INSIGHT

Navigating Washington State’s sweeping 2025 tax changes: What you need to know

August 13, 2025

Services: Tax

Major tax legislation can feel overwhelming when it suddenly reshapes the landscape you’ve been operating in. On May 20, 2025, Washington Governor Bob Ferguson signed multiple tax bills into law as part of the biennial budget passed by the state legislature on April 28, 2025. These changes represent some of the most significant tax increases in Washington State’s history, affecting businesses and individuals across the state.

The reality is that these legislative changes were designed to address a projected $16 billion budget shortfall over the next four years. While that may explain the necessity, it doesn’t make the impact on your bottom line any less real. The following breakdown covers the key changes and what they mean for you.

Business and occupation tax increases that will hit your bottom line

New progressive rate structure for service businesses

House Bill 2081 makes numerous rate adjustments to the B&O tax, and the changes are substantial. If your business operates in the service and other activities classification, you’re looking at potential rate increases that depend on your revenue level.

Starting October 1, 2025, the new progressive structure works like this:

1.5% for businesses with affiliated group gross income under $1 million
1.75% for businesses with affiliated group gross income between $1-5 million
2.1% for businesses with affiliated group gross income over $5 million

What makes this particularly challenging is that the rate tiers will be based on the entire gross income of the affiliated group, rather than the taxpayer’s own gross income. This means if you’re part of a larger corporate structure, you could face the highest rate even if your individual entity has lower revenues.

New surcharges targeting specific industries

The legislation doesn’t stop at rate increases. Several new surcharges are being implemented that could significantly impact specific sectors:

Financial institutions will see their surcharge increase from 1.2% to 1.5%, effective October 1, 2025. This applies to institutions that are part of a consolidated group with at least $1 billion in annual net income.

Advanced computing businesses face the most dramatic change. The Advanced Computing Surcharge (ACS) increases to 7.5% from 1.22%, effective January 1, 2026. The ACS annual cap has also increased to $75 million from $9 million. If your business involves cloud computing, software development, or operates as an online marketplace, this could represent a substantial cost increase.

Large corporations across all industries will face a new 0.5% B&O tax surcharge on Washington-taxable income over $250 million in a calendar year, effective January 1, 2026. While this targets the largest businesses, it’s scheduled to sunset on December 31, 2029.

Payment card processing gets its own classification

House Bill 2020 creates a new business and occupation (B&O) tax rate and a new B&O tax deduction related to income from providing payment card processing services. Starting January 1, 2026, payment card processing activities will be subject to a 3.1% rate.

This change actually resolves a decade-long dispute between the industry and the Department of Revenue by clarifying that processors only pay B&O tax on their processing fees, not on the interchange and network fees they pass through to other parties.

Investment income deduction changes following the Antio decision

One of the most significant changes for businesses and individuals with investment income stems from House Bill 2081 clarifying the Washington Supreme Court’s decision in Antio, LLC v. Dept. of Revenue.

The bill provides that investments are incidental if the total worldwide gross income derived is less than 5% of the total worldwide gross income of the business annually. This means if your investment income exceeds 5% of your total income, you may no longer be able to deduct it for B&O tax purposes.

There are specific exemptions that may still allow deductions regardless of the 5% threshold:

Nonprofit organizations
Collective investment vehicles
Retirement accounts and their recipients
Family investment vehicles and their recipients

This change has particularly significant implications for active traders and investment-focused businesses. With the Antio court decision and HB 2081 now law, day traders may be pulled into Washington’s business tax system.

Sales tax expansion to digital services and technology

New taxable services starting October 2025

Senate Bill 5814 expands the sales and use tax base and B&O tax retailing classification to include the following services, effective October 1, 2025:

Information technology services: Including technical support, network operations support, help desk services, and training
Custom website development: Design, development, and support services
Custom software development: Including customization of prewritten software
Security services: Investigation, security monitoring, and armored car services
Temporary staffing services: With exceptions for certain hospitals
Advertising services: Both digital and non-digital creation and dissemination
Live presentations: Lectures, seminars, workshops, and courses

Digital advertising tax faces legal challenges

The digital advertising component of SB 5814 is particularly controversial and legal challenges – particularly under the federal Internet Tax Freedom Act (ITFA) – are ripe and appear inevitable. A digital banner ad will be taxed, whereas a banner towed by an airplane promoting the same product will not. This discriminatory treatment of digital versus traditional advertising mirrors issues that have led to ongoing litigation in Maryland.

The “human effort” exclusion elimination

Additionally, specific exclusions for digital automated services (DAS) are eliminated, except when occurring between members of an affiliated group. This means that services previously exempt because they involved significant human effort will now be subject to sales tax if delivered digitally.

Capital gains and estate tax increases for high-net-worth individuals

Progressive capital gains tax structure

Senate Bill 5813 imposes a 2.9% additional capital gains tax on Washington capital gains exceeding $1 million, in addition to the 7% capital gains tax currently imposed on capital gains exceeding $270,000. This creates an effective rate structure of:

7% on capital gains between $270,000 and $1 million
9.9% on capital gains exceeding $1 million

The additional tax is effective retroactively to January 1, 2025, which means it applies to transactions that occurred earlier this year.

Significant estate tax changes

The estate tax changes are equally substantial. SB 5813 imposes two primary changes to the current estate tax structure: (i) it increases the exemption amount to $3,000,000 to make up for the lack of adjustments between 2018 and 2025 and annually adjusts the amount for inflation starting in 2026; and (ii) it increases the graduated tax rates for assets above $1,000,000.

The estate tax rate now reaches a maximum of 35% for estates exceeding $9 million, making it the highest state-level estate tax rate in the nation by a large margin. For estates subject to both federal and state taxes, the combined effective tax rate is a maximum of approximately 61%.

Vehicle and fuel tax increases

Senate Bill 5801 amends various excise and other taxes with several provisions that will affect transportation costs:

Gas tax increase: Six cents per gallon starting July 1, 2025, bringing the total to $0.554 per gallon
Special fuel tax: Additional three cents per gallon beginning July 1, 2025
Rental car tax: Increases to 11.9% from 5.9% in 2026, then reduces to 9.9% in 2027
Luxury vehicle tax: New 8% tax on vehicles exceeding $100,000
Aircraft luxury tax: 10% tax on noncommercial aircraft exceeding $500,000

Eliminated business and occupation tax preferences

Senate Bill 5794 eliminates certain B&O tax preferential rates, likely in response to a recent tax exemption study published by the Washington Department of Revenue. Starting January 1, 2026, eliminated preferences include:

Certain seafood products manufacturing
Dairy products manufacturing
Fruit and vegetable canning
Processing perishable meat products
R&D performed by nonprofit organizations

Additionally, the bill eliminates the B&O tax exemption for the rental or lease of individual storage space at self-storage facilities, effective April 1, 2026.

What you should do now

Given the scope and complexity of these changes, taking action sooner rather than later is strongly recommended:

For businesses

Review your current tax classification and determine how the new rates will affect your B&O tax liability
Assess your investment income to understand the impact of the Antio decision clarification
Evaluate your service offerings to determine which may now be subject to sales tax
Update your sales tax collection processes if you provide newly taxable services
Consider the timing of any planned transactions given the retroactive nature of some changes

For individuals

Review your investment strategy in light of the higher capital gains tax rates
Reassess your estate planning given the increased estate tax exemption and higher rates
Consider accelerating or deferring capital gains depending on your specific situation
Evaluate the timing of any planned asset sales before year-end

Moving forward with confidence

While these tax changes represent significant increases, the key to managing their impact lies in understanding them thoroughly and planning accordingly. The legislation affects different taxpayers in different ways, and the specific impact on your situation will depend on your business structure, income levels, and transaction timing.

What’s particularly important to remember is that many of these changes are either newly effective or will take effect in the coming months. This means you still have time to plan and potentially mitigate some of the impacts through strategic decision-making.

The tax landscape in Washington has fundamentally shifted, but with proper planning and guidance, you can navigate these changes successfully. The most important step is to start the planning process now, while you still have time to make informed decisions about your tax strategy.

Ready to develop a strategy for these tax changes? Our team at BPM is here to help you understand the specific impact of these legislative changes on your business and personal tax situation. Contact us today to schedule a consultation and develop a plan that protects your interests while maintaining compliance with Washington’s evolving tax requirements.