Washington State’s interim guidance clarifies new state tax changes

The Washington Department of Revenue recently published nine different interim guidance documents regarding the changes enacted by Engross Substitute Senate Bill 5814 (ESSB 5814) earlier this year. ESSB 5814 broadened the state’s tax base by subjecting new categories of services to the retail sales tax and retailing business and occupation (B&O) tax, with many of the provisions effective Oct. 1, 2025. The interim guidance provides insights on the department’s interpretation and enforcement of the new provisions, as well as direction on how existing contracts should be treated. The guidance is intended to reflect the current position of the department where final guidance has not yet been published.

Interim guidance statements provide the first glimpse of the department’s interpretation

The Washington Department of Revenue recently released interim guidance statements clarifying the department’s position on the taxation of certain services now subject to retail sales tax. As discussed in our article, Washington state enacts broad tax increases, ESSB 5814 was part of a suite of base-broadening legislation that made a variety of previously untaxed services taxable under the retailing classification of Washington’s B&O tax and retail sales tax effective Oct. 1, 2025. These services include:

• Information technology (IT) services
• Custom website development services
• Custom software and the customization of prewritten software
• Investigation, security, security monitoring and armored car services
• Temporary staffing services
• Advertising services
• Live presentations
• Elimination of Digital Automated Services (DAS) exclusions

Each interim guidance statement addresses specific issues relating to the taxation of the above, including issues of sourcing and the potential applicability of exemptions, such as the resale and multiple points of use (MPU). Also, the department provides a separate interim guidance statement to clarify how contracts for these services will be treated if the contracts predate the ESSB 5814 Oct. 1, 2025 effective date.

IT services

ESSB 5814 makes sales of IT services taxable under the retail classification of the B&O tax and subjects them to retail sales tax. The department’s interim guidance outlines what constitutes an IT service and distinguishes IT services from other related services. Additionally, the guidance clarifies several IT service sourcing issues and how resale and MPU exemptions may apply.

Custom website development services

ESSB 5814 makes sales of custom website development services taxable under the retail classification of the B&O tax and subject to the retail sales tax. The department’s interim guidance provides clarity regarding the sourcing of receipts of custom website development services, including the receipt of services at multiple locations. Furthermore, the guidance clarifies circumstances where resale and MPU exemptions may apply.

Custom software and the customization of prewritten software

ESSB 5814 makes sales of custom software and the customization of prewritten software taxable under the retail classification of the B&O tax and subject to retail sales tax. The department’s interim guidance explains what qualifies as custom software and which activities constitute the customization of prewritten software. Additionally, the guidance provides clarity regarding the sourcing of receipts for custom software and the customization of prewritten software. Furthermore, the guidance clarifies circumstances where resale and MPU exemptions may apply.

Investigation, security, security monitoring and armored car services

ESSB 5814 makes sales of investigation, security, security monitoring and armored car services taxable under the retail classification of the B&O tax and subject to retail sales tax. The department’s interim guidance explains what constitutes investigation, security, security monitoring and armored car services, including whether alarm monitoring services qualify, and distinguishes investigation, security, security monitoring and armored car services from other related services. Additionally, the guidance clarifies several sourcing issues with examples and how resale and MPU exemptions may apply.

Temporary staffing services

ESSB 5814 makes sales of temporary staffing services taxable under the retail classification of the B&O tax and subject to retail sales tax. The department’s interim guidance distinguishes temporary staffing services from other similar labor services, including direct-hire and independent-contractor arrangements. The guidance outlines a four-factor test that the department will use to determine whether a temporary staffing service has been provided. Additionally, the guidance clarifies circumstances where the resale exemption may apply.

Advertising services

ESSB 5814 makes sales of advertising services taxable under the retail classification of the B&O tax and subject to retail sales tax. The department’s interim guidance statement explains what constitutes advertising services and provides a list of exclusions. The guidance provides clarity regarding the sourcing of advertising services with examples. Additionally, the guidance clarifies circumstances where resale and MPU exclusions may apply.

Live presentations

ESSB 5814 makes sales of live presentations taxable under the retail classification of the B&O tax and subject to retail sales tax. The department’s interim guidance defines live presentations and distinguishes live presentations from other similar services through several examples. The guidance provides clarity regarding the sourcing of live presentations, including live presentations delivered in person, electronically and hybrid. The guidance clarifies circumstances where resale and MPU exemptions may apply.

Elimination of DAS exclusions

ESSB 5814 eliminates the DAS exclusions for data processing and services involving primarily human effort. This elimination makes data processing services and services involving primarily human effort taxable under the retail classification of the B&O tax and subject to retail sales tax. The department’s interim guidance explains how this change affects professional service providers with an assortment of examples. Furthermore, the guidance describes how to treat digital features added to existing products and services.

Treatment of existing contracts

Beyond guidance relating to the above services, the department issued a separate interim guidance statement outlining how contracts in effect prior to Oct. 1, 2025 should be treated relative to the ESSB 5814 effective date.

The guidance defines existing contracts as contracts ‘signed and executed prior to Oct. 1, 2025,’ where ‘the underlying services are to be provided on or will continue after Oct. 1, 2025,’ and where ‘the underlying services of that contract would be considered a ‘retail sale’ effective Oct. 1, 2025.’

The guidance provides for different treatment of ‘existing’ contracts depending on whether the contract price was paid before Oct. 1, 2025 or whether the contract was altered after Oct. 1, 2025. If the contract price of an existing contract was paid before October 2025 but the services are provided on or after Oct. 1, 2025, the department ‘deems the sale to have occurred prior to Oct. 1, 2025’ for the purpose of the provisions of ESSB 5814.

If the contract price of an existing contract has not been paid and the services are provided on or continue after Oct. 1, 2025, the department ‘will accept tax reporting under the tax classification that applied to the underlying contract activity prior to Oct. 1, 2025,’ providing temporary relief from the provisions of ESSB 5814 through March 31, 2026. Beginning April 1, 2026, existing contracts are fully subject to the provisions of ESSB 5814.

If an existing contract is altered after Oct. 1, 2025, it loses its character as an existing contract and becomes fully subject to the provisions of ESSB 5814 as if it were not an existing contract. The guidance defines ‘alter’ as to ‘materially or substantively’ change or amend a contract. The statement indicates ‘altering’ includes changes to the parties or activities of the contract, as well as changes to the parties’ rights, responsibilities or obligations under the contract. It may also include changes to a contract’s term, contract amount or period of effect.