In May 2025, Washington State enacted sweeping tax reforms to address a significant budget shortfall, with several changes directly impacting professional service providers. Governor Bob Ferguson signed these bills into law on May 20, 2025, implementing what may be the largest tax increase in the state’s history. For professional services firms, these changes affect both how you’re taxed and what services are subject to sales tax.

Business & Occupation Tax Changes Hit Service Providers

Washington’s Business & Occupation (B&O) tax is a gross receipts tax that applies to your total revenue, not profit. Under the new law, professional service firms face significant rate increases based on their revenue levels. If your firm has more than $5 million in Washington-sourced gross income, or is part of an affiliated group exceeding this threshold, your B&O tax rate for service activities increases from 1.75% to 2.1%. For firms with gross income between $1 million and $5 million, the rate remains at 1.75%.

Additionally, a new 0.5% B&O surcharge applies to businesses with more than $250 million in Washington taxable income, with the first $250 million exempt from the surcharge calculation. This temporary surcharge expires December 31, 2029. The legislation also narrows the B&O tax deduction for investment income, limiting the exemption to “incidental” investment income representing less than 5% of your business’s total worldwide gross income.

Sales Tax Expansion Creates New Compliance Requirements

Starting October 1, 2025, several professional services previously exempt from sales tax will now be subject to retail sales tax and reclassified under the retailing B&O category. The expansion includes information technology services, custom website development services, custom software and customization of prewritten computer software, investigation and security services, temporary staffing services, advertising services, and live presentations such as lectures, seminars, workshops, or courses delivered in-person or online.

For firms that do provide newly-taxed services, the compliance requirements are significant. Businesses will need to register for sales tax collection if not already registered, update billing systems to collect and track sales tax, modify client contracts and engagement letters, train staff on new compliance requirements, and review pricing structures to account for tax impacts.

Data Processing and Digital Services Clarifications

The new law defines “data processing services” as systematic operations performed on client-supplied data to extract required information or convert data to usable information. This includes check processing, image processing, form processing, survey processing, payroll processing, and claim processing. Importantly, data processing does not include custom software development or customization services, which are covered under separate provisions.

The expansion of digital automated services (DAS) removes certain exclusions that previously existed, meaning that services such as data processing and those primarily involving human effort, which are transmitted electronically via software, are now subject to retail sales tax. However, specific exclusions remain for services like telehealth, and the Department of Revenue is working on additional guidance to clarify how the expanded definition will be enforced.

However, traditional professional service providers such as accountants, lawyers, engineers, architects, appraisers, and lobbyists are generally not affected by these changes simply because they use software applications to perform their work. According to the Washington State Department of Revenue’s FAQ guidance, these professionals remain subject to B&O tax under the Service and Other Activities classification and are considered consumers of any software they purchase.

The key distinction lies in how services are delivered. Simply using email or an online portal to receive client files or deliver results does not convert your professional service into a taxable retail sale. However, if you offer a portal where clients can choose from do-it-yourself templates with minimal professional review, this could be considered a digital automated service subject to sales tax. The state is working on an interim guidance statement that will provide additional clarification.

Preparing for Implementation

The timeline for these changes is aggressive. B&O tax rate increases and the new $250 million surcharge took effect immediately upon enactment, while the sales tax expansion to covered professional services begins October 1, 2025. Various tax preference repeals will take effect April 1, 2026.

Professional service firms should analyze their service offerings to determine which activities may now be subject to sales tax versus those that remain under the service classification. This includes reviewing system capabilities to handle sales tax collection and B&O tax classification changes, updating standard engagement letters and client contracts to address sales tax collection where applicable, and establishing clear protocols for proper tax treatment if you offer both traditional professional services and newly-taxed services.

The Washington State Department of Revenue is developing additional guidance to clarify implementation of these changes, and Governor Ferguson has indicated that some provisions may require adjustment in the next legislative session, particularly regarding the services tax expansion.

Given the complexity and scope of these changes, professional service firms should act now to understand how the new laws affect their specific operations and implement necessary system and process updates before the October 1, 2025 effective date. The stakes are high, and proper preparation will be essential for maintaining compliance while minimizing the financial impact on your practice.

At Geffen Mesher & Company, our state and local tax (SALT) team is closely monitoring these developments and working with clients to ensure compliance with the new requirements. If you would like help evaluating how the new laws apply to your business, our SALT team is here to assist.

About Geffen Mesher:
Geffen Mesher, a Portland-based accounting firm, focuses on providing ongoing financial strategy, accounting and tax advisory services for businesses and individuals. We serve numerous industries and create solutions that help our diverse clientele plan and build their financial futures wisely. Learn more at gmco.com.