09 September 2025

Washington Department of Revenue addresses 'existing contracts' for services that will be taxable beginning October 1

  • The Washington Department of Revenue has published guidance on the sales tax treatment of services under existing contracts that will be subject to tax beginning October 1, 2025.
  • Sellers may elect to treat the subject services as a retail sale subject to retailing business and occupation (B&O) tax and sales tax or (2) maintain the same tax classification of the service before October 1, 2025.
  • An "existing contract" for these services means the contract was executed before October 1, 2025.
  • The election applies to payments for services made after October 1, 2025, but only for transactions occurring through March 31, 2026.
 

On August 29, 2025, the Washington Department of Revenue (WA DOR) published guidance for "existing contracts" for services that will be subject to sales tax beginning October 1, 2025, as a result of the enactment of SB 5814.1 An "existing contract" for these services means the contract was executed before October 1, 2025. For more information on SB 5814, see Tax Alert 2025-1125.

Background

On May 20, 2025, Washington Governor Bob Ferguson signed SB 5814 into law. Effective October 1, 2025, SB 5814 expands the sales tax base to additional services, including:

  • Advertising services
  • Live presentations
  • Information technology services
  • Custom website development services
  • Investigation, security, and armored car services
  • Temporary staffing services, except for qualifying hospitals
  • Sales of custom software
  • Customization of prewritten software

Since the enactment of SB 5814, the WA DOR had to quickly interpret and implement the expanded sales tax base, which required interpreting specifically which activities fall within those listed. For example, the WA DOR recently determined that a "live presentation" does not include college classes.2

New guidance

The new guidance permits sellers to choose how to classify the listed services for "existing contracts."

Sellers may treat the transaction sourced to Washington as (1) a retail sale subject to retailing B&O tax and sales tax or (2) maintain the same tax classification of the service before October 1, 2025; typically, such activities will be classified at the service and other activities B&O tax classification.

This election applies to payments for services made after October 1, 2025, but only for transactions occurring through March 31, 2026. Sellers must treat any contracts executed after October 1, 2025, for services listed in SB 5814 as a retail sale and subject to sales tax unless the client provides an exemption certificate.

Existing contracts that are altered (i.e., materially or substantively changed) after October 1, 2025, are subject to retailing B&O and retail sales tax on the date the contract is amended.

Implications

With the October 1 effective date fast approaching, the WA DOR's decision to allow taxpayers to choose their tax treatment offers a response to the complexities and challenges brought about by SB 5814. Companies with existing contracts for these newly taxable services will have limited time to decide which tax treatment to elect. In reaching that decision, affected taxpayers should consider a number of factors, most notably the differences in the B&O tax rate and transaction sourcing methodologies.

For retail sales, sellers electing to follow the new law must determine if the transaction is sourced to Washington in accordance with the methodology prescribed by the Streamlined Sales Tax Agreement, and as adopted by Washington in RCW 82.32.730. If the transaction is sourced to Washington, the customer will be charged sales tax and the seller's B&O tax rate at the retailing classification, which is 0.471%.

If sellers elect to keep the historical tax treatment for transactions subject to an existing contract for services, the transaction will likely be apportioned to the location where the customer receives the benefit of the service and subject to the service and other activities B&O tax rate, which ranges from 1.5% to 2.1%. Sales tax is not charged to the customer when the transaction is not classified as a retail sale.

It is not yet known whether the Washington legislature will review the provisions in SB 5814 and make technical corrections and changes to the law in the next session, which begins in January 2026.

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Endnotes

1 See, Wash. Dept. of Rev., Interim guidance statement regarding contracts existing prior to October 1, 2025, and changes made by ESSB 5814 (August 29, 2025).

2 See, Wash. Dept. of Rev., Interim Statement regarding live presentations for schools and institutions of higher education (June 9, 2025).

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Contact Information

For additional information concerning this Alert, please contact:

State and Local Tax

Published by NTD’s Tax Technical Knowledge Services group; Chris DeZinno, legal editor

Document ID: 2025-1822