How 2025 Washington state tax reform impacts businesses and taxpayers
The Washington State Legislature has enacted a series of sweeping tax reforms during its 2025 session, signaling a shift toward progressive taxation and modernization of the state’s revenue system.
These changes will significantly impact large businesses, high-income individuals and digital service providers. Below is a comprehensive breakdown of the most consequential legislation in the Washington state tax reform.
Major overhaul of the B&O tax system: House Bill 2081
Effective January 1, 2026, HB 2081 introduces a 0.5% surcharge on all business and occupation (B&O) tax classifications for businesses exceeding $250 million of Washington-taxable revenue. The surcharge is expected to generate substantial revenue to support state programs.
The bill increases the surcharge rate for specified financial institutions by 0.3% to 1.5% effective October 1, 2025. The advanced computing surcharge rate will see an increase from 1.22% to 7.5% effective January 1, 2026, and also raises the surcharge cap from $9 million to $75 million annually.
These changes primarily affect financial institutions and companies in the high-tech sector, particularly those engaged in cloud computing and data processing, respectively.
Beginning January 1, 2027, the standard B&O tax rate for many classifications will increase from 0.484% or 0.471% to a flat 0.5%. The rate for contests of chance (gambling) will also see an increase to 1.8%.
Beginning October 1, 2025, a progressive rate structure will be introduced for the “Service and Other Business Activities” classification:
- 1.5% for businesses with gross income under $1 million
- 1.75% for income between $1 million and $5 million
- 2.1% for income exceeding $5 million
This marks a significant departure from Washington’s traditionally flat B&O tax structure and reflects a broader move toward income-sensitive taxation.
Lastly, following the Antio LLC v. Department of Revenue decision, this bill amends RCW 82.04.4281 to state that only “incidental” investment income may be deducted under the investment income deduction. According to the Antio decision, “incidental” is defined as less than 5% of total gross income annually.
Clarification of payment card processing taxation: House Bill 2020
Effective January 1, 2026, HB 2020 creates a new B&O tax classification for payment card processing services. This new classification is taxed at a 3.1% rate and allows deductions for interchange fees, network fees and fees retained by other payment processors.
Expansion of sales tax to digital and other services: Senate Bill 5814
Effective October 1, 2025, SB 5814 expands the retail sales tax base to include a broader range of digital services.
The bill eliminates the “human effort” exclusion, which previously exempted certain digital services involving manual input or oversight. As a result, services such as automated marketing platforms, AI-driven analytics tools and cloud-based software subscriptions may now be subject to digital sales tax.
Additionally, services such as IT training and support, custom website and software development, temporary staffing services, digital and nondigital advertising, live presentations and investigation, security, security monitoring and armored car services are now subject to sales tax.
This change aligns Washington with other states that have modernized their tax codes to reflect the digital economy and is expected to generate significant new revenue from the tech and media sectors.
Capital gains and estate tax reform: Senate Bill 5813
Effective January 1, 2025, SB 5813 introduces a progressive capital gains tax:
- 7% on gains under $1 million
- An additional 2.9% on gains over $1 million
This replaces the previous flat rate and is designed to increase tax equity by placing a greater burden on ultra-high-net-worth individuals.
The bill also revises the estate tax structure, increasing the top marginal rate to 35% for estates exceeding $9 million. However, it maintains key exemptions for retirement accounts and family-owned farms.
The exclusion threshold for taxable estates is raised to $3 million, offering some relief to smaller estates while increasing obligations for larger ones.
Reform of tax preferences: Senate Bill 5794
Effective January 1, 2026, SB 5794 eliminates over a dozen outdated or underperforming tax preferences. These include exemptions and deductions that no longer align with the state’s economic goals or have failed to deliver measurable benefits. Eliminations include various food-related manufacturing exemptions, such as those for certain seafood and dairy products, perishable meat processing and fruit and vegetable canning.
Effective October 1, 2025, the limited B&O tax exemption for credit unions merging with or acquiring a bank regulated by the Department of Financial Institutions is repealed, subjecting credit unions and banks to a 1.2% B&O rate.
Effective April 1, 2026, the B&O tax exemption for the rental or lease of storage space as self-storage facilities is repealed.
The bill also mandates regular performance reviews of remaining tax preferences, requiring the Department of Revenue to assess their effectiveness and recommend changes or repeals as needed. This move is part of a broader effort to ensure transparency and accountability in tax policy.
Transportation revenue and infrastructure funding: Senate Bill 5801
Effective July 1, 2025, SB 5801 introduces several new revenue measures to support transportation infrastructure:
- A 6-cent increase (subject to inflation) in the state fuel tax, effective July 1, 2025
- An 8% luxury sales tax on vehicles valued at $100,000 or more, effective January 1, 2026
- A 10% luxury sales tax on noncommercial aircraft valued at $500,000 or more, effective April 1, 2026
These measures aim to address funding shortfalls in transportation while promoting environmental sustainability by shifting some of the tax burden to luxury and high-emission vehicles.
What businesses and individuals should do next
These legislative changes will have far-reaching implications for tax planning, compliance and financial strategy.
To prepare, businesses should:
- Reevaluate their B&O tax classification and assess exposure to new surcharges.
- Review digital service offerings for potential sales tax obligations.
- Prepare for increased documentation and reporting requirements.
High-income individuals and estate planners should:
- Reassess capital gains strategies in light of the new progressive rates.
- Update estate plans to reflect the revised brackets and exclusions.
Proactive planning can help ensure that you’re maximizing tax strategies to support your business or wealth goals.
How Wipfli can help
Navigate complex state and local tax changes with confidence. Wipfli’s experienced advisors can help you optimize your strategy, minimize risk and uncover opportunities in Washington’s new tax landscape.
Reach out today to talk about how these reforms may impact your business or personal tax strategy.
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