‘It’s been a little confusing’: WA businesses look to navigate new sales tax law

Trevor Finchamp, co-owner of Karma Cultivate, was surprised when he received a notice from the Washington Department of Revenue this summer.

The Spokane-based digital marketing agency he runs with his wife has roughly a dozen clients and mainly cater to nonprofit organizations. Founded nearly six years ago, the firm offers services such as website creation, photography, video and event planning.

In August, Finchamp was among 90,000 business owners in Washington notified that beginning Oct. 1, their business would need to start collecting sales tax from customers as the result of a tax package adopted during the 2025 legislative session.

“I’m not antitax, by any means. I understand where it’s going, and I support that,” Finchamp said. “But the way this has been rolled out, it’s been a little confusing and abrupt, and especially when it’s affecting nonprofits, it’s a little more frustrating to have to charge them more.”

Days before the change takes effect, Finchamp is unsure “exactly what services it will apply to.”

The change has sparked surprise regarding which businesses are affected, concern that costs will ultimately be passed down to consumers and more questions from some business owners. It has also prompted a lawsuit from Comcast, which alleges portions of the newly-adopted tax law violates a federal law against “discriminatory taxes” on electronic commerce.

The new sales tax law hits various service industries, including advertising, live presentations, temporary staffing, armored car services and custom website development. The new taxes were passed this spring by the Legislature and signed by Gov. Bob Ferguson to help lawmakers collect an extra $1.12 billion through 2027 to help close the state’s budget deficit.

As he signed the change into law in May, Gov. Bob Ferguson said the sales tax increase and other changes in the legislation “raises revenue necessary to balance our budget” and that they are part of a “balanced approach” in the $9.4 billion tax package that he ultimately signed off on. In his comments, Ferguson noted that he rejected two other tax proposals put forth by budget writers that would have collected more tax revenue than the package that ultimately passed.

“I understand, very clearly, that this will be a very challenging budget for Washingtonians. There’s no two ways around that,” Ferguson said during a May 20 press conference after he signed a two-year operating budget and tax legislation into law. “But I believe it’s a balanced approach, and I think it sets us on a trajectory for sustainability in the future.”

As lawmakers debated the legislation on the House floor, State Rep. April Berg, D-Mill Creek, chair of the House Finance committee, said the legislation would help “modernize” Washington’s tax code “so that we can tax the things that folks actually are using in our state.”

“A bill like this starts to tax services,” Berg said. “We are more of a service economy in this state now more than ever. We used to be very agriculture and farming based, manufacturing is still a huge part of our community. But services, technology, that is now most of our economy.”

The revenue, Berg said, would help fund schools, the justice system, health care and other programs that residents rely on.

Republicans, though, contend the legislation was rushed without full consideration of the impact. State Rep. Travis Couture, R-Allyn, said Friday that the change to the sales tax “caused a lot of confusion” over the summer for affected small businesses.

“Some of them maybe heard about new taxes, but it gets confusing,” Couture said. “And now they’re seeing all of the guidance and memos from the Department of Revenue, and they’re just shocked, like ‘How does this apply to me?’ ”

Comcast’s lawsuit, filed in Thurston County, alleges the tax on internet advertising violates the Internet Tax Freedom Act, as it exempts some forms of advertising, including advertising in newspapers, radio and television.

Should they succeed, Couture said it could reduce state revenue by as much as $500 million over the next four fiscal years.

“If that does actually occur, then our state budget, which just recently took almost a billion-dollar hit in the revenue forecast, could take another $500 million hit for the loss of taxes for some period of time until something is worked out, either by the court or by the Legislature,” Couture said. “So, there’s a lot of frustration going on.”

Starting Oct. 1, some also will notice other changes that take effect. The cost of a Discover Pass, which provides unlimited day-use entry to state parks and recreation areas, will rise from $30 to $45 – the first time its price has been increased since 2011.

An increased business and occupation tax on “specified financial institutions” and service businesses with an annual gross income over $5 million also will go into effect this week. A business and occupation tax is on a business’s gross revenue, not on profits.

But as the new sales tax laws take effect, some say customers should anticipate an adjustment period as businesses collect sales taxes for the first time.

Patrick Connor, Washington state director for the National Federation of Independent Business, said in an interview that businesses that didn’t previously charge the sales tax will need to get caught up on the ins and outs of calculating and remitting the tax.

“There’s likely to be a learning curve in addition to having to field calls from angry customers suddenly having to pay 10% because sales tax has been added to an existing contract,” Connor said.

After notifying the businesses, the revenue department worked to determine how the new tax laws will be implemented.

In recent weeks, the agency has issued interim guidance for businesses to follow as it develops permanent sales tax rules, which shows how the same service may – or may not – be subject to the tax.

For instance, the agency determined that driving courses qualify as a “live presentation,” and thus are subjected to the tax, at least if the class is from a private, independent driving school.

“A driving school is considered a live presentation now, and that is part of the shock,” Couture said. “How some of these items are seemingly clear language but they got wrapped up into it.”

The guidance, issued earlier this month, specifies that courses offered by private or public secondary schools or one-on-one lessons do not qualify for the tax.

“There’s a deep unfairness there and an inequity in how the tax is going to apply,” Connor said. “If your kid goes to a high school that still has a driver’s ed course, then there’s no tax. If your school doesn’t offer it and you have to go to the local driving school, now it’s going to cost that family 10% more.”

Precision Driving Academy, based in Liberty Lake, is one of the driving schools who will now charge the tax. Co-owner JC Dimitrova said Friday that the company wanted to be “very transparent with their customers” about the change. A banner on the top of their website now warns visitors that beginning Oct. 1, the sales tax will be applied to all driving courses and written tests, and the company also sent emails to students who may be impacted.

“I would say that some families are frustrated, but at the same time, they know that this is out of our control,” Dimitrova said. “But they are very grateful that we are being very transparent about what we’re seeing come down the pipeline.”

While some customers will notice the increased costs when they go to a register, Connor said it mostly will be paid in business-to-business transactions, with owners now paying the tax on their security systems, outside tech support and for advertising.

“So, businesses, particularly small businesses, are going to be making some tough decisions about where to spend their dollars given the pending increase,” Connor said. “And others are going to have to decide whether they can, and if they should, increase their price to consumers, and what that will do to impact their customers.”

Finchamp said while they haven’t lost a client due to the new charge, some have inquired about potentially reducing the size and scope of the contracts to account for the new costs as they brace for financial uncertainty.

“They’re all operating with really thin budgets, and hearing that they have to dedicate any additional funding towards their marketing or fundraising effort is always kind of a gut punch when they’re trying to put as much as possible toward their mission,” Finchamp said. “I think the general response has been concern. I think all of the nonprofits are bracing for a challenging year next year, with the economy and limited grant opportunities, so they’re all just trying to figure out where the money’s going to come from.”