Alert
2025 Washington State Legislative Session Update: Prepare for Excise Tax Changes
The 2025 Washington legislative session adjourned April 27th, with the legislature approving a $77.87 billion two-year state operating budget, including a variety of excise tax increases and other changes.
Explore the Washington State excise tax changes and how they can impact Washington businesses with the following insights.
Business & Occupation Tax
The Business & Occupation (B&O) tax is imposed on gross receipts under various classifications. The most common B&O tax classifications are retailing, wholesaling, manufacturing, and service and other activities.
Tax Rate Increases
Beginning January 1, 2027, Engrossed Substitute House Bill (ESHB) 2081 enacts B&O tax rate increases to 0.5% for the following business activities:
- Retailing
- Wholesaling
- Standard manufacturing and extracting
- Manufacturing, retailing, and wholesaling of commercial airplanes and component parts
- Printing and publishing of periodicals or magazines
- Chemical dependency treatment
- Salmon canning services
- Insurance agents
- Childcare
- Cold storage warehousing
- Highway contractors and government contracting
Additionally, beginning January 1, 2027, the B&O tax rate for businesses with more than $5 million of gross receipts from service and other activities will increase from 1.75% to 2.1%.
Tax Surcharge Increases
In addition to these tax rate increases, ESHB 2081 also increases the:
- Surcharge on specified financial institutions increases from 1.2% to 1.5%;
- Surcharge on advanced computing services increases from 1.22% to 7.5%
Additionally, a new 0.5% B&O surcharge is imposed on taxpayers with taxable income over $250 million. Persons engaged in farming and taxpayers subject to the advanced computing surcharge are not subject to this surcharge.
Exclusions from determining taxable income include income from:
- Manufacturing
- Selling products manufactured by the taxpayer
- Specific products, including, but not limited to, food, food ingredients, prescription drugs.
Additional B&O Tax Changes
Investment Income Deduction
As a result of the uncertainty surrounding the investment income deduction from the Washington State Supreme Court decision in Antio, LLC v. Wash. State Dep’t of Revenue (2024), ESHB 2081 clarifies that the investment income deduction is limited to only amounts incidental to the main purpose of the business.
Investments are considered incidental if the total worldwide gross income from investments is less than 5% of the business’s annual total worldwide income.
The deduction limitation doesn’t apply to:
- Nonprofit organizations
- Collective investment vehicles
- Family investment vehicles
- Retirement accounts
Retail Sales and Use Tax Changes
Services Subject to Sales Tax
Effective October 1, 2025, Engrossed Substitute Senate Bill (ESSB) 5814 imposes retail sales and use tax on several activities that were previously subject to the Service & Other Activities B&O tax.
The services impacted include:
- Information technology training services and technical support;
- Custom website development services;
- Custom software and customization of prewritten computer software;
- Investigation and security services, including monitoring and armored car services;
- Temporary staffing services; and
- Advertising services (both digital and non-digital).
Digital products, which encompass digital goods and digital automated services (DAS), will continue to be taxed regardless of access method. DAS, defined as services transferred electronically using software applications, will also see new classifications under SB 5814, making the following services taxable:
- Services primarily involving the application of human effort by the seller
- Live presentations
- Advertising services
- Digital processing services
Exemptions from New Retail Sales Tax Imposition
Certain services will remain subject to the Service & Other Activities B&O tax, including:
- Temporary staffing services utilized by hospitals
- Telehealth and telemedicine services
The following services are also impacted when the sale of such services is between members of an affiliated group:
- Information technology consulting training, and support services
- Custom web design services
- Investigation and security services
- Advertising services
- Digital automated services primarily involving human effort
- Live presentations conducted via the internet or telecommunications
- Data processing services
Capital Gains Tax and Estate Tax Increases
Beginning with tax year 2025 and tax collection in calendar year 2026, the state capital gains tax will be revised as follows:
- Washington Capital Gains of $1 Million or Less. The tax remain 7%
- Washington Capital Gains Exceeding $1 Million. The tax increases to 9.9% on the amount of capital gains exceeding $1 million.
The state estate tax will be revised as follows:
- The exclusion amount for an estate is increased to $3 million for estates of decedents dying between July 1, 2025 and January 1, 2026. The exclusion will be increased each year based on the consumer price index.
- For estates of decedents dying on or after July 1, 2025, the rate of the estate tax is increased. The rate is based on the value of the property in the estate, with a maximum rate of 35%, up from the original 20%.
Property Tax Increases
Beginning in the 2026 calendar year, ESSB 2049 increases a school district's maximum per-pupil limit for enrichment levy purposes is increased as follows:
- Maximum per-pupil limit is increased by an inflation enhancement of $500 above Seattle CPI for all school districts in CY 2026.
- Maximum per-pupil limit is increased for school districts with fewer than 40,000 students by an inflation enhancement of 3.3%above Seattle CPI each year from CY 2027 to CY 2030.
- Beginning in CY 2031, the maximum per-pupil limit is $5,035 for all school districts, to be increased by Seattle CPI annually thereafter.
Other Important Tax Changes
Effective April 1, 2026, ESSB 5794 eliminates the following tax preferences:
- Exemptions for sales of precious metals and bullion
- Home energy assistance public utility tax credit
- International services B&O tax credit
Credit Union Changes
Beginning October 1, 2025, state-chartered credit unions that merge with or acquire a bank will no longer be exempt from the B&O tax, which will be set at 1.2% of their gross income.
B&O Tax on Storage Unit Rental Income
Beginning April 1, 2026, the rental or lease of individual self-service storage space will be subject to B&O tax at a rate of 1.5% or 1.75%, regardless of duration.
We’re Here to Help
For more information about how your business could be affected by the 2025 Washington legislative session, contact your Moss Adams professional.