ARTICLE | August 24, 2026

Washington enacted significant tax legislation in 2025 and 2026 affecting high-income individuals, estates, businesses, vehicle purchases, services, and a range of industry-specific activities. The changes take effect over several years, making effective dates especially important. 

Millionaires’ Tax 

Beginning January 1, 2028, Washington will impose a 9.9% tax on an individual’s Washington taxable income. The tax will first be reported and paid in 2029, based on 2028 income. 

The tax generally applies after a $1 million standard deduction. For married couples and state-registered domestic partners, the combined deduction is $1 million, even if the taxpayers file separately. Consequently, the tax is based on Washington taxable income exceeding the applicable threshold—not simply on federal adjusted gross income exceeding $1 million. 

The tax base generally begins with federal adjusted gross income and includes specified Washington adjustments, such as: 

• Washington capital gains; 

• Certain income from state and local government bonds; 

• State tax credits; 

• Loss carryovers; 

• Income from incomplete non-grantor trusts; and 

• Other statutory adjustments. 

Washington residents generally allocate all income to Washington. Nonresidents are taxed on Washington-source income. A nonresident who performs services in Washington for five or fewer days during a calendar year generally will not allocate compensation to Washington under the applicable de minimis rule. 

Taxpayers may receive a nonrefundable credit for certain taxes paid to another state and for specified Washington taxes. 

Elective Pass-Through Entity Tax 

Beginning in 2028, eligible partnerships, LLCs, and S corporations may elect to pay a 9.9% pass-through entity tax at the entity level. The election is annual, must be made by a Department of Revenue-prescribed deadline no later than June 15 of the tax year, and is irrevocable for that year. 

The millionaire’s tax is being challenged in court. Its legal status also affects other scheduled changes to Washington’s taxation of certain services. If the tax is invalidated, some of the service-related sales tax repeals scheduled for 2029 may not take effect. 

For a deeper dive into the millionaires’ tax, check our webinar: https://insights.larsongross.com/project/wa-new-millionaires-tax/ 

Capital Gains Changes 

Washington’s existing capital gains tax also changed. For tax years beginning in 2025, the state’s 7% tax on Washington-allocated long-term capital gains exceeding $278,000 (indexed annually for inflation) is supplemented by a 2.9% tax on the portion of gains exceeding $1 million. 

These thresholds apply to taxable long-term capital gains, not to total federal income. 

Beginning June 11, 2026, taxpayers may prepay Washington capital gains tax up to six months before the filing deadline. No interest accrues on an overpayment made during that prepayment period. The legislation also revises the definition of federal net long-term capital gain used in calculating the Washington tax. 

Interaction between the Millionaires’ Tax and the Capital Gain Tax 

For purposes of the millionaires’ tax, Washington generally removes long-term capital gains and losses included in federal AGI and then adds back Washington capital gains subject to the capital gains tax, together with the amount deducted under the capital gains tax’s standard deduction provision. The statute also excludes long-term gains from sales or exchanges exempt under RCW 82.87.050. In practical terms, the capital-gains standard deduction is not intended to reduce the same gain twice—once for the capital gains tax and again for the millionaires’ tax.  

The millionaires’ tax then provides a nonrefundable credit for Washington capital gains tax imposed on the same Washington capital gains for the same tax year. The credit cannot exceed the millionaires’ tax otherwise due, cannot generate a refund, and cannot be carried forward or backward.  

Illustrative example  Assume, solely for illustration, that:  An individual has $1.2 million of Washington long-term capital gains;  The capital gains standard deduction is $250,000;  There are no other items of income, deductions, or exemptions; and  The gain is not from an exempt asset.

The capital gains tax would apply to $950,000, producing a 7% tax of $66,500. For the millionaires’ tax, the capital gain is removed from federal AGI and then added back with the $250,000 capital-gains deduction, producing approximately $1.2 million of Washington base income. The $1 million millionaires’ tax deduction would leave $200,000 subject to the 9.90% rate, or $19,800 before credits. The $66,500 capital gains tax credit would eliminate the $19,800 millionaires’ tax, but the unused $46,700 would not be refundable or available in another year. The taxpayer would still owe the $66,500 capital gains tax. 

This example demonstrates that the capital gains tax generally remains payable even when its credit eliminates the millionaires’ tax. Conversely, a taxpayer may owe the millionaires’ tax because of a combination of ordinary income and capital gains even when the capital gains tax itself does not apply. 

Estate Tax 

Washington’s estate tax rules changed twice within a relatively short period. 

For decedents dying on or after July 1, 2025, Washington temporarily increased the applicable exclusion amount to $3,076,000 and increased rates for larger estates. Under that structure, the highest rate reached 35% for Washington taxable estates of $9 million or more. The exclusion amount was also scheduled to receive inflation adjustments beginning in 2026. 

For decedents dying on or after July 1, 2026, subsequent legislation generally restores the pre-July 2025 rate structure. Rates now generally range from 10% to 20%. The legislation also modifies the applicable exclusion amount and the deduction available for qualified family-owned businesses. 

These changes create different estate-tax results depending on the decedent’s date of death. Estate planning documents and valuation analyses should therefore account for the applicable law in effect on that date. 

Luxury Taxes and Transportation-Related Taxes 

Luxury Vehicle Tax 

An 8% luxury tax applies to the portion of the value of a qualifying motor vehicle exceeding $100,000. The $100,000 threshold increases by 2% at the beginning of each fiscal year. 

Trade-in value generally cannot be used to reduce the amount subject to the luxury tax. Commercial vehicles and vehicles weighing more than 10,000 pounds are generally excluded, although motor homes received special treatment under the 2026 legislation. 

For leased vehicles, the luxury tax may be spread over the lease payments rather than imposed entirely at the beginning of the lease. The 2026 legislation also modified the tax base and clarified exemptions for certain tribal and nonresident transactions. 

Motor homes are temporarily exempt from the luxury vehicle tax for vehicles sold or used between July 1 and December 31, 2026. Washington also created a penalty-and-interest waiver program for certain luxury vehicle tax periods through June 30, 2026. 

Other Vehicle and Transportation Taxes 

Beginning January 1, 2026: 

• The additional motor-vehicle sales and use tax increased from 0.3% to 0.5%. 

• The replacement-tire fee increased to $5 per tire. 

The rental-car tax increased to 11.9% in 2026 and is scheduled to decrease to 9.9% beginning January 1, 2027. 

A 9.9% tax on specified peer-to-peer vehicle-sharing transactions begins January 1, 2027. 

A 0.5% additional tax on recreational vessels was scheduled to begin July 1, 2026. The 2026 legislation modified the vessel-tax base and addressed exemptions for qualifying tribal and nonresident transactions. 

The 2026 legislation also repealed the luxury-aircraft tax. 

Other B&O Changes 

Washington enacted broad changes to its business and occupation tax system. The changes include rate increases, new surcharges, changes to small-business relief, and industry-specific rules. 

General B&O Rates and Surcharges 

The standard B&O rates of 0.484% and 0.471% increased to 0.5%. 

The service and other activities classification was restructured into three tiers, with a top rate of 2.1%, generally effective October 1, 2025. 

Other rate increases and surcharges include: 

• The base gambling B&O rate increased from 1.5% to 1.8%. 

• A temporary 0.5% surcharge applies to Washington taxable income exceeding $250 million per calendar year. 

• The financial-institution surcharge increased to 1.5%. 

• The advanced-computing surcharge increased to 7.5%, subject to a $75 million annual cap per taxpayer. 

Beginning July 1, 2026, specified amounts are excluded from the high-grossing-business surcharge. The exclusions include amounts received by hospitals, certain prescription-drug warehousing and reselling businesses, licensed health-care providers, and wholesale sellers of food and food ingredients. 

Small-Business Relief 

Beginning July 1, 2026, the small-business B&O credit increases to: 

• $125 per month for nonservice businesses; and 

• $375 per month for service businesses. 

The annual taxable-income threshold for filing B&O returns also increases from $125,000 to $250,000. 

Industry-Specific B&O Changes 

Several industries received specialized rules: 

• Mortgage lenders: Beginning July 1, 2026, the mortgage-interest deduction is generally limited to lenders with less than $10 billion in annual mortgage originations. This replaces the prior limitation based on whether a lender operated in 10 or fewer states. 

• Insurance companies: Retroactive to October 2, 2019, the exemption for insurance-premium-tax-related amounts is generally limited to the person that actually paid the insurance premium tax. Amounts received from annuity sales are exempt. Certain retroactive liabilities may qualify for penalty and interest relief and may be paid over as many as three years. 

• Advanced computing and insurance: All insurance companies are exempt from the advanced-computing surcharge retroactive to January 1, 2022. An affiliated group deriving more than half of its worldwide revenue from insurance premiums is subject to a $25 million group cap. 

• Prescription drugs: Beginning January 1, 2027, a qualifying critical-access pharmacy may use a 0.138% preferential B&O rate. The preferential rate for warehousing and reselling prescription drugs is repealed for 2027, when the regular 0.5% wholesaling rate returns. A new 0.35% preferential rate applies beginning in 2028. 

• Payment-card processing: Beginning January 1, 2026, payment-card processing is subject to a 3.1% B&O rate, with deductions for specified interchange, network, and processor-retained fees. Closed-loop payment networks are excluded. 

• Storage units: Storage-unit rentals became subject to service-and-other-activities B&O tax beginning April 1, 2026, at a rate of 1.5% or 1.75%, depending on the applicable classification. 

Washington also clarified that the incidental-investment-income deduction generally applies when investment income is less than 5% of worldwide gross income. Several B&O preferences were repealed effective January 1, 2026, including preferences for title-insurance agents, certain testing laboratories, international services, precious metals and bullion, and home-energy assistance. 

Rate Updates and Other Tax Changes 

Taxation of Services 

Beginning October 1, 2025, Washington expanded retail sales and use tax to a number of services, including: 

• Information-technology training and technical support; 

• Custom website development; 

• Custom software and customization of prewritten software; 

• Investigation, security monitoring, security, and armored-car services; 

• Temporary staffing; 

• Advertising; and 

• Live presentations. 

The law also narrowed certain exclusions for digital automated services while retaining or creating exclusions for specified affiliated-group transactions and telehealth services. 

 

The 2026 legislation made several refinements. Among other changes, it:  Excluded direct hires, paymaster services, and independent contractors from temporary staffing services;  Clarified the scope of taxable investigation services;  Narrowed the definition of taxable live presentations;  Allowed advertising services to qualify for a multiple-points-of-use exemption;  Excluded specified temporary staffing services provided to hospital-based clinics; and  Exempted certain retail services purchased by schools and libraries.

Many of the 2025 service taxes are scheduled for repeal beginning January 1, 2029, including taxes on custom software, information-technology consulting, training and support, custom websites, data processing and data entry, investigation and security services, most temporary staffing, and live presentations. Advertising is not included in the listed repeal. The repeal is contingent on the millionaire’s tax surviving its legal challenge. 

Consumer, Data Center, and Excise Tax Changes 

The 2026 legislation created or expanded sales and use tax relief for certain grooming and hygiene products, diapers, over-the-counter drugs, and services purchased by schools and libraries. Effective dates vary, with several broader exemptions scheduled for January 1, 2029. 

For data centers, refurbishment-based exemption certificates generally expire or may no longer be issued beginning July 1, 2026. Replacement server equipment is excluded from eligible equipment. Newly constructed data centers may continue to qualify for exemption certificates, but the exemption generally applies only to the initial installation of original server equipment and not to later server refreshes. 

Other excise tax changes include: 

Tobacco-derived and synthetic nicotine products became subject to the other-tobacco-products tax beginning January 1, 2026. 

Nicotine vapor products generally moved from the volumetric vapor-products tax to the tobacco-products tax. 

Manufacturers became subject to an excise tax on banking or selling surplus zero-emission vehicle credits beginning May 20, 2025, for credits associated with model year 2024 and later. 

The hazardous-substance-tax exemption for agricultural crop-protection products was extended through January 1, 2038, subject to statutory limitations. 

Sales and use tax exemptions for coal used to generate electricity were repealed effective March 11, 2026. 

Businesses may round cash payments to the nearest nickel beginning June 11, 2026. The selling price and tax must be calculated before rounding, and the tax itself may not be rounded. Amounts retained through upward rounding are not subject to B&O tax, while amounts forgiven through downward rounding are not deductible. 

Conclusion 

Washington’s recent tax legislation creates a layered transition in which the rules may change several times between 2025 and 2029. The most significant developments are the 2028 millionaire’s tax and elective pass-through entity tax, the revised estate-tax regime, new luxury vehicle and transportation taxes, substantial B&O changes, and the temporary expansion—and possible future repeal—of sales tax on services. 

Businesses and individuals should pay particular attention to the effective dates of October 1, 2025; January 1, 2026; July 1, 2026; January 1, 2027; January 1, 2028; and January 1, 2029, as well as the continuing litigation over Washington’s high-income tax.