Many businesses in the Evergreen State face scary new taxes come October. Bills passed by the legislature in April 2025 could mean a $4 billion tax increase for Washington state businesses.
Several tax increases become effective October 1, 2025, including:
- Business & Occupation tax increases
- Retail Sales & Use tax expansion to software and service businesses, including
- Advertising
- Information Technology
- Temporary Staffing
- Other service businesses
“These two new laws – emanating from bills ESHB 2081 and ESSB 5814 – will have the most impact on medium and large businesses,” said Jeff Heyel, CMI, CPA, Vice President of Tax for recovery audit firm CPRS. “It’s important for businesses to not only get ready for this change, but to have an audit plan in place in 2026.”
Heyel suggested adding a Reverse Sales & Use Tax Audit or an AP Recovery Audit to your 2026 financial plan to help offset the new Washington tax increases. A major software developer and other companies have already hired CPRS to assist with tax impacts of the new laws.
“Until now, the sales tax in Washington was mostly applied to physical things such as clothing, electronics, or restaurant meals,” said the Tri-City Regional Chamber of Commerce in a recent blog. “However, under ESSB 5814, several services will now be taxed, just like the goods you buy in a store. If you provide any of these services, you will have to start charging your customers’ sales tax and sending that money to the state.”
The Washington Department of Revenue (DOR) has been sending Special Notices to clarify these laws. DOR staff presented the new laws and their implementation plan at a Washington tax conference this summer.
Heyel recommends businesses be concerned about several areas, including:
- Washington B&O Tax Apportionment – Reevaluation is Recommended
“Washington Business & Occupation tax apportionment is tricky. Service revenue taxable under the Service and Other Activities B&O tax classification in Washington gets apportioned, and only income attributed to in-state activities gets taxed. Calculations related to apportionment are very complex and may be impacted by the new tax laws,” Heyel said. “As such, a reevaluation of a taxpayer’s apportionment B&O tax calculations is recommended.” - Sourcing will become an Issue
“The location you use to determine if retail products or services are taxable in Washington is crucial,” Heyel said. “It will be important for taxpayers to determine the correct sourcing locations for services that become subject to retail sales tax or use tax starting October 1, 2025.” - Private-Letter Rulings (PLR) may be required
“Even though the DOR is currently inundated with requests for clarifications, Private Letter Rulings are an important tool companies should use,” Heyel said. “The guidance PLRs provide is binding, so if a company gets audited, the DOR auditor has to follow PLR guidance.”
Heyel also warned about over-reliance on Tax Engine software. “Tax engines usually do a good job, but should be checked to confirm categories are correct, locations are accurate, and available deductions are included.”
Businesses concerned about tax impacts to their bottom line do have options for offsetting the tax increases:
- Consider doing a Reverse Sales & Use Tax Audit. These backward-looking audits uncover overpayments and secure meaningful, defensible recoveries. Reverse Sales & Use Tax Audits take full advantage of every exemption and exclusion available.
- Conduct an AP Recovery Audit. Recovery audits dig deep to uncover systemic errors and recover lost profits that traditional ERP systems often miss. CPRS facilitates efficient, AI-enhanced audit testing that provides detailed client reporting, metrics, and data security in a unified private cloud environment.
- Catch invoice errors before they occur. CPRS Active Invoice Review combines an AI-enhanced, proprietary Pearl™ technology suite with carefully selected and rigorously trained auditors to validate invoices in real-time.
- Consider doing a Reverse Sales & Use Tax Audit. These backward-looking audits uncover overpayments and secure meaningful, defensible recoveries. Reverse Sales & Use Tax Audits take full advantage of every exemption and exclusion available.
2025 Washington state tax increases
Service and Other Activities Business & Occupation Tax Rate Increases
- 1.5% tax rate for less than $1 million taxable income
- 1.75% tax rate for $1 million to under $5 million
- 2.1% tax rate for $5 million or more
Retail Sales Tax Added To:
- IT sales & services, including website development
- Sales of custom software and customization of prewritten software
- Investigation, security, security monitoring, and armored car services
- Temporary staffing services
- Advertising services
- Live presentations
Capital Gains Tax Increases
- Annual long-term capital gains in excess of $1 million
CPRS recovers billions in overpaid taxes for the world’s largest companies while protecting vendor and government relationships at the national, state, and local levels.
Don’t wait for government tax increases to impact your bottom line. Contact CPRS today.
