Article

Washington Legislature passes multiple bills with significant tax changes

May 07, 2025 · Authored by Shannon Bonner, Kelly Nelson

The Washington Legislature passed a series of bills containing significant tax changes during the last week of April and the bills currently sit with the Governor awaiting signature.

The bills contain measures to increase the capital gains tax on high income earners, modify the estate tax, expand the state sales tax, and increase the business and occupations tax on certain industries, among other changes.

Capital gains tax increase

Washington’s capital gains tax was approved in 2021 and effective Jan. 1, 2022. The tax has survived repeal efforts including legal challenges and a statewide ballot initiative this past November.

With the tax being upheld, the Legislature passed changes to the capital gains tax rate beginning Jan. 1, 2025. Specifically, SB 5813 adds a new tier to the state’s capital gains excise tax rate, placing an additional 2.9% tax on the sale or exchange of long-term assets such as stocks, bonds, business interests or other investments above $1 million. This would be on top of the already imposed 7% tax on gains over $270,000 per year, adjusted annually, making the total tax 9.9% on capital gains of over $1 million per year.

Estate tax modifications

Additionally, SB 5813 modifies the estate tax by allowing exclusions up to $3 million in value for estates of decedents dying on or after July 1, 2025, while also indexing the value for inflation in the future. The bill also increases the tax rate on estates, which currently range from 10% to 20% depending on the size of the estate, to 10% to 35% beginning July 1, 2025.

Business and Occupation tax changes

a. Rate changes

HB 2081 (the Legislation) increases the Business and Occupation (B&O) tax on multiple sectors including an increase to common B&O tax classifications such as an increase from 0.484% to 0.5% for standard manufacturing, extracting and wholesaling, and an increase from 0.471% to 0.5% for standard retailing and radioactive waste clean-up.

b. Surcharges

High grossing businesses: Beginning Jan. 1, 2026, the Legislation includes a 0.5% surcharge on businesses earning more than $250 million in Washington taxable income. The Legislation includes limited exclusions to the $250 million threshold such as income derived from specific manufacturing activities; wholesaling or retailing activities of products manufactured by the taxpayer; and sales of food, food ingredients and other similar products. The surcharge is set to expire Dec. 31, 2029.

Advanced computing surcharge: The Legislation also raises the Advanced computing surcharge on select computing business from 1.22% to 7.5% and increases the annual payment cap from $9 million to $75 million beginning Jan. 1, 2026.

Financial institutions: The Legislation also increases the B&O surcharge from 1.2% to 1.5% on specified financial institutions beginning Oct. 1, 2025. A specified financial institution is a member of a consolidated financial institution group that reported an annual net income of at least $1 billion on its consolidated financial statement for the previous year, not including net income attributable to noncontrolling interests.

c. B&O investment income deduction

The recent Washington Supreme Court decision, Antio v. Washington State Department of Revenue, held that the deduction for the amounts derived from investment income are limited to income earned through investments incidental to the main purpose of the taxpayer’s business rather than the main business purpose.

The Legislature, as detailed in the bill, intends on providing clarity around the definition of ‘incidental to the main purpose of the business’ for purposes of the deduction through its statutory revision. Specifically, the revision at RCW 82.04.4281 would allow a person to deduct “amounts derived from investments that are incidental to the main purpose of the person’s business. Investments are incidental to the main purpose of the person’s business if the total worldwide gross income derived from such investments is less than five percent of the person's total worldwide gross income of the business annually.”

Additionally, the Legislation further specifies who can deduct investment income regardless of whether the investments are incidental to the main purpose of the business. This includes:

• Nonprofit organizations;
• Collective investment vehicles;
• Retirement accounts and recipients of distributions therefrom; and,
• Family investment vehicles and recipients of distributions therefrom.

The Legislation also includes limitations on the deductibility of amounts from collective investment vehicles including:

• Amounts derived from investments of persons who are invested in a collective investment vehicle but not themselves a collective investment vehicle;
• Amounts received by persons as compensation for services rendered to either the collective investment vehicle or the collective investment vehicle's investors, or both;
• Amounts derived from sources other than investments by a collective investment vehicle;
• Amounts derived from factoring.

The Legislation requires the department to adopt rules and examples necessary to implement these new provisions.

Expanded sales tax to select services

SB 5814 would expand the state sales tax to certain specified services. Specifically, beginning Oct. 1, 2025, the term “sale at retail” is expanded to include:

• Information technology training services, and technical support;
• Custom website development services;
• Investigation, security services, security monitoring services and armored car services;
• Temporary staffing services;
• Advertising services; and
• Custom software, and customization of prewritten computer software.

The terms “sale at retail” and “retail sale” do not include a sale between members of an affiliated group. Additionally, "a retail sale of digital goods, digital codes, or digital automated services does not include the following services if the sale occurs between members of an affiliated group”:

• Any service that primarily involves the application of human effort by the seller, and the human effort originated after the customer requested the service;
• Live presentations where participants are connected to other participants via the internet or telecommunications equipment;
• Advertising services; and
• Data processing services.

The Legislation would also repeal certain digital automated service exclusions, including: any service that primarily involves the application of human effort by the seller, live presentations, advertising services and data processing services. These changes would be effective as of Oct. 1, 2025.

What’s next?

Per discussion with the Washington Legislature, the Governor has until May 20, 2025, to either sign or veto the bills passed by the Legislature and delivered to him at the end of this past legislative session; if no action is taken, the bills will become law on that date. In the meantime, taxpayers should consider the impacts of the potential capital gains tax rate increase, modification of the estate tax, expansion of the sales tax base and increase to the business and occupations tax.

If you have any questions, please reach out to your Baker Tilly state tax advisor.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.