Significant tax reforms are on the horizon for Washington State, set to impact businesses across various sectors. With changes to the Business & Occupation (B&O) tax and the expansion of the sales tax base, it’s crucial for business owners to understand these developments and prepare accordingly.

What’s Changing — and Why It Matters

Washington State has passed a series of major tax changes aimed at tackling a projected $16 billion budget deficit—and business owners need to be paying attention.

Starting October 1, 2025, many businesses will face:

• Higher B&O tax rates, especially in manufacturing and service industries

• Expanded sales tax requirements for services like digital ads, IT support, and some forms of custom software or website development

• New surcharges for businesses earning over $5 million or $250 million annually

• Inclusion of storage unit leases in B&O tax calculations.

These changes aren’t just numbers on a page. They represent real impacts: higher operational costs, increased compliance burdens, and tighter margins for businesses across Washington.

Let’s say you run a boutique marketing agency or a software development firm. Starting next year, you may need to charge sales tax on your services for the first time ever—and your B&O tax rate might jump significantly. If you don’t update your pricing, systems, or compliance processes, you could find yourself losing profit—or worse, also facing penalties.

Whether you’re a small business already running lean or a large corporation scaling fast, these tax updates will affect how you price, plan, and protect your business. The good news? There’s still time to prepare—and the earlier you act, the better positioned you’ll be.

Overview of the Tax Changes

Business and Occupation (B&O) Tax Changes

• Effective Dates:
  • October 1, 2025:

• • • The B&O tax rate for the “services and other activities” category will increase from 1.75% to 2.1% for businesses with gross income over $5 million.

• • • The surcharge on specified financial institutions will rise from 1.2% to 1.5%.

• • January 1, 2026:
    

• • • A new 0.5% B&O tax surcharge will apply to businesses with Washington taxable income exceeding $250 million. This surcharge is temporary and will expire on December 31, 2029. The surcharge only applies to the portion of taxable income over $250 million.
      
    • The advanced computing surcharge will increase from 1.22% to 7.5%, with the annual cap rising from $9 million to $75 million. (This typically affects large technology companies with substantial Washington-based computing infrastructure.)
• Implications:
  • These changes mean higher tax liabilities for many businesses, particularly those in the service sector and large corporations. For example, a consulting firm with $6 million in annual revenue will see its B&O tax rate increase, leading to higher operational costs.

Sales Tax Expansion

• Effective Date:
  • October 1, 2025
    
• Newly Taxable Services:
• • Digital advertising services, including online referrals, search engine marketing, and web campaign planning

• • Information technology services, such as IT training, technical support, and custom software development

• • Some forms of custom website development, particularly those involving programming or backend systems

• • Temporary staffing services (Sales tax will generally be collected and remitted by the staffing agency)

• • Security services, including monitoring and armored car services

• • Data Processing Services, this may impact professional service businesses that use technology, such as document portals to collect information from clients.
• Implications:
  • Businesses offering these services must begin collecting and remitting sales tax, necessitating updates to billing systems. For instance, a digital marketing agency will need to account for sales tax in their service fees, potentially impacting client budgets and service demand.  Please Note!  If a business doesn’t collect sales tax or not enough sales tax, the business must pay the sales tax themselves.

Why These Changes Matter

• Increased Operational Costs: Higher tax rates and new tax obligations will raise the cost of doing business.
  
• Compliance Complexity: Businesses must adapt to new tax collection and remittance processes, increasing administrative burdens.
  
• Strategic Financial Planning: Proactive planning is essential to mitigate the financial impact of these tax changes.
  
• Risk of Penalties: Failure to comply with new tax regulations can result in significant penalties and interest charges.
  

Who Is Most Affected?

• Service-Based Businesses: Consulting firms, marketing agencies, and IT service providers will face higher B&O tax rates and new sales tax obligations.
  
• Large Corporations: Companies with substantial revenue will be subject to additional surcharges, increasing their tax burden.
  
• Small Businesses: Smaller enterprises may struggle with the administrative and financial challenges posed by these tax changes.

Actionable Steps for Business Owners

1. Assess Tax Exposure: Review your services and revenue streams to determine how the new tax laws affect your business.
   
2. Update Systems: Ensure your billing and accounting systems can handle the collection and remittance of newly applicable sales taxes.
   
3. Consult Professionals: Engage with tax advisors to develop strategies for compliance and tax efficiency.
   
4. Educate Your Team: Inform your staff about the changes to ensure accurate implementation and compliance.

What to Watch for Next

• Regulatory Guidance: Stay updated on further clarifications from the Washington Department of Revenue.
  
• Legal Challenges: Monitor potential legal disputes that may affect the implementation of these tax changes.
  
• Industry-Specific Impacts: Be aware of how these changes uniquely affect your industry and adjust accordingly.

How ProfitArch™ Can Help

Navigating these complex tax changes can be daunting.

ProfitArch™ offers comprehensive support to help your business adapt and thrive:

• Customized Tax Strategy Reviews: Tailored assessments to understand your specific tax obligations
  
• Scenario Modeling: Forecasting tools to anticipate financial impacts and plan accordingly
  
• Compliance Support: Assistance in updating systems and processes to meet new tax requirements

👉 Schedule a discovery call today to ensure your business is prepared for these upcoming changes.