13 April 2026 Washington enacts sales and use tax and business and occupation tax changes and clarifications, including future tax relief
On March 30, 2026, Washington Governor Bob Ferguson signed SB 6346, to provide sales and use tax and business and occupation (B&O) tax relief beginning in 2029.
To pay for these and other changes, SB 6346 imposes a new income tax on individuals with income of $1 million or more (see Tax Alert 2026-0852). The sales and use tax and B&O tax changes in SB 6346 do not take effect until 2029; however, these changes will be null and void if a court of final jurisdiction invalidates Washington's new income tax. The governor also signed several other tax bills into law that make technical and administrative clarifications (SB 6113), and address various tax issues related to peer-to-peer car sharing, data centers (SB 6231), prescription drugs (SB 6228), insurance companies (HB 2487), mortgage lending (HB 2089), the hazardous substance tax (SB 6244), and penny rounding (HB 2334). Select measures are discussed below. A law enacted in 2025 (ESSB 5814) imposed sales tax on certain services (see Tax Alert 2025-1125). SB 6346 will repeal the sales tax on the following services:
Tax will continue to apply to sales of advertising services, unless it is a sale between members of an affiliated group.
In addition, SB 6346 will increase: (1) the small business B&O tax credit to $125 per month for non-service businesses and to $375 per month for service businesses (from $55 and $160 per month, respectively), and (2) the annual taxable income threshold for the B&O tax return to $250,000 (from $125,000).
The Department of Revenue is extending a grace period for sellers to not collect sales tax on these services through June 30, 2026, when the new exemptions take effect, if there is an existing contract between the buyer and seller for the services. A law enacted in 2025 imposes a 0.5% B&O tax surcharge rate on businesses with Washington taxable income exceeding $250 million beginning in 2026. (See Tax Alert 2025-1125.) Effective July 1, 2026, SB 6346 exempts several types of Washington taxable income from the surcharge including amounts:
SB 6346 increases eligibility for the Working Families' Tax Credit by lowering the age limit to 18 and adding a need and payment standard for cash assistance provided to eligible low-income persons. This change is effective for applications submitted beginning in calendar year 2029. SB 6113 makes various technical corrections and changes requested by the Department of Revenue. Many of the changes relate to the sales tax on services and the B&O tax surcharge adopted in 2025. These changes apply retroactively to October 1, 2025. SB 6113 adds examples of "investigation services," to include providing investigation, detective, and personal background check services (e.g., private detective services, background check services, fingerprint services, bounty hunting services, private investigation services, lie detection and polygraph services, missing person tracing services, and skip tracing services). It also excludes direct hires, paymaster services and independent contractors from the definition of "temporary staffing services."
Note the similar but slightly different "live presentations" definition clarifications listed previously in SB 6346. SB 6113 also consolidates the list of activities excluded from the definition of a retail sale when sold between affiliated entities into one section and clarifies that sales of custom software, customization of prewritten computer software, and live presentations between affiliates are not retail sales.
The law exempts bailment transactions from use tax when the present user's bailor or donor has already paid sales or use tax, and exempts the use of any service subject to sales tax if the service is rendered by the taxpayer's own employees in the course of their employment SB 6113 clarifies that the use of a digital automated service that is incidental to the underlying service provided by a business does not make the underlying service subject to retail sales tax if: (1) the digital delivery is solely for the purpose of transmitting or exchanging communications between the service provider and the buyer, (2) there is no consideration paid for the electronic communications, and (3) the underlying service is subject to a B&O tax classification other than retailing. The law disallows the use of a direct pay permit for purchasing athletic or fitness facility services and allows the use of a direct pay permit for purchases of information technology services. It also amends the definition of a retail sale to exclude any service provided by a public agency to another public agency pursuant to an interlocal agreement. SB 6311 also codifies the Department of Revenue's guidance for a transition period for taxpayers with qualifying existing contracts for service activities that have been classified as retailing activities. The transition period begins October 1, 2025, and ends March 31, 2026. Taxpayers with a qualifying existing contract may elect to treat the amounts received during the transition period as gross income subject to retailing B&O tax and retail sales tax or service and other activities B&O tax. If a taxpayer with a qualifying existing contract does not make an election during the transition period, the amounts received will be subject to retailing B&O tax and retail sales tax. SB 6311 defines a "qualifying existing contract" as a contract for services that became subject to sales tax beginning October 1, 2025, was signed before October 1, 2025, and was not altered during the transition period. A contract is altered if it is materially or substantively changed, amended or renewed. Under SB 6113, advertising services are eligible for the multiple points of use sales tax exemption. Businesses that purchase disseminated advertising services for use both inside and outside Washington may claim the sales tax exemption by providing the seller with an exemption certificate but must report use tax on the portion used in Washington. For use tax purposes, sourcing of advertising services is based on the locations where the related advertisements are viewed by a user or otherwise interacted with by a user. The Department of Revenue will provide sourcing methodologies for the advertising services if a taxpayer is unable to determine the location of use. In this case, the Department of Revenue may authorize or require an alternative method that includes internet statistics and population. The Department of Revenue will require the taxpayer to source the services statewide if the taxpayer is unable to determine the local level within Washington due to a lack of information. SB 6113 adds the following services to the definition of a wholesale sale if the services are not sold at retail: information technology training and technical support, custom website development, investigation and security services, temporary staffing services and advertising services. The law adds that gross income subject to B&O tax under the payment card processing classification may be subject to the rate surcharge for specified financial institutions and the workforce education investment surcharge on advanced computing businesses. This clarification to the payment card processing classification applies retroactively to January 1, 2026. SB 6113 also clarifies the small business B&O tax credit applies to the tax imposed on credit unions merging with a regulated bank and the terms "property" or "personal property" include products sold through the use of digital codes. SB 6113 includes peer-to-peer car sharing in the definition of "marketplace facilitator" and excludes the term from the definition of "travel agency services." Further, a peer-to-peer car sharing program is prohibited from allowing a vehicle to be placed on a digital network or software application for the purpose of making the vehicle available for sharing unless the peer-to-peer car sharing program first requests an electronic certification from the shared vehicle owner as to whether the shared vehicle owner obtained the shared vehicle as a vehicle for resale. The law also clarifies that peer-to-peer car sharing transactions are not subject to the additional motor vehicle sales tax. SB 6231 eliminates the sales and use tax exemption for data center refurbishment and replacement of server equipment as of July 1, 2026. HB 2487, in response to recent litigation, modifies the B&O tax exemption for insurance business activities. Previously, the exemption applied to "any person in respect to insurance business upon which a tax based on gross premiums is paid to the state." This verbiage in effect extended the B&O tax exemption to businesses which were associated with insurance activities but did not provide insurance policies. Under the new law, the exemption only applies to "the person who paid the insurance premium tax" as well as: (1) gross premiums and prepayments received by a health care service provider exempt from premium taxes; (2) consideration received by an insurer for annuities regulated by RCW 48.23 (life insurance and annuities) and 48.24 (group life and annuities); and (3) gross premiums received by an assigned risk plan where premium taxes were paid by a servicing carrier for such plan. This change applies both prospectively and retroactively to October 2, 2019. HB 2487 makes changes to the advanced computing B&O tax surcharge applicable to insurance affiliated groups and requires the Washington Department of Revenue to waive penalties and interest otherwise due for delinquent B&O taxes resulting from a person that previously claimed the B&O tax exemption. The Department must allow such persons to enter into a three-year repayment schedule for taxes owed. This provision applies to taxes, penalties and interest owed for delinquent taxes due on gross income of the business between October 2, 2019, and March 31, 2026. Applications for penalty and interest waiver, and the repayment schedule, must be submitted to the Department on or before December 31, 2026. SB 6228 removes the preferential 0.138% B&O tax rate for warehousing and reselling prescription drugs, effective January 1, 2027. Instead, for calendar year 2027, a 0.5% B&O tax applies to gross income of a business for warehousing and reselling drugs for human use pursuant to a prescription, with the rate reduced to 0.35% starting January 1, 2028. Effective January 1, 2027, the B&O tax rate on critical access pharmacies making retail sales is 0.138%. A critical access pharmacy is an independent pharmacy meeting certain conditions. HB 2334 provides guidance on rounding cash transactions due to the penny shortage caused by the federal government's ending of the production of the penny.1 Effective June 11, 2026, unless the buyer has the exact change for the total price or charge due (including sales tax) for an in-person cash transaction, the seller may round the amount due to the nearest amount divisible by five cents as follows:
These rounding rules only apply to in-person, cash transactions. The rules do not apply to payments made by check, credit card, money order, debit card, electronic payment or similar instruments. If the transaction is mixed, rounding only applies to the portion of the transaction paid in cash. Rounding does not alter the sales price or the amount of tax owed or collected. Those selling goods or services must calculate and remit taxes and fees based on the sales price before any rounding. B&O tax does not apply to amounts received from rounding up. Likewise, a deduction from B&O tax is not allowed for rounding down. HB 2089 eliminates a B&O tax deduction for high volume mortgage lenders on loans primarily secured by first mortgages or trust deeds on non-transient residential properties effective July 1, 2026. A high-volume lender is defined as either being a specified financial institution as defined in RCW 82.04.29004, or having annual closed mortgage origination volume of at least $10 billion in the prior calendar year. HB 2089 eliminates the requirement that the lender is not located in more than 10 states. SB 6244 (enacted March 23, 2026) extends until January 1, 2038 (from January 1, 2028), the exemption from the hazardous substance tax for certain agricultural crop protection products that are temporarily warehoused in Washington but not otherwise used, manufactured, package or sold in the state. Affected taxpayers should review the tax changes described above and take note of their various applicability dates. The sales and use tax and B&O tax relief provisions in SB 6346, which are not effective until 2029, will only become effective if the state's new personal income tax is upheld, and court challenges to the tax have already been filed. Taxpayers electing the existing contract grace period to not charge the customer sales tax should keep adequate documentation of this election because there is no requirement that the election be communicated to the buyer or to the Department of Revenue.
Document ID: 2026-0853 | ||||||||
