Recent state and federal legislative changes introduce significant updates to Washington Business & Occupation (B&O) rates, sales tax scope, capital gains, and federal pass-through rules.
1. Increased B&O Tax Rates & Surcharges (HB 2081)
- Service Rate Hikes: Effective October 1, 2025, the B&O rate for businesses in “services and other activities” earning over $5 million gross increases from 1.75% to 2.10%.
- High-Revenue Surcharges: Starting January 1, 2026, the advanced computing surcharge rises to 7.5%, and an additional 0.5% surcharge applies to Washington taxable income over $250 million.
- General Increases (2027): Beginning January 1, 2027, standard manufacturing, wholesaling, and retail B&O rates rise to a flat 0.5%.
2. Retail Sales Tax Expansion to Services (ESSB 5814)
Effective October 1, 2025, Washington expands the definition of a “retail sale” to include several previously exempt B2B and professional services:
- Custom software development and custom website creation.
- Information technology (IT) support and consulting.
- Advertising services.
- Investigation, security, and temporary staffing services.
Action: Service providers statewide must collect and remit retail sales tax and reclassify these revenue streams under the retailing B&O rate.
3. Dedicated B&O Classification for Payment Processors (HB 2020)
- New 3.1% B&O Rate: Effective January 1, 2026, payment card processors are moved into a dedicated 3.1% B&O tax category.
- Interchange Deductions: To offset the higher gross rate, processors can deduct interchange fees, network fees, and third-party processor costs from gross receipts.
4. Capital Gains Surcharge Above $1M (SB 5813)
- Top Rate Increase: Washington’s 7% capital gains excise tax increases to 9.9% on net long-term capital gains exceeding $1 million (retroactive to January 1, 2025).
- Real Estate & Retirement Excluded: The tax continues to apply primarily to the sale of corporate stock, business interests, and financial assets, excluding real estate and qualified retirement accounts.
5. Sunsetting the Employee Ownership Tax Credit (SHB 2047)
- The B&O tax credit program supporting conversions to worker cooperatives, Employee Ownership Trusts (EOTs), or ESOPs is being phased out.
- Credits must be earned by June 30, 2025, and claimed before July 1, 2026.
6. Excise Tax on Large-Scale ZEV Credits (SHB 2077)
- A specialized excise tax applies to manufacturers banking or selling large volumes (25,000+ per model year) of Zero-Emission Vehicle (ZEV) credits.
- While aimed at high-volume automotive producers, clean-energy businesses should monitor supply-chain cost pass-throughs.
7. Federal Pass-Through Deduction (OBBBA)
The federal Qualified Business Income (QBI) 20% deduction under Section 199A was made permanent for pass-through entities (LLCs, S-Corps, partnerships, and sole proprietors).
- Pros: Preserves significant income tax savings for eligible small business owners and stabilizes long-term tax planning.
- Cons: Strict phase-out thresholds apply based on income levels and Specified Service Trades or Businesses (SSTBs), skewing benefits toward capital-intensive or high-payroll firms.
- Washington Context: Washington has no individual personal income tax, so QBI deductions directly impact federal liability while state-level B&O gross revenue taxes remain unaffected.
Action Checklist for Washington Businesses
| Focus Area | Required Action |
| Invoicing & Point-of-Sale | Update billing systems to collect local sales tax on newly taxable services (IT, advertising, custom software). |
| Gross Receipts Accounting | Segregate revenue streams to ensure correct categorization under newly adjusted B&O tiers. |
| Entity Planning | Model out S-Corp vs. C-Corp structures to evaluate federal QBI optimization against rising state-level service B&O rates. |
| Capital Gains Strategy | Structure equity exits, installment sales, or trust planning to manage the 9.9% bracket on gains above $1M. |
| ESOP Deadlines | File pending employee-ownership B&O credit claims before the July 1, 2026 deadline. |
Contact Huddleston Tax CPAs for personalized tax planning, compliance audits, and entity restructuring tailored to Washington businesses.