On May 20, Washington state enacted SB 5814, expanding the sales and use tax base to include a range of high-tech and digital services, including advertising, software, and IT support. Signed into law by Governor Bob Ferguson, the legislation is expected to face swift legal challenges under the federal Internet Tax Freedom Act and may significantly impact businesses operating in the state.
Effective October 1, 2025, Washington’s sales and use tax base will expand significantly to include digital advertising and certain high-tech and IT services. The expanded law includes the following changes:
- Taxes Digital Advertising Services: Taxable digital advertising services include online referrals, search engine marketing, website traffic analysis, and web campaign planning. The law expressly does not tax advertising services in printing or publishing, radio, TV, and outdoor advertising such as billboards and transit displays.
- Taxes High-Tech and IT Services: The law imposes sales and use tax on high-tech services such as custom website development, IT technical support, virtual or in-person IT training, data processing, and data entry—types of business input services purchased by businesses that could potentially be passed on implicitly in the end price paid by consumers.
- Imposes a One-Time Sales Tax Prepayment Obligation: Businesses with $3 million or more in taxable sales during 2026 must prepay 80% of the sales tax collection during the June 2026 reporting period, by June 25, 2027. Failure to make the full payment by the due date will result in a one-time 10% penalty.
- Forecasts Significant Revenue for Washington: SB 5814 is projected to generate $1.1 billion in the next two years and $2.7 billion over four years and was designed to help bridge Washington’s $16 billion budget gap.
- Raises Constitutional Concerns: The discriminatory structure of the tax—targeting digital formats while exempting traditional media—raises potential challenges under the federal Internet Tax Freedom Act (ITFA) and First Amendment.
Taxpayers providing digital advertising, high-tech, and IT services should carefully review the impact of the expanded sales and use tax base. Litigation to challenge the legislation under the ITFA and First Amendment is expected, and the prepayment obligation is also a novel approach that may be subject to dispute. Taxpayers providing services subject to the tax should consider both the compliance requirements to mitigate unexpected exposures and potential challenges based on their business.