 5814 removes several exclusions from the definition of Digital Automated Services (DAS)—this includes removing exemptions for human-effort-based services, live presentations, advertising, and data processing. An exception was carved out permitting an exclusion for telehealth/telemedicine services.

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Who Is Affected?

1. Advertising Services

Now taxable are digital advertising services—including online campaigns, search engine marketing, campaign evaluation, graphic design, ad placement, lead generation, and website traffic analysis. Traditional channels like print, radio, broadcast, and billboards remain exempt—but this carve-out raises legal concerns under the federal Internet Tax Freedom Act.

2. Custom Web Design & Custom Coding

Services such as custom website development, SaaS solutions, custom software licensing, or software customization—regardless of delivery method—are now subject to sales tax. This includes cloud-based custom software, modifications to existing software, and access or subscription-based services.

3. Live Presentations

Live presentations—whether in-person or real-time virtual events such as webinars, workshops, or training sessions—are now taxable. Some exceptions apply: courses offered by public/private K–12 institutions or accredited higher education institutions are excluded.

Additional Affected Categories

For completeness, ESSB 5814 also taxes: IT support and training, temporary staffing, security-related services, and armored car services.

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Revenue Classification & Transitional Safeguards for Existing Contracts

1. Tax Classification Shift
These newly taxable services will be taxed under the retailing B&O tax classification (around 0.471%), replacing the higher “Service and Other Business Activities” classification (1.5%–1.75%). Notably, the new classification now also subjects these services to retail sales tax.

2. Transitional Provisions for Existing Contracts
If a contract was signed and executed before October 1, 2025, and the services fall under the newly taxable categories:

• If payment was made before October 1: The transaction is treated as non-taxable (under prior B&O rules).

• If payment occurs after October 1, without changes to the agreement: The prior tax treatment continues through March 31, 2026. Starting April 1, 2026, the new retailing B&O classification and sales tax must apply.

• If the contract is materially altered after October 1: The entire contract becomes subject to retailing B&O and sales tax at that point.

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Compliance Checklist: What Businesses Need to Do Now

For Service Providers (e.g., Advertisers, Web Developers, Event Organizers):

• Inventory Services: Identify offerings now taxable under ESSB 5814.

• Register for Sales Tax: Businesses—WA-based or those meeting economic nexus thresholds—must register to collect retail sales tax.

• Update Systems: Modify billing, accounting, and contract systems to include sales tax on affected services.

• Train Teams & Inform Customers: Ensure staff understand changes, communicate new tax line items clearly to clients.

• Evaluate Contracts: Determine status of existing contracts and assess whether to adjust or keep terms to benefit from the transition provisions.

• Monitor DOR Guidance: The DOR is expected to issue Interim Guidance Statements (IGSs) in September 2025 on key topics like contracts, advertising, IT services, web development, live presentations, etc.

For Purchasers (Businesses Buying These Services):

• Budget for Higher Costs: Expect sales tax to be added to invoices starting October 1.

• Confirm Vendor Tax Treatment: Ensure vendors collect sales tax where required or self-assess use tax if not collected.

• Review Contracts Carefully: Contracts signed before October 1 may benefit from the transitional period—assess whether you might delay or accelerate service delivery/payment accordingly.

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Legal and Policy Implications

• Legal Risk: Law experts and tax analysts anticipate legal challenges, as ESSB 5814 may conflict with the Internet Tax Freedom Act by targeting digital advertising while exempting offline equivalents.

• Economic Impact: Businesses may face enforcement challenges, system upgrades, competitive disadvantages, and increased costs. Tax on services typically used as business inputs may ultimately affect pricing and operations.

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Conclusion

ESSB 5814, effective October 1, 2025, marks a sweeping change in Washington State’s tax landscape—encompassing advertising, custom web and software work, live presentations, IT services, and more. For businesses in these industries—advertisers, web design/coding firms, presentation producers—this shift means:

• New sales tax collection duties

• Lower B&O tax rate—but with new sales tax liability

• Important transitional rules for existing contracts

• Upcoming guidance that businesses should closely monitor

• Potential legal and operational complexities

Pivotal Forensic Accounting & Audits can help clients assess exposure, implement compliance processes, and review contracts during this transition. Please let us know if you’d like a tailored workshop, compliance audit, or deeper guidance on ESSB 5814’s implications.

Sources

• Washington State Department of Revenue – “Services Newly Subject to Retail Sales Tax” (2025 Interim Guidance)

• Washington State Department of Revenue – “Interim Guidance Statement Regarding Contracts Existing Prior to October 1, 2025”

• Washington Research Council – “Questions About ESSB 5814 and Service Tax Expansion”

• Tri-City Regional Chamber of Commerce – “Washington to Tax More Services Starting October 2025”

• Sales Tax Institute – “Washington’s Senate Bill 5814 Expands Sales Tax to Digital Services”

• Holland & Knight – “Washington State Budget Triggers Higher Business Capital Gains and Service Tax Changes”

• EisnerAmper – “Washington State Sales Tax Expansion”

• T. Nguyen Law – “New Services Now Taxed Under Retail Sales Tax Effective October 1, 2025”

• Inside SALT – “Analysis of Senate Bill 5814 and Digital Advertising Taxes”