Washington State Professional Services Sales Tax

Starting October 1, 2025, Washington State levies a sales tax on many, maybe most, business professional services.

Thus, if you’re a business professional selling your services?  You want to know how the new Washington state professional services sales tax works. You want to know where and when it applies. And you also want to understand how you can or should constructively respond. (You have some options here.)

One other remark before I start jabbering. This is still all a little foggy. Who knows how this ends up. Discussions appear to be underway among policy makers about whether this sales tax on professionals was what they intended and whether it should continue to be the law. And now into the details.

How the Washington State Professional Services Tax Works

Normally, states don’t levy sales tax on professional services. And for a long time, Washington state’s tax laws worked the same way.

But as a matter of fact, professional services often fall into a category, digital automated services, that states can and do subject to retail sales taxes.

What is a digital automated service? Here’s the statutory definition: A digital automated service (quoting from the revised code of Washington) “means any service transferred electronically that uses one or more software applications.”

Thus, a plain language reading: Email? Online portals? Video conferencing? Your telephone? All those use one or more software applications to transfer electronically text, files, video or audio. Thus, professionals using those tools to provide services potentially needed to calculate and collect retail sales taxes. Except for one thing: An exclusion applied to this work in past.

Historically while professional services did look like a digital automated service, state law excluded (and here again I quote) “any service that primarily involves the application of human effort by the seller, and the human effort originated after the customer requested the service.”

In April 2025, however, the legislature struck the boldfaced language above using Engrossed Substitute Senate Bill 5814, a couple of weeks later Governor Ferguson signed the bill into law, and now professional services may be subject to retail sales taxes.

Which Firms Need to Deal with New Sales Tax

Probably if you’re a Washington state professional, you need to calculate, collect and remit Washington state sales taxes starting October 1, 2025. (And if you are a Washington state resident, you need to pay Washington state sales taxes when you buy professional services.)

Just to be clear—remember the trigger here is a professional uses software to deliver the service—all of the following items probably count as digital automated services and therefore trigger retail sales taxes:

• A consultant does a bunch of research and then delivers the research results via a streaming video conference. That streaming video conferencing software results in the activity being treated as a retail sale.
• A researcher writes a whitepaper and then emails the paper to the client. The email software triggers classification of the service as a retail sale.
• A tax accountant prepares a tax return and then delivers the return using an online portal. The online portal results in the tax return being treated as a digital automated service.
• A bookkeeper provides remote general accounting services via QuickBooks Online or maybe via a remote desktop connection to the QuickBooks desktop software. Either the QuickBooks Online software or the Windows remote desktop connection software trigger classification of the service as a retail sale.

A clarification: A professional might be able to deliver any of these services in non-digital, non-automated ways. The consultant can deliver a presentation in person (though maybe shouldn’t use PowerPoint?) The researcher can courier or hand deliver the research paper. The tax accountant can print a copy of the tax return and ask clients to pick up that up in person. A bookkeeper might be able to work onsite. These alternatives allow the professional to avoid classification as a digital automated service.

But many professionals? Yeah, they’ve embraced technology. They use software to automate and speed up their work. And at this stage, reconfiguring the workflow to escape the sales tax? That seems impractical.

How Business and Occupation Taxes and Rates Change

Here’s something else to know. The change in the state’s rule about how the tax accounting works delivers some new benefits.

For one thing, the business and occupation excise tax rate probably drops. Retail sales business and occupation (B&O) tax rates run .471 percent (so slightly less than half a percent). Services B&O tax rates usually run 1.5 percent for small businesses and then 1.75 percent for larger businesses.

Furthermore, while the services B&O tax applies to often all of a firm’s revenues, the retail sales B&O tax rate applies to in-state sales.

A professional services firm with $1,000,000 in revenues in past paid a 1.5% or 1.75% services B&O tax on $1,000,000 of revenue. But if half the firm’s services go to out of state customers? The new Washington state professional services sales tax subjects $500,000 to the new lower retail sales .471% B&O tax.

The drop in B&O taxes obviously doesn’t “pay” for the maybe 10 percent-ish retail sales taxes. But it may partially compensate the firm for new compliance costs and the clients it loses due to the effective 10 percent-ish increase in prices. And that’s the next thing to talk about.

Price Elasticity Means Professional Services Firm Will Leak Clients and Revenues

One important practice management point to mention.

If your services cost 10 percent more due to the new sales tax, probably some clients will change their purchasing habits.

In the case of a tax accounting firm, for example? Some clients might move to a retail tax preparer where the preparer delivers a paper copy of the tax return after collecting the numbers. (A paper deliverable saves the sales tax.)

And a tax accountant should not be completely surprised if a client moves to an out of state tax accounting firm. Technically, that firm won’t have to follow Washington state’s sales tax accounting rules unless it provides more than $100,000 of services to Washingtonians. (The Washington client should still pay the tax as a use tax.)

How large will this attrition grow? My guess is 3 percent-ish. That percentage of lost business reflects the usual elasticity of professional services, -.3. (That’s minus 30%.) In other words, a 10 percent price increase to the clients and customers times minus 30% equals a minus 3% change.

Accounting Stuff You Want to Do For Sales Tax

Before I wrap this up, some steps I think you and I take:

1. Get good address information into the accounting system so we can correctly source sales because these sales get sourced to where a client uses the service. (You can use the state’s lookup tool here.)
2. Set up your accounting system to correctly calculate the right sales tax rates on invoices. This will be a headache. Washington segregates the state into hundreds of local sales tax jurisdictions. Hopefully you won’t have more than a few dozen. If you do, use a sales tax service. By the way, in QuickBooks you’ll set up sale tax code items.
3. Alert clients and customers to the new effective higher price if you now need to begin charging sales taxes. We can’t protect our clients from this new cost. We can warn them.
4. Clearly differentiate any remaining services from retail sales on invoices. For example, if you meet with a client on-site, that’s clearly professional service and not retail sales.
5. Explore un-bundling services. A $1,000 tax return for example might be unbundled into a $900 tax return (not subject to sales tax) and then the following delivery options: $100 for portal delivery (subject to sales tax) , $200 for mailed paper delivery (not subject to sales) or free “counter” pickup (also not subject to sales tax). This approach adds risks unless we first get clear guidance from the Department of Revenue. But unbundling might work
6. If you’re reading this blog post before October 1, 2025, complete and bill that work-in-progress before the October 1. Also try to collect for that work before October 1 since while it technically shouldn’t be subject to sales tax unless it was performed after October 1? Gosh, you never know what position the state might take.

Related Articles

Washington state enacted a bunch of changes to state tax laws in April and May of 2025. These two blog posts describe in detail two changes significant for many small business owners:

The changes in the Washington qualified Family-owned Business Interest Deduction for 2025 and future years.

The bumps in the state’s estate tax rates, which you can explore using our updated Washington estate tax calculator 2025 version