Washington State Passes Significant Tax Increases Affecting Both Businesses And Consumers

Summary

Sweeping legislative changes are reshaping Washington state's tax landscape. On May 20, 2025, Washington's governor signed legislation significantly increasing the Business and Occupation (B&O) tax, sales tax, and more, imposing billions of dollars in additional tax on businesses and consumers. This alert addresses the following newly enacted laws:

• B&O Tax Rate Increases and New Surcharges (ESHB 2081)
• Sales Tax Expansion (ESSB 5814)
• Capital Gains and Estate Tax Modifications (SB 5314 and SB 5813)
• Elimination of Certain Tax "Preferences" (SB 5794)
• New Taxes on Electric Vehicle Credits and Luxury Items (HB 2077 and ESSB 5801)
• New B&O Tax Classification for Payment Card Processing (HB 2020)

As these changes roll out, businesses and consumers should consult with tax professionals to fully understand the implications.

Sweeping legislative changes are reshaping Washington state's tax landscape. On May 20, 2025, Washington's governor signed legislation significantly increasing the Business and Occupation (B&O) tax, sales tax, and more, imposing billions of dollars in additional tax on businesses and consumers. This alert addresses the following newly enacted laws:

• B&O Tax Rate Increases and New Surcharges (ESHB 2081)
• Sales Tax Expansion (ESSB 5814)
• Capital Gains and Estate Tax Modifications (SB 5314 and SB 5813)
• Elimination of Certain Tax "Preferences" (SB 5794)
• New Taxes on Electric Vehicle Credits and Luxury Items (HB 2077 and ESSB 5801)
• New B&O Tax Classification for Payment Card Processing (HB 2020)

As these changes roll out, businesses and consumers should consult with tax professionals to fully understand the implications.

B&O Tax Rate Increases and New Surcharges (ESHB 2081)

ESHB 2081 substantially changes Washington's B&O tax scheme, increasing rates and creating new surcharges.

Increased Tax Rate for Multiple B&O Tax Classifications

Beginning January 1, 2027, several B&O tax classifications will see permanent rate increases to 0.5% that are currently subject to a rate of 0.484% or 0.471%.¹

Increased Progressive Rates for the Service and Other Business Activities Classification

ESHB 2081 also creates a progressive tax rate structure for the Service and other business activities classification. In addition to a new 2.1% rate, the rate tiers will be based on the entire gross income of the affiliated group, rather than the taxpayer's own gross income. Specifically, the rates will be:

• 1.5% Taxpayers whose affiliated group's gross income was less than $1 million in the preceding calendar year or who are required to pay the Advanced Computing Surcharge pursuant to RCW 82.04.299.
• 1.75% Taxpayers whose affiliated group's gross income was $1 million - $5 million in the preceding calendar year.
• 2.1% Taxpayers whose affiliated group's gross income exceeded $5 million in the preceding calendar year.

Increased Rate for Gambling Classification

Increases the tax rate on contests of chance (gambling) to 1.8% for all such activities.

New High Grossing Business Surcharge

Beginning January 1, 2026,there will be a brand new surcharge on businesses with Washington taxable income exceeding $250 million in a calendar year. The Department of Revenue estimates that more than 400 businesses will be subject to the new surcharge. For purposes of calculating the $250 million, certain Washington taxable income is exempt.²

Increased Specified Financial Institution Surcharge

Beginning October 1, 2025, the Specified Financial Institution Surcharge increases from 1.2% to 1.5%. A specified financial institution is defined as a member of a consolidated financial institution group that reported on its consolidated financial statement for the previous calendar year annual net income of at least $1 billion not including net income attributable to noncontrolling interests, as the terms "net income" and "noncontrolling interest" are used in the consolidated financial statement.

Increased Advanced Computing Surcharge

Beginning January 1, 2026, the Advanced Computing Surcharge increases more than sixfold from 1.22% to 7.5%. Additionally, the original annual cap paid by all members of an affiliated group increases more than eightfold from $9 million to $75 million per year.

When originally enacted, the Department indicated this surcharge only applied to approximately four taxpayers in Washington state. The fiscal note included with ESHB 2081 does not indicate how many taxpayers will be impacted by this modification, which potentially impacts any affiliated group with total worldwide combined income over $25 billion. Importantly, the definition of "advanced computing" in RCW 82.04.299(1)(f)(i) is quite broad:

"[D]esigning or developing computer software or computer hardware, whether directly or contracting with another person, including: Modifications to computer software or computer hardware; cloud computing services; or operating as a marketplace facilitator as defined by RCW 8.08.0531, an online search engine, or online social networking platform."

We anticipate that the Department will assert that this surcharge increase impacts numerous taxpayers who may not even be aware of it.

Limiting the Investment Income Deduction

ESHB 2081 modifies the investment income deduction following the Washington Supreme Court's Antio decision. RCW 82.04.4281 is amended to explicitly provide that only "incidental" investment income may be deducted, defined as less than 5% of total gross income annually. Now, only certain taxpayers may deduct such investment income regardless of the 5% cap.³

Sales Tax Expansion (ESSB 5814)

ESSB 5814 significantly expands the Washington retail sales tax to impose tax on several service categories that happen to be digitally or electronically delivered, including Information Technology training services, technical support, and other similar services, data processing, and advertising services, to name a few.⁴ The retail sales tax would generally not apply to sales of these types of services between members of an affiliated group as defined in RCW 82.04.299(1)(f).

This Bill also expands the scope of "digital automated services" subject to sales tax by eliminating the "human effort" exclusion from the definition of "digital automated service."

Note: Sourcing Retail Sales of Services
Sales subject to sales tax are sourced on a transaction-by-transaction basis. Under existing law, services subject to sales tax are deemed to occur where the customer "makes first use" of the service. The broad expansion of sales tax to new services likely creates significant sourcing issues for taxpayers.

Capital Gains and Estate Tax Modifications (SB 5314 and SB 5813)

Significant changes to the state's capital gains tax are introduced in SB 5314, including a new tax credit for B&O taxes paid on the same property. The Bill also clarifies taxpayers cannot use any long-term capital gain loss carryforward generated from transactions prior to January 1, 2022 to offset Washington capital gains after the enactment of the tax on January 1, 2022.

Now, the Department can waive or cancel penalties on the delinquent payment of taxes if the taxpayer requests a waiver, the taxpayer has not been contacted by the Department for enforcement purposes regarding the reporting period covered by the waiver, and the taxpayer has timely remitted payment on all tax returns due for the preceding five years.

SB 5813 introduces a progressive rate structure for capital gains, setting a 7% rate for gains up to $1 million and 9.9% for those exceeding this threshold from tax year 2025 onwards. The estate tax exclusion also increases to $3 million for decedents post-July 1, 2025. Further, the Bill modifies the progressive tax rate structure of the estate tax by significantly increasing it with the top marginal rate of 35% for those decedents with Washington Taxable Estates exceeding $9 million.

Elimination of Certain Tax "Preferences" (SB 5794)

In a move purported to streamline tax "preferences," SB 5794 repeals several tax exemptions and deductions.⁵

New Taxes on Electric Vehicle Credits and Luxury Items (HB 2077 and ESSB 5801)

HB 2077 introduces a tax on the banking and sale of Zero-Emission Vehicle credits.

ESSB 5801 increases the motor fuel tax by 6 cents per gallon starting July 1, 2025. Additionally, starting January 1, 2026, this Bill creates two new luxury taxes for vehicles and noncommercial aircraft. For vehicles, the new 8% luxury tax applies to the value of a sale, lease, or transfer of certain vehicles exceeding $100,000. There are few exemptions from this tax including: commercial motor vehicles (RCW 46.25.010); and motor vehicles with a gross vehicle weight rating of greater than 10,000 pounds other than motor homes (RCW 46.04.305).

For noncommercial aircraft, the new additional 10% luxury tax applies to the sale, lease, or transfer exceeding $500,000.

New B&O Tax Classification for Payment Card Processing (HB 2020)

Effective January 1, 2026, HB 2020 creates a new B&O tax classification for those conducting payment card processing, imposing 3.1% on such activities. This new classification does not apply to (1) activities where the processor also operates or is affiliated with the payment network and makes payment to an affiliated financial institution; and (2) where the payment card processing company is also the issuer of the card.

Without changing the statutory definition of gross income, the Bill provides a B&O tax deduction for interchange fees, network fees, and portions of fees retained by other processors.

Footnotes

1. B&O tax classifications that will see permanent rate increases to 0.5%: Manufacturing; Retailing; Wholesaling; Extracting; Airplane/Component Manufacturing and Retailing; Radio/TV Broadcasting; Extracting or Processing for Hire; Operating a Cold Storage Warehouse or Storage Warehouse; Printing Materials Other Than Newspapers; Insurance Agents; Government Contractors; Radioactive Waste Clean-Up.

2. Certain Washington taxable income exempt from new high grossing business surcharge:

• Businesses subject to the additional financial institution surcharge, RCW 82.04.29004;
• Businesses subject to the Advanced Computing Surcharge, RCW 82.04.299;
• Manufacturers taxable under RCW 82.04.240;
• Manufacturers or processors for hire for semiconductor materials taxable under RCW 82.04.2404;
• Manufacturers for semiconductor materials taxable under RCW 82.04.241;
• Businesses reporting under RCW 82.04.260, which includes manufacturers and processors of various foods and by-products, research and development organizations, travel agents, stevedoring and associated activities, insurance producers, surplus line brokers, title insurance agents, hospitals, commercial airplane activities, timber product activities, and canned salmon processors;
• Commercial airplane activities, RCW 82.04.2602;
• Alternative jet fuel, RCW 82.04.290;
• Aluminum smelters, RCW 82.04.2909;
• Businesses manufacturing solar energy systems or solar grade silicon, silicon solar waters, silicon solar cells, thin film solar devices, or compound semiconductor solar wafers to be used exclusively in components of such systems, RCW 82.04.294(1);
• Businesses wholesaling or retailing products described in RCW 82.04.240, 82.04.2404, 82.04.241, 82.04.260, 82.04.2602, 82.04.287, 82.04.2909, and 82.04.294(1);
• Sales of food and food ingredients pursuant to RCW 82.08.0293;
• Sales of food purchased under SNAP described in RCW 82.08.297;
• Sales of prescription drugs described in RCW 82.08.0281;
• Washington taxable income attributable to the wholesale or retail sale of petroleum products by a person who is both located in a state other than Washington and the owner of such material processed for it in Washington by an affiliated processor for hire subject to the rate in RCW 82.04.280(1)(c);
• Income for which a credit is allowed for persons taxable on multiple activities, RCW 82.04.440;
• Persons engaged in business primarily as a farmer or eligible apiarist, RCW 82.04.213;
• Income for wholesale and retail transactions of fuel, RCW 82.38.020.

3. Persons that can still take investment income deduction. Nonprofit organizations; Collective investment vehicles (the Bill provides that this new term must meet specifically listed criteria, to include accepting unrelated persons as its investors); Retirement accounts and recipients of distributions therefrom; Family investment vehicles and recipients of distributions therefrom (The Bill defines this new term as: (1) estate of any decedent; (2) intervivos or testamentary trusts, with certain limitations; (3) qualified tuition program pursuant to IRC § 529; and (4) a coverdell education savings account pursuant to IRC § 530).

4. Services affected by sales tax expansion. Information Technology training services, technical support, and other similar services; Data Processing; Custom website development services; Investigation, security services, security monitoring services, and armored car services; Temporary staffing services; Custom software and customization of prewritten computer software; Advertising services, including all digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements; Live presentations including, but not limited to, lectures, seminars, workshops, or courses where participants attend either in-person or via the internet or telecommunications equipment that allows audience members and the presenter or instructor to give, receive, and discuss information with each other in real time.

5. Elimination of certain preferences. If a credit union organized under the laws of Washington merges or acquires a bank that is regulated by the department of financial institutions, the credit union no longer qualifies for the exemption from B&O tax and is subject to tax equal to the gross income of the credit union multiplied by 1.2%; Businesses renting or leasing individual storage space at self-service storage facilities as defined in RCW 19.150.010 will now generally be subject to the Service and other B&O tax classification; The preferential rate for title insurance agents is repealed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.