The Washington Department of Revenue (DOR) has provided taxpayers with interim guidance for both retail sales tax and for business and occupation (B&O) tax purposes following the legislative changes enacted by Engrossed Substitute Senate Bill 5814, which went into effect October 1, 2025, and relate to the taxability of digital services in Washington. While the changes do not impact sales between members of affiliated groups, the legislation eliminates previous exclusions on the sale of general digital automated services (DAS) related to services which primarily involve human effort, such as live presentations, advertising, and data processing. Taxpayers can rely on the interim guidance provided by the DOR related to sales of DAS and professional services, DAS and data processing, and digital features which are added to existing products while the DOR creates permanent guidance.
According to the provided DOR guidance, the legislature did not intend for professional services to be considered taxable simply because a digital automated service is used to present the services. In order to determine taxability, there are four points to consider. First, the digital product or products cannot be used by the purchaser to perform the professional service. Additionally, the price for the professional services much be known to the purchaser at the time of purchase and may not change based on availability of the digital product. Finally, the digital product cannot be marketed as or available for purchase and must be provided without charge. If all these apply, the DAS has been used to communicate the results of services, and the services provided are considered professional services, rather than digital automated services.
If a data processing component is part of the DAS related offerings, it may still qualify for an alternate B&O classification. The legislative change did eliminate the exclusion for data processing, which would make standalone data processing services subject to retail sales tax and the retailing B&O classification. However, the DOR has announced that in cases where the product or service offered meets another classification’s definitions for B&O or exclusion, the DOR will accept the other classification even where elements of data processing exist.
The final category put forth by the DOR is when digital features are added to existing products. Simply adding a digital feature may significantly impact tax treatment. Before taxpayers begin transferring products or services electronically or adding new features, they need to carefully evaluate where their products should be classified under the B&O and digital products regulations.
The change to retail classification for DAS products in Washington represents a shift in taxability for taxpayers, but this guidance serves to clarify that the change may not impact all business types. Taxpayers who may fall into DAS categories will need to consider where their offerings will fall under the guidance from the DOR when determining if sales tax needs to be collected and ensure they are correctly categorized on B&O returns. Additionally, taxpayers will need to keep clear records for backup to show which DAS and related products are and are not subject to the retail sales tax and retail B&O rate as opposed to other classifications. (Interim Guidance Statement Regarding Changes Made by ESSB 5814 to DAS Exclusions and the Definition of “Retail Sale”, Washington Department of Revenue, September 12, 2025)