What Small Business Owners Need to Know about Washington State Tax Changes

💡 Heads up: Financial institutions face a surcharge increase to 1.5% (up from 1.2%) effective October 1, 2025. Businesses over $250 million in gross receipts face an additional 0.5% surcharge starting January 1, 2026.Washington State has undergone a sweeping overhaul of its tax system, and if you own a small business here, the changes are significant enough that “I didn’t know” is not something you want to say to the Department of Revenue.

Signed into law as part of Senate Bill 5814 (ESSB 5814) and House Bill 2081, these changes hit in waves starting October 1, 2025, with more rolling in through 2027. Here’s what you need to know.

New: Sales Tax on Services

This is the big one. Starting October 1, 2025, Washington expanded its retail sales tax to cover many services that were previously untaxed. If your business provides any of the following, you may now be required to collect and remit sales tax:

• Information technology (IT) services — including help desk, technical support, network operations, and data entry
• Custom software development and custom website development
• Temporary staffing services
• Investigation, security, and security monitoring services
• Advertising services
• Live presentations

For many service-based small businesses, this is a first — and it requires updating your invoicing, accounting software, and client contracts to ensure you’re collecting the right amount.

💡 Existing contracts: If you had a contract signed before October 1, 2025, and the services continue after that date, you had relief until April 1, 2026. As of now, all existing contracts are fully subject to the new sales tax rules. If your contract was modified after October 1, 2025, it lost “existing contract” status immediately.

B&O Tax Rate Increases for Service Businesses

Washington’s Business & Occupation (B&O) tax also got more expensive for service-oriented businesses. Under the “Service and Other Activities” B&O classification, rates are now tiered based on your prior year’s gross income in that category:

• Under $1 million in gross income: rate stays at 1.5% (no change)
• $1 million to $4.99 million: rate increases to 1.75%
• $5 million or more: rate increases to 2.1%

These tiers apply to your affiliated group’s combined income — not just your individual business entity — so if you have related entities, they count together.

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More B&O Rate Changes Coming in 2027

Starting January 1, 2027, B&O rates for manufacturing, wholesaling, retailing, and extracting businesses will increase from roughly 0.48% to 0.5%. It’s a small bump, but worth factoring into your long-range financial planning now.

Progressive Capital Gains Tax

Washington’s capital gains excise tax is now graduated. Gains under $1 million remain taxed at 7%, but anything above $1 million jumps to 9.9%. This change applies retroactively to January 1, 2025, meaning even gains from earlier in 2025 are subject to the higher rate.

If you sold your business, commercial property, or other high-value assets this year, this matters. And if you’re planning a sale in the near future, the timing of the transaction could have a meaningful tax impact.

💡 Action item: Talk with us before completing any major asset sale. Structuring and timing can significantly affect your tax exposure.

King County: New 0.1% Sales Tax for Public Safety

If your business is located in King County and makes taxable sales, there’s one more change: a new 0.1% sales and use tax dedicated to public safety took effect October 1, 2025, with collections beginning January 2026. Make sure your point-of-sale system and accounting software reflect the updated combined rate.

Seattle Businesses: Proposition 2 B&O Changes

Seattle voters passed Proposition 2 in November 2024, bringing changes to the city’s B&O tax effective January 1, 2026. Here’s what changed:

• Small businesses with less than $2 million in gross receipts owe no Seattle B&O tax.
• Businesses over $2 million pay only on receipts above that threshold — a new $2 million standard deduction.

Note that Seattle B&O tax is separate from the Washington State B&O tax and must be filed independently.

What Should You Do Right Now?

• Review your services: Are you now required to collect sales tax? If so, update your invoices and accounting system immediately.
• Know your B&O tier: Pull your prior year’s gross income under the Service and Other Activities classification. If you’re approaching $1 million or $5 million, plan accordingly.
• Check your contracts: If you have ongoing service agreements, confirm they’ve been properly transitioned to the new tax treatment.
• Plan for capital gains: If a business sale is on your horizon, let’s talk strategy now.

We’re Here to Help

Washington’s tax landscape just got a lot more complicated - and it’s still evolving! Our team stays on top of DOR guidance so you don’t have to. If you have questions about how these changes apply to your business specifically, give us a call.