Washington State Sales Tax – Technology Companies

Effective October 1, 2025, Washington State will significantly broaden its retail sales tax base to include a wide range of technology-related services and products. Under Engrossed Substitute Senate Bill (ESSB) 5814, many services and products previously exempt from sales tax—such as information technology (IT) services, custom website development, custom software, and certain digital automated services (DAS)—will now be subject to retail sales tax and the retailing Business & Occupation (B&O) tax.

1. What Is the New Tax?

• ESSB 5814 amends the definition of “retail sale” in RCW 82.04.050 to include various technology services and products.
• Tax Rates:
  • Retail Sales Tax: 6.5% state rate, plus local rates (total can exceed 10%).
  • Retailing B&O Tax: 0.471% of gross receipts (lower than the “service and other activities” B&O tax).
• Responsibility: The tax is imposed on the consumer, but sellers must collect and remit the tax to the Washington Department of Revenue (DOR).

2. What Technology Services and Products Are Now Taxable?

A. Information Technology Services

• IT training services
• Technical support
• Network operations and support
• Help desk services
• In-person training (hardware/software)
• Data entry and data processing
• Other IT support functions

B. Custom Website Development Services

• Design, development, and support of websites, regardless of delivery method

C. Sales of Custom Software and Customization of Prewritten Software

• Charges for access and use of custom software
• Customization of prewritten software
• Applies to physical, electronic, or remote delivery (including SaaS)
• Includes subscription, per-use, per-user, or per-license charges

D. Modification of Digital Automated Services (DAS) Exclusions

• Narrows previous exclusions for services involving human effort, live presentations, advertising, and data processing
• These services are now taxable unless another exemption applies
• Note: Telehealth and telemedicine services remain excluded from DAS and are not subject to sales tax

E. Other Notable Categories

• Investigation, security, and armored car services (e.g., background checks, security monitoring, event security)
• Temporary staffing services (except those provided to hospitals)
• Advertising services (digital and non-digital, with exceptions for newspapers, print, radio, TV, and out-of-home advertising)

F. Exemptions and Special Rules

• Sales between members of an affiliated group (as defined in RCW 82.04.299(1)(f)) are generally exempt
• Temporary staffing services provided to hospitals are not subject to the new tax

3. Effective Date

• The new tax applies to sales occurring on or after October 1, 2025.
• Technology companies should review their offerings and contracts to determine which transactions will be subject to the new tax from this date forward.

4. Administrative Steps for Compliance

A. Registration and Tax Classification

• Businesses not previously reporting under “retailing” B&O, retail sales, and local sales tax must update their excise tax return profiles with the DOR.
• Update can be made via the DOR’s online portal (My DOR).

B. Tax Collection and Remittance

• Collect sales tax from customers at the time of sale.
• Remit collected tax to the DOR.
• Use destination-based sourcing to determine the applicable sales tax rate.

C. Invoicing and Documentation

• Invoices must separately state the sales tax collected.
• Update billing systems to ensure accurate tax calculation and disclosure.

D. Reporting

• Report gross income from newly taxable services under the “retailing” B&O, retail sales, and local sales tax classifications on the excise tax return.
• Maintain records to substantiate taxability and any applicable exemptions (e.g., sales to affiliates).

E. Additional Guidance

• The DOR will provide further guidance, including special notices, FAQs, and interim guidance statements. Monitor the DOR’s website for updates.

5. Key Considerations for Technology Businesses

• Contract Review: Amend contracts as needed to address new tax obligations, including pricing and tax collection provisions.
• Customer Communication: Notify customers about new tax charges on invoices for affected services and products.
• Bundled Services: Ensure proper allocation and tax treatment for bundled offerings (some taxable, some not).
• Out-of-State Sales: Analyze whether Washington sales tax applies to services provided to out-of-state customers based on sourcing rules.
• Affiliated Group Transactions: Confirm exemption eligibility for affiliate transactions and maintain supporting documentation.
• Potential Legal Challenges: Be aware that the new tax, especially on digital advertising, may face legal challenges under federal law. Compliance is required unless and until a court rules otherwise.

Conclusion

ESSB 5814 marks a significant change in Washington’s taxation of technology services and products. Technology companies should act promptly to assess the impact, update systems and contracts, and ensure compliance by October 1, 2025. For further guidance, consult your tax advisor or contact the Washington Department of Revenue.