The Washington Department of Revenue (DOR) recently issued guidance for service providers with new and existing contracts entered into before the effective date of legislation, which expands the sales tax to additional services and repeals existing exclusions. See Interim guidance statement regarding contracts existing prior to October 1, 2025, and changes made by ESSB 5814 (August 29, 2025).
Background―Tax on Services Expanded
On May 20, 2025, Washington enacted SB 5814 (c. 422), under which the following services will be taxable as retail sales as of October 1, 2025: advertising; live presentations; information technology; custom website development; investigation, security, and armored cars; and temporary staffing. The tax will also be extended to sales of custom software and customization of prewritten software. In addition, the law also eliminates the following exclusions from the definition of digital automated services: services involving primarily human effort, live presentations, advertising services, and data processing services.
Guidance Issued in Response for Existing Contracts
The DOR was asked if existing contracts entered into before the October 1 effective date that were not subject to tax will continue to receive the same treatment. For purposes of the guidance, an existing contract must be signed and executed prior to October 1. The underlying services are to be provided on or will continue after October 1, and the underlying services of that contract would be a taxable retail sale as of October 1.
Examples Provided
The guidance offers numerous examples. One example concerns a taxpayer that has an existing contract under which the contract price has been paid before October 1, but the services are provided on or after October 1. Under the guidance, the sale is deemed to have occurred before October 1, and the transaction will not be subject to the retailing business and occupation (B&O) tax or retail sales tax and will be subject to the tax classification that applied before the changes made by the legislation. According to the department, it does not matter if the seller maintains its accounting records on a cash or accrual basis.
Under another example, the taxpayer has an existing contract, under which the contract price has not been paid and the services are provided on and after October 1. The contract terms will not be altered after October 1. Under this scenario, the DOR stated that it would accept tax reporting under the classification that applied to the underlying contract activity prior to October 1 and will allow this treatment until March 31, 2026. Starting April 1, 2026, the taxpayer must begin reporting retailing B&O tax and retail sales tax on the gross income received from existing contracts. If such a taxpayer elects to reporting and pay under the retailing B&O tax classification as per SB 5814 as of the October 1 effective date, the taxpayer must also collect and remit retail sales tax on those sales, unless a valid retail sales tax exemption applies. The guidance provides numerous other examples.
Altered Contracts
The DOR also advises that existing contracts that are altered after October 1, 2025, are subject to retailing B&O tax and retail sales tax at the time the contract is altered. Altered means that the contract is materially or substantively changed or amended. Such qualified changes include, but are not limited to, 1) the addition, removal, or exchange of the contracting parties; 2) changes to the underlying contract activities; 3) updates to contractual terms that impact any of the parties’ rights, responsibilities, or obligations; and 4) updates or changes to the contractual term, contract amount, or period the contract is in effect. The guidance provides examples and scenarios related to altered contracts.
Ryan’s Take and Action Steps
The guidance is clearly labeled as “interim guidance,” which means that it can be revised by the DOR. Service providers must first determine whether the contract is eligible―meaning whether the underlying service provided under the contract will be deemed a retail sale as of October 1. This should prompt taxpayers to immediately examine their current contracts to see whether the services they provide are currently exempt, will be subject to tax pursuant to the legislative change, and importantly whether such exemption may continue as per the guidance. An examination of all the examples and scenarios detailed in the guidance should be undertaken to determine whether they can be applied to a service provider’s contracts.
Contact our tax experts today to ensure your contracts comply with the new legislation.
TECHNICAL INFORMATION CONTACTS:
Zack Reif
Principal
Ryan
602.955.1792
zack.reif@ryan.com
Laraine Nebrida
Director
Ryan
713.629.0090
laraine.nebrida@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.