Washington State has enacted significant tax reforms under Governor Bob Ferguson’s Washington’s tax landscape has changed significantly over the past year.
Several tax changes passed by the Washington Legislature in 2025 are now in effect, including changes to the state’s Business & Occupation (B&O) tax, a new surcharge on very large businesses, and an expansion of Washington’s retail sales tax to cover certain services that previously weren’t subject to sales tax.
For small business owners, the most important thing isn’t simply knowing that “taxes went up.” It’s understanding which changes actually apply to your business and whether you need to change how you price, invoice, collect sales tax, or plan for your tax liability.
What Changed With Washington’s B&O Tax?
Washington’s B&O tax is unusual because it is generally based on gross receipts rather than profit.
That means a business can owe B&O tax even when its profit margin is relatively small or when it has an otherwise unprofitable year.
In 2025, Washington enacted legislation modifying B&O tax rates for a number of business activities. One of the more significant changes affects businesses reporting under the Service and Other Activities classification.
Beginning October 1, 2025, that classification was divided into three tiers based on the business’s taxable income from the prior calendar year:
- Less than $1 million: 1.5%
- $1 million to less than $5 million: 1.75%
- $5 million or more: 2.1%
Certain businesses, including hospitals and real estate brokers, are excluded from the higher tiers.
The important point for a small business owner is that the applicable rate can depend on what your business does and how much taxable income it had in the prior year.
So don’t assume that another business’s B&O rate is the same as yours.
There’s Also a New Tax for Very Large Businesses
Washington also created a 0.5% surcharge on certain Washington taxable income above $250 million.
The surcharge began January 1, 2026 and is scheduled to expire December 31, 2029.
For the overwhelming majority of small businesses, this isn’t something to worry about.
The threshold is extremely high. But it’s worth mentioning because it is part of the broader B&O changes and demonstrates that Washington’s 2025 tax legislation wasn’t limited to small-business rate changes.
There are also specific exemptions and exclusions from the surcharge, so even businesses above the threshold need to determine whether particular income is subject to it.
Washington Now Taxes Certain Services
For many businesses, this is potentially the bigger practical change.
Effective October 1, 2025, Washington expanded the definition of taxable retail sales to include a number of services that previously weren’t subject to retail sales tax.
The newly taxable categories include services such as:
- Information technology services
- Custom website development
- Custom software and software customization
- Advertising and marketing services
- Certain live presentations
- Temporary staffing
- Security and investigation services
The Washington Department of Revenue estimates that the change affects more than 90,000 businesses.
For a service business that has never collected sales tax before, this can represent a significant change to how invoices and accounting systems need to work.
IT and Website Businesses Need to Pay Attention
Technology businesses are one of the groups that need to look particularly closely at the new rules.
Washington now generally treats a wide range of IT services, custom website development, and certain software services as retail sales subject to retail sales tax.
Examples can include technical support, help desk services, network support, implementation services, custom website development, custom software, and customization of prewritten software.
The rules can get complicated when a business provides multiple types of services on the same engagement.
For example, a company might provide consulting, software implementation, ongoing support, and custom development under one contract. Whether and how each component is taxed can depend on exactly what is being provided.
If your business provides technology services, don’t simply assume that “we’re a consulting company” means you don’t need to collect sales tax.
Advertising and Marketing Services Are Now Taxable, Too
Advertising services were also brought into Washington’s retail sales tax system beginning October 1, 2025.
The state’s definition is broad. It can include activities such as advertising strategy, search engine marketing, online referrals, lead-generation optimization, campaign planning, acquisition of advertising space, and evaluating website traffic to measure advertising effectiveness.
That means some businesses that have historically invoiced clients without sales tax may now need to add it.
For agencies and marketing firms, this can be especially important because a single client engagement may contain several different types of services.
Washington’s Department of Revenue is also currently involved in legal proceedings concerning certain advertising services, but the department says it must enforce the law as enacted while those issues are being considered.
Sales Tax Isn’t the Same as Your Business’s Income
One important distinction for business owners is that sales tax you collect from customers isn’t revenue that belongs to you.
If you charge a customer $10,000 for a taxable service and collect $1,000 in sales tax, you’re generally collecting that $1,000 on behalf of the state.
Don’t treat the entire $11,000 as business revenue available to spend.
This sounds obvious, but businesses that are new to collecting sales tax can accidentally create cash-flow problems by spending money they’ve collected for the state.
Your accounting system should make it clear how much you’ve collected and how much you owe.
Will These Taxes Increase Prices?
Possibly.
Businesses have several ways to respond to higher taxes and new collection requirements.
A business might absorb some of the cost, raise prices, reduce other expenses, adjust its service mix, or pass some or all of the additional cost on to customers.
There’s no universal answer.
A business with strong margins may be able to absorb a modest increase. A business operating on thin margins may have very little room to do so.
The important thing is to understand your actual numbers before making the decision.
If your costs increase but your pricing doesn’t, make sure you know exactly what that does to your gross margin and profitability.
What Should Seattle Small Business Owners Do?
The changes apply throughout Washington, so this isn’t strictly a Seattle tax issue.
However, Seattle-area businesses are likely to encounter the same statewide B&O and sales-tax changes as businesses elsewhere in Washington.
The first step is to determine which tax classifications apply to your business.
Don’t assume that because you haven’t collected sales tax historically, you don’t need to start now.
If your business provides IT, website development, advertising, software, staffing, security, or another newly taxable service, review the applicable Washington Department of Revenue guidance and determine whether your invoices need to change.
Review Your Invoices and Contracts
If your services became subject to sales tax on October 1, 2025, your billing process may need to change.
That means reviewing:
- Client invoices
- Accounting software
- Sales tax settings
- Contracts and service agreements
- Pricing
- Customer communications
- Bookkeeping procedures
Existing contracts can create additional questions. Washington has issued specific guidance addressing contracts that existed before October 1, 2025, so businesses shouldn’t assume every existing agreement is treated identically to a new engagement.
If you’re still billing clients the same way you did before October 2025, it’s worth taking a second look.
Don’t Forget About B&O Tax When Looking at Profit
One of the biggest mistakes a Washington business owner can make is looking only at federal income tax.
A business might have a relatively modest federal taxable income while still owing Washington B&O tax because the B&O system generally looks at gross business income rather than net profit.
That makes margin management particularly important.
Imagine two businesses each generate $1 million in revenue.
One has $700,000 in expenses.
The other has $950,000 in expenses.
Their federal income-tax situations could look dramatically different, but both can still have Washington B&O obligations based on their applicable tax classification.
This is one reason Washington business owners need to look at state tax planning separately from federal income tax planning.
What About Individuals Moving to Washington?
Washington doesn’t impose a traditional individual state income tax on wages, which remains an important consideration for people evaluating where to live and work.
But that doesn’t mean Washington residents are completely insulated from state and local taxes.
Sales taxes, property taxes, business taxes, capital gains taxes for qualifying long-term capital gains, and other taxes and fees can all affect an individual’s overall financial picture.
For someone considering a move to Washington, the better question isn’t simply:
“Does Washington have an income tax?”
It’s:
“What will my total tax and cost-of-living picture look like after I move?”
That answer can vary considerably depending on income, home ownership, investments, business ownership, and spending patterns.
What Business Owners Should Do Now
You don’t necessarily need to overhaul your entire business because Washington changed its tax rules.
But you should know how the changes affect your particular business.
Start by reviewing your B&O tax classification and applicable rate. If you provide services that became taxable under ESSB 5814, verify that you’re correctly collecting and remitting sales tax. Review your invoices and accounting software. And make sure your bookkeeping separates sales tax collected from actual business revenue.
It’s also worth reviewing pricing.
If a service is now subject to sales tax, the sales tax itself isn’t necessarily a reason to raise your underlying price. But if your business is absorbing additional administrative costs or higher B&O obligations, that may be a good reason to revisit your pricing strategy.
The Bottom Line
Washington’s 2025 tax legislation represents a meaningful change for businesses, particularly service businesses that previously operated outside the state’s retail sales tax system.
B&O tax rates changed, a new high-grossing business surcharge began in 2026, and Washington expanded sales tax to a number of services including IT, custom website development, advertising, certain software services, temporary staffing, and security services.
For small business owners, the takeaway isn’t simply that “Washington raised taxes.”
It’s that the rules governing how you calculate, collect, and report state taxes may have changed.
If you haven’t reviewed your Washington tax situation since these changes took effect, now is a good time to do it. A review of your B&O classification, sales-tax obligations, pricing, contracts, and bookkeeping can help you avoid an unpleasant surprise — particularly if your business provides services that became taxable beginning October 1, 2025.
And as always with Washington’s tax system, the details matter. Two businesses with the same revenue can have very different tax obligations depending on what they sell, how they sell it, and where their customers are located.