NEWS & RESOURCES

Authored by: Charlie Miracle, CPA, Financial Advisor

Major Changes to Washington State’s B&O Tax and Sales Tax: What Businesses Need to Know

Washington State relies on a combination of sales tax and the Business & Occupation (B&O) tax to fund government operations. While sales tax is paid directly by consumers on certain purchases, B&O tax is paid by businesses based on their gross revenue, rather than their net income or profits.

Recently, several bills have been signed into law that significantly change sales tax rates and B&O tax rates across various industries. Business owners must stay informed to ensure compliance with the new tax laws and avoid unnecessary penalties.

New Sales Tax Laws: Expanding Taxable Services

Senate Bill 5814 introduces sales tax on services that were previously exempt. Businesses in the following industries may need to start collecting sales tax:

• IT training services
• Custom website design
• Live training seminars
• Investigation services
• Temporary staffing services

Additionally, the bill eliminates a key exemption that previously applied to services transferred electronically using software applications. This means that certain professional services, including accounting, may soon be subject to sales tax, which could have widespread implications for service providers.

Adjustments to B&O Tax Rates

House Bill 2081 makes notable adjustments to Washington’s B&O tax structure, including:

• Increasing the B&O tax rate for retailing from 0.484% to 0.5%.
• Establishing a new Service and Other Activities tax rate of 2.1% for businesses with more than $5.0 million in annual gross revenue.
• Clarifying the taxation of investment income, specifically:
  • Businesses that earn 5% or less of their revenue from investments will not owe B&O tax on that income.
  • Nonprofits, foundations, private colleges, and other organizations with endowment funds remain exempt from B&O tax on investment income.

These changes are particularly relevant for service-based businesses and large corporations that rely on investment income as part of their financial portfolio.

Increased B&O Tax Rates for Manufacturing and Rentals

Senate Bill 5794 raises B&O tax rates for certain manufacturing industries, including:

• Seafood product manufacturing
• Fruit and vegetable canning
• Dairy product manufacturing
• Perishable meat product manufacturing

Additionally, this bill removes the B&O tax exemption for the rental and lease of individual storage space at self-storage facilities, making self-storage businesses subject to increased taxation.

Fuel and Rental Car Tax Increases

Senate Bill 5801 introduces new fuel and vehicle-related taxes, including:

• An increase in gas tax to $0.554 per gallon in July 2025, with an inflation adjustment in July 2026.
• Sales tax on rental cars will rise to 11.9% in 2026, before decreasing to 9.9% in 2027.

These changes will directly impact both businesses and consumers, particularly those relying on transportation-related services.

How Businesses Should Prepare

With these new tax laws taking effect, business owners must stay informed and ensure compliance to avoid penalties. Businesses should:

• Determine whether their services are now subject to sales tax under Senate Bill 5814.
• Review their B&O tax rates and classify their business activities accordingly under House Bill 2081.
• Adjust their pricing strategies to account for increased tax burdens.
• Consult a tax advisor to ensure proper reporting and compliance with these new regulations.

Both consumers and businesses will feel the impact of these tax changes in the coming months and years. While the goal of these adjustments is to generate state revenue, they also present new financial challenges for Washington businesses. Careful tax planning and consultation with professionals will be key to navigating this evolving tax landscape.

At Cordell, Neher & Company, PLLC, we specialize in tax planning and responding to ever changing tax laws. Reach out to our team to learn more about how we can support your business. Contact us at cnccpa.com or call (509) 663-1661. We’re here to provide you with a complete financial team in your corner.