Article
Washington DOR clarifies sales tax treatment of pre-Oct. 1, 2025, contracts
Sept. 11, 2025 · Authored by Matt Graham
On Aug. 29, 2025, Washington’s Department of Revenue (DOR) issued an interim guidance statement explaining how to report tax on existing contracts that span the Oct. 1, 2025, effective date of Engrossed Substitute Senate Bill 5814 (ESSB 5814). The guidance provides limited transitional relief for certain contracts and clarifies when post-effective-date changes will trigger retailing business and occupation (B&O) tax and retail sales tax. Taxpayers can rely on this guidance until permanent guidance is issued.
Background
ESSB 5814 modernizes Washington’s retail sales tax base by: (1) extending sales tax to several services, (2) repealing certain exclusions applicable to digital automated services (DAS), and (3) excluding specified affiliate transactions from the definition of a retail sale. The statute is effective Oct. 1, 2025. Newly taxable services include information technology services, custom website development, investigation/security/armored car services, temporary staffing, live presentations, advertising services, and sales of custom software as well as customization of prewritten software.
For ongoing updates on newly taxable services, DOR has published a dedicated landing page and FAQs .
What counts as an existing contract?
For purposes of the interim guidance, a contract is existing only if all of the following are true:
- It was signed and executed before Oct. 1, 2025;
- The covered services are performed on or after Oct. 1, 2025 (or continue past that date); and
- The services become retail sales as of Oct. 1, 2025, under ESSB 5814.
How are existing contracts taxed?
The interim statement addresses three common situations.
Paid in full before Oct. 1, 2025
If the contract price is invoiced and paid before Oct. 1, 2025, but services occur or continue after that date, DOR deems the sale to have occurred before the effective date — so no retail sales tax is due, and the receipts may be reported under the Service & Other B&O classification. The method of accounting doesn’t change the outcome.
Unpaid as of Oct. 1, 2025, and unaltered terms
If the contract hasn’t been paid and its terms don’t change after Oct. 1, taxpayers may continue reporting under pre-ESSB 5814 treatment through March 31, 2026. Beginning with periods starting April 1, 2026, receipts must be reported under retailing B&O, and sellers must collect and remit retail sales tax unless an exemption applies. Taxpayers can opt to switch to retailing/sales tax as of Oct. 1, 2025, but if they do, sales tax collection is also required.
Altered after Oct. 1, 2025
Material changes to an existing contract after Oct. 1 — such as changing parties, expanding or changing the scope of services, revising amounts/term, or other substantive amendments — trigger retailing B&O and sales tax at the time of the alteration. Non-substantive updates, such as replacing a notice email address, don’t change the contract for this purpose.
Who’s affected?
Businesses that sell or buy services newly taxable under ESSB 5814 — including IT and software firms such as custom software, customization, IT support and training; temporary staffing providers and their customers; advertisers and marketing agencies; event producers/presenters; and security/investigation services — should evaluate their pre-Oct. 1, 2025, contracts for possible transition treatment and compliance updates.
Actions to consider
Start by inventorying and classifying contracts. Flag agreements signed/executed before Oct. 1, 2025, for newly taxable services and identify payment status as of that date.
- Assess change risk. Avoid unintended material amendments such as scope expansions or rate/term changes, after Oct. 1, 2025, if transition treatment is desired. Track any modifications that could flip the contract into retailing B&O/sales tax immediately.
- Plan for the April 1, 2026, cutover. For unaltered, unpaid existing contracts, implement system changes to begin retailing B&O tax reporting and sales tax collection no later than April 1, 2026.
- Update invoices and exemption procedures. Ensure invoicing clearly reflects tax treatment and collect exemption certificates where applicable once retail treatment applies. See DOR’s ongoing updates for service-specific nuances.
- Coordinate with procurement and legal. Insert tax clauses in new amendments or renewals to address sales tax, and train teams on which edits may be considered material under DOR’s framework.
Important caveats
This is interim guidance and may change with final guidance or future legislation.
Only contracts for services that become retail sales on Oct. 1, 2025, qualify as existing under this transitional relief; services that aren’t newly taxable don’t qualify.
DOR is publishing additional topic-specific guidance, including live presentations and FAQs for professional services; taxpayers should monitor DOR’s site for ongoing updates and clarifications.
2025 Washington state legislative session update: Prepare for excise tax changes
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.