On May 20, Washington Gov. Bob Ferguson signed a series of tax bills designed to address a projected $16 billion shortfall in the 2025-2027 biennial operating budget. The changes include the increase of the business and occupation (B&O), capital gains, and estate tax rates; the extension of sales tax to additional business services; and the introduction of taxes on zero-emission vehicle credits.
Key Budget Package Tax Changes
B&O Tax (HB 2081, SB 5794)
Effective January 1, 2027, HB 2081 makes several changes to the state’s B&O tax rates, including increasing:
- Manufacturing and wholesaling B&O rates from 0.484% to 0.5%; and
- The retailing B&O rate from 0.471% to 0.5%.
The bill also increases the rate for service and other activities for companies with over $5 million in gross receipts subject to service and other activities B&O tax in the prior year from 1.75% to 2.1%. Businesses with less than $1 million in gross receipts subject to service and other activities B&O tax in the prior year will continue to be subject to a 1.5% rate, and businesses with between $1 million and $5 million in gross receipts subject to service and other activities B&O tax will continue to be subject to a 1.5% rate. Those changes take effect October 1, 2025.
SB 5794 eliminates the exemption for self-storage rentals and adds them to this classification. Washington previously classified this type of income as that from real estate rentals, which is excluded from B&O taxation.
HB 2081 also creates and increases the following surcharges:
- Companies will be subject to a 0.5% B&O tax surcharge on the amount of Washington taxable income over $250 million, effective January 1, 2026;
- The financial institutions surcharge will increase from 1.2% to 1.5%, effective October 1, 2025; and
- The advanced computing surcharge will rise from 1.22% (capped at $9 million) to 7.5% (capped at $75 million), effective January 1, 2026.
Finally, following the decision in Antio LLC v. Wash. State Dep’t of Rev. (see our related Alert, State Supreme Court Decision Prompts Washington to Rethink Its B&O Investment Income Rules), the legislature made clarifying changes to the investment income deduction. SB 5167 codifies a 5% incidental threshold and clarifies that nonprofit organizations, collective investment vehicles, retirement accounts and recipients of distributions therefrom, and family investment vehicles (which includes some trusts) and recipients of distributions therefrom may deduct investment income even if the nonprofit, collective investment vehicle, retirement account, or family investment vehicle exceeds the threshold.
SB 5167 directs the Department of Revenue to implement an expanded voluntary disclosure program for all entities engaged in investment activities that are not a banking, lending, or security business. The program allows taxpayers that are not under audit as of July 1, 2025, to disclose and pay tax liabilities related to investment activities in exchange for waivers of penalties and interest.
Capital Gains and Estate Taxes (SB 5813)
As part of the budget package, the rate on capital gains exceeding $1 million will increase from 7% to 9.9%. Gains above the exemption amount of $250,000 and below $1 million will continue to be taxed at 7%.
SB 5813 also establishes a new estate tax structure. Effective for deaths on or after July 1, 2025, the top rate will be 35% for estates over $9 million.
Sales Tax (SB 5814)
SB 5814 extends Washington’s sales tax to services such as custom software development, information technology training, live presentations, advertising, temporary staffing, security services, and data processing.
The bill also subjects synthetically created nicotine products to the state’s tobacco taxes.
Zero-Emission Vehicle Credits Tax (HB 2077)
As part of the budget package, HB 2077 introduces taxes on zero-emission vehicle credits, including a 2% tax if an automaker sells such credits to other manufacturers and a 10% tax on credits banked for use in future model years.
The bill also includes an exemption for automakers that bank or sell fewer than 25,000 credits per model year.
Major Transportation Bill Changes (SB 5801)
Washington state’s transportation revenue package (SB 5801) makes changes to fuel taxes and to sales taxes on motor vehicles and aircraft.
Effective July 1, 2025, the package increases the gasoline tax by $0.06 to $0.554 and the diesel tax by $0.03 to $0.524. Both taxes then increase by 2% annually.
Between July 1, 2025, and December 31, 2026, the retail car rental tax rate will increase from 5.9% to 11.9%; beginning January 1, 2027, it will decrease to 9.9%. SB 5801 extends the rental car tax to peer-to-peer car sharing.
The transportation package also adds luxury sales taxes on some sold or leased motor vehicles and aircraft. Automobiles with a price (without accounting for trades) greater than $100,000 will be taxed an additional 8% of the amount over $100,000. The $100,000 deduction amount increases by 2% each year beginning July 1, 2026. Noncommercial aircraft with a price (without accounting for trades) over $500,000 will be taxed at an additional 10% of the amount over $500,000.
Other changes in SB 5801 include:
- An increase of the additional sales tax on sales of motor vehicles from 0.3% to 0.5%;
- The imposition of an additional 0.5% sales tax on sales and leases of recreational vessels, which are defined as specified vessels subject to the watercraft excise tax;
- Increases to title, registration, and vehicle weight fees; and
- Increasing the fee on the sale of new vehicle tires from $1 to $5 per tire.
Wealth Tax and Property Tax Increases Not Included
Importantly, the final legislative changes do not include a pioneering state wealth tax, which would have imposed a 0.5% tax on an individual’s worldwide financial intangible assets exceeding $50 million.
The final bills also did not include the proposed 3% increase to the property tax limit. Under Washington law, property tax revenue can rise by only 1% per year in a single tax district.
Implications for Businesses and Individuals
The imposition of increased B&O tax rates and new B&O surcharges, as well as the application of the sales tax to many business-to-business services, will increase the tax burden of many Washington businesses.
The capital gains rate increase will affect Washington residents and those with Washington-source capital gains. Washington residents with large estates can expect the significant changes to the estate tax to have a substantial impact.
BDO Insight
- Retailing B&O tax and sales tax use a destination-based sourcing regime, while the service and other activities B&O tax is apportioned. Thus, it's crucial to evaluate the sourcing of newly taxable retail services to ensure the proper sourcing method is used, resulting in the correct amount of tax.
- The limited availability of deductions and credits for the B&O tax means any increase in rates or surcharges is likely to affect the profit margins of businesses operating in Washington.
- Companies now required to collect the state’s sales tax, including those providing custom software development and security services, will need to update their billing systems to collect the tax from customers.
- Similarly, auto, aircraft, and boat dealers will want to ensure that invoicing systems are set up to include the additional sales taxes on vehicles and vessels and the luxury taxes on vehicles and aircraft.
- Washington residents and those with Washington-source capital gains may benefit from evaluating the timing and amount of capital gains to plan for the rate increase.
- Taxpayers that might be affected by the significant increase in the estate tax should consider consulting wealth advisers to discuss planning options.
- Entities with liabilities arising from investments that came to light as a result of the Antio case may consider the expanded voluntary disclosure program for mitigating past exposure, penalties, and interest.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.