ARTICLE | June 02, 2025

Executive summary

On May 20, 2025, Washington Gov. Bob Ferguson signed multiple tax bills into law as part of the biennial budget passed by the state legislature on April 28, 2025. Collectively, the tax bills adopt both tax increases and new taxes to balance the budget and help reduce growing projected deficits. Specifically, the tax bills broaden the retail sales tax base, increase tax rates for business & occupation (B&O) tax, capital gains excise tax, and estate tax, and add new tax surcharges for certain large businesses and financial institutions. A selective summary of the more salient provisions is provided in the article below.

House Bill 2081: B&O tax rate increases

General classification changes

House Bill 2081 makes numerous rate adjustments to the B&O tax effective as described in the ‘New Rate’ column below.

Surcharge rates

The bill increases the B&O tax surcharge rate for specified financial institutions to 1.5% from 1.2%, effective Oct. 1, 2025, and the Advanced Computing Surcharge (ACS) surcharge to 7.5% from 1.22%, effective Jan. 1, 2026. The ACS annual cap has also increased to $75 million from $9 million.

Additionally, the bill imposes a new 0.5% B&O tax surcharge on Washington-taxable income over $250 million in a calendar year, effective Jan. 1, 2026. There are several exemptions from the surcharge, including those engaged in the primary business as a farmer or eligible apiarists and those subject to the ACS. Income exempt from the surcharge includes sales of food and food ingredients and prescription drugs, certain income from timber products, certain income subject to manufacturing tax rates, income from the wholesale or retail sale of self-manufactured products, and income from various wholesale and retail fuel transactions. The surcharge is scheduled to expire on Dec. 31, 2029.

Antio response

Effective Jan. 1, 2026, House Bill 2081 clarifies the Washington Supreme Court’s decision in Antio, LLC v. Dept. of Revenue, explicitly providing that only ‘incidental’ investment income may be deducted for B&O tax purposes. 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.

The legislation clarifies what gross receipts may be deducted by allowing the following persons to deduct amounts derived from investments regardless of whether the investments are incidental to the main purpose of the person’s business: nonprofit organizations, collective investment vehicles, retirement accounts and recipients of distributions from those accounts, and family investment vehicles and recipients of family investment vehicles. However, those persons remain subject to the B&O tax on their gross receipts derived from activities not qualifying as investments–limitations unchanged by House Bill 2081. There are also limitations placed on the deductibility of collective investment vehicles.

House Bill 2020: New B&O tax classification for payment card processing

House Bill 2020 imposes a new tax classification for purposes of the B&O tax for businesses conducting payment card processing activities, effective Jan. 1, 2026. The classification is subject to a 3.1% rate. Payment card processing activities include services related to directly or indirectly acquiring, processing, or routing electronic transactions for issuers, acquirers, payment networks or merchants. Those activities do not include issuing and authorizing the use of payment cards, authorization and clearance of transactions by a payment network, or retail services or the retail sale of hardware or software. Exceptions to the new tax classification include activities where the processor also operates or is affiliated with the payment network and makes payment to an affiliated financial institution and where the payment card processing company is also the issuer of the card.

Senate Bill 5814: Sales and use tax and B&O base expansion

Sales tax base expansion

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

• IT training services and technical support, including assisting with network operations and support, help desk services, in-person training, and similar services.
• Custom website development services, such as design, development and support.
• Custom software development and customization of prewritten software.
• Investigation, security, security monitoring and armored car services.
• Temporary staffing services, except for certain hospitals.
• Digital and nondigital services related to the creation and dissemination of advertisements, but excluding newspapers, printing or publishing, and radio and television broadcasting.
• Live presentations, including lectures, seminars, workshops or certain courses.

Additionally, specific exclusions for digital automated services (DAS) are eliminated, except when occurring between members of an affiliated group. Those services include services primarily involving human effort, live presentations, advertising services and data processing services.

Finally, the bill amends how certain products are taxed under nicotine products by expanding the definition of ‘tobacco products’ to include non-tobacco nicotine products, such as tobacco-derived or synthetic products.

Senate Bill 5813: Capital gains and estate tax increases

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 (2024 inflation adjusted amount), effective Jan. 1, 2025. The rate remains 7% for capital gains of $1 million or less.

The Washington estate tax is based on taxable estate value per $1 million bracket. The top bracket includes estates valued at $9 million or more. The bill increases the estate tax for each bracket beginning at $1 million. The estate tax rate increases from 20% to 35% on estates with a taxable estate value of $9 million and greater. There is no change in the estate tax for estates up to $1 million. However, both the estate tax deduction and the qualifying family-owned business interest deduction for decedents dying on or after July 1, 2025, is increased to $3 million with corresponding changes to how inflation adjustments are made.

Senate Bill 5794: B&O tax preferential rate repeals

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. Some of the eliminations include certain seafood products manufacturing, dairy products manufacturing, fruit and vegetable canning, processing perishable meat products, and R&D performed by nonprofit organizations, among others, effective Jan. 1, 2026.

Additionally, the legislation makes the following changes:

Effective Oct. 1, 2025, eliminates the B&O tax exemption for a Washington credit union merging or acquiring a bank that is regulated by the department of financial institutions. Such credit union will now be subject to a B&O of 1.2%.

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

Senate Bill 5801: Vehicle-related transactions

Senate Bill 5801 amends various excise and other taxes as listed below:

• Increases the gas tax rate by six-cents-per-gallon, for a total of $0.554 per gallon, beginning July 1, 2025, with an inflation adjustment beginning July 1, 2026. An additional three-cent-per-gallon tax is imposed on special fuel, beginning July 1, 2025, with an inflation adjustment beginning July 1, 2028.
• Increases the rental car sales tax to 11.9% from 5.9% in the 2026 calendar year, and then reduces the rate to 9.9% beginning Jan. 1, 2027.
• Imposes additional luxury taxes on the sale, lease or transfer of certain vehicles on the amount exceeding $100,000 and on the amount exceeding $500,000 for certain noncommercial aircraft.