What You Need to Know Starting October 1, 2025
Big changes are coming for Washington-based IT service providers and their customers. Starting October 1, 2025, under Engrossed Substitute Senate Bill (ESSB) 5814, many IT services will officially be classified as “retail sales” making them subject to both retailing Business & Occupation (B&O) tax and retail sales tax if sold to a consumer.
Here’s a breakdown of what’s changing and how businesses can prepare.
What Counts as Taxable IT Services?
The Washington Department of Revenue considers any services that support or assist information technology infrastructure to be taxable as an IT Service. These services may include, but are not limited to providing network assessments, planning, design, migration services, network security services, system upgrades, and other network maintenance services to a client’s information technology infrastructure. Below is a more detailed breakdown of taxable IT services.
IT services include, but are not limited to, the following types of activities:
- Support activities such as telephone consulting, help desk services, and remote training related to network hardware or software.
- Services that provide network diagnostic, analysis, advisory support, quality assurance testing, localization services, network information logistics, and maintenance support services on new or existing network infrastructure.
- Onboarding and offboarding services (e.g., setting up users with laptops and accounts).
- Managed IT services, including infrastructure network configuration, analysis, and implementation.
- Consulting or project management services, including planning efforts, analysis, engineering, testing, or deployment.
- Project management and technical program manager services that manage engineers and consultants who are providing IT services.
- Migrating services and support, including the transfer, relocation of services from one environment to another, and associated project management services.
- Consulting and support services in connection with digital products, including digital automated services.
- Services that troubleshoot hardware and software issues and that provide information technology solutions.
- Security management and implementation of network security strategies.
- Custom website development services (separately classified as a retail sale)
- Sales of digital automated services, including software as a service (classified as a retail sale).
- Sales of remote access software (classified as a retail sale).
- Sales of custom software and customization of computer software (classified as a retail sale).
- Telecommunications services and ancillary services (classified as a retail sale).
What is Not Included?
Not all tech-related services are affected. The following remain outside the scope of taxable IT services:
- Web hosting, domain name registration, and payment processing services.
- Cryptocurrency mining activities (does not include network system support or operation services).
IT-Related Consulting: When Does Retail Tax Apply?
The distinction between traditional consulting and newly taxable IT consulting can sometimes be complex. The key is whether the service involves supporting or assisting a customer’s IT infrastructure.
Factors That Trigger Retail Sales Tax
A consulting service will likely be subject to retail sales tax if it:
- Involves the application of software to deliver the service.
- Is delivered through a digital platform, such as streaming conference or online portal.
- Includes deliverables that are a “digital good,” such as a downloaded whitepaper.
Example of a Taxable Consulting Service
A consultant advises a company on migrating its data to a new cloud-based system. The planning, design, and migration services are all taxable as IT services.
Factors That Do Not Trigger Retail Sales Tax
For consulting services that do not fall under the new IT service rules, the previous tax structure generally still applies. Traditional consulting services, such as management or business consulting, are generally not subject to retail sales tax.
Example of a Non-Taxable Consulting Service
A consultant advises a company on a new business strategy, delivering their recommendations in a standard paper report. This is generally subject to the B&O tax but not retail sales tax.
How is the Sales Tax Rate Determined?
Sales tax is destination-based, meaning it is tied to where the customer receives the service. If services are delivered to multiple locations, sellers and buyers can agree on a reasonable allocation method. If no location is specified, the default is the purchaser’s business or billing address.
What About Non-Profits and Government Agencies?
Nonprofits and state/local governments are generally treated like any other business. They must pay retail sales tax when purchasing IT services and collect it when selling them.
Conclusion
This change is statewide and affects all IT service providers, including KDH Consulting. Customers should expect to see sales tax applied to services that previously may have been exempt.
For more details, frequently asked questions, and examples you can visit the Washington Department of Revenue’s official guidance.