Governor Ferguson Signs Law Expanding Sales Tax and Raising B&O Rates to Boost State Revenue

Overview

On May 21, 2025, Washington Governor Bob Ferguson signed into law a set of fiscal measures aimed at increasing state revenue through the expansion of the sales and use tax base and an increase in Business and Occupation (B&O) tax rates. These changes reflect the state’s continued efforts to modernize its tax code and generate sustainable funding for public programs, infrastructure, and education.

https://taxnews.ey.com/news/2025-1125-washington-governor-signs-laws-to-expand-sales-tax-base-and-increase-business-and-occupation-tax-rates

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Key Provisions

1. Expansion of the Sales and Use Tax Base

• Effective October 1, 2025, the state’s retail sales tax will apply to additional services, many of which were previously exempt.
• This includes:
  • Digital automated services
  • Certain professional and consulting services
  • Prewritten software accessed remotely
• The intent is to reflect changes in consumer behavior and the digital economy by taxing services that are now integral to business and personal activity.

2. B&O Tax Rate Increases

• The legislation increases the B&O tax rates for several categories:
  • Service and other activities category will see a rate hike from 1.5% to 1.8%.
  • Financial institutions will face a surtax, bringing their total B&O tax rate to 2.7%.
• These increases are intended to target high-revenue industries while maintaining lower rates for small businesses and manufacturers.

Rationale Behind the Legislation

• Washington’s tax system is heavily dependent on sales tax and does not impose a personal income tax.
• As spending patterns shift from goods to services and more economic activity moves online, the tax base was narrowing.
• The expansion ensures that modern business models—especially in tech and professional services—contribute their fair share.
• The B&O tax increase aims to balance revenue needs without disproportionately affecting lower-income households.

Revenue Impact and Use

• The combined changes are expected to generate hundreds of millions in new revenue over the next biennium.
• Funds will be directed toward:
  • Public education
  • Infrastructure projects
  • Homelessness and housing initiatives
  • Environmental and climate resilience programs

Implications for Businesses

• Businesses offering newly taxed services will need to adjust billing systems, register for collection, and educate clients about the new tax liabilities.
• Companies operating in the digital services space and financial sectors should expect higher tax compliance obligations.
• Tax planning and reclassification of services may be necessary to manage the increased cost burden.

Next Steps

• Businesses are encouraged to consult with tax professionals or legal advisors to:
  • Understand how the expanded tax base affects them
  • Prepare for the October 1, 2025, implementation date
  • Update accounting systems accordingly

Conclusion
This legislative package marks a major shift in Washington’s tax structure. By broadening the tax base and increasing B&O rates for high-margin industries, the state seeks to secure a more equitable and sustainable revenue stream. Businesses—especially in the digital, professional services, and financial sectors—should act now to prepare for these significant changes.