Even though Senate Bill 5814 was just signed on May 20, 2025, by the Governor of Washington, legal challenges are already anticipated due to the controversial way the legislature singles out certain advertising services that are digitally or electronically delivered.
The bill expands the retail sales tax to cover several additional services, effective October 1, 2025. It also redefines “digital automated services” by removing the “human effort” exclusion from the definition. As a result, services that primarily involve human effort are now subject to sales tax if delivered digitally. The bill further defines the sourcing of taxable services, specifying that sales are taxed based on where the customer “first uses” the service, evaluated on a transaction-by-transaction basis. This expansion to digital services introduces complex sourcing challenges for businesses.
The following categories can expect to feel the impact of this expansion:
The bill’s narrow focus on digital advertising is particularly concerning, as it raises the risk of violating the federal Internet Tax Freedom Act. Additionally, sales between affiliated group members—as defined in RCW 82.04.299(1)(f)—are exempt from sales tax.
Finally, nicotine products will also be affected as the bill expands the tax to cover synthetic and tobacco-derived products.
Due to the likeliness of taxpayer challenges and ensuing litigation, the Sales Tax Institute will continue to monitor updates related to this bill, and House Bill 2081, which was signed the same day. (Washington State Legislature, SB 5814, May 20, 2025)
UPDATE: The Washington Department of Revenue’s recent guidance related to S.B. 5814 outlines how contracts signed before October 1, 2025, are treated based on payment status and how the contract is altered.
If the contract was fully paid before the October 1, 2025, effective date, then the sale is considered to have occurred before October 1. These transactions are consequently not subject to retail sales tax or retailing B&O tax, even if services are rendered afterward. Businesses should report the services under the pre-existing tax classification.
If the contract remains unchanged and unpaid after the effective date, businesses can continue to report it under the old classification until March 31, 2026. Beginning April 1, 2026, companies will be required to update these contracts to be reported under the retailing Business and Occupation (B&O) tax. The sales tax must be collected unless exempt. Taxpayers may elect to report under the new classification earlier, but they must also collect sales tax if they opt to do so.
Finally, any material changes to a contract after October 1 trigger the immediate application of retailing B&O and retail sales tax. These changes include alterations to the parties, scope of services, terms affecting rights and responsibilities, duration of services, and compensation. Clerical updates, like edits to contact information, do not affect tax treatment. (Interim Guidance Statement Regarding Contracts Existing Prior to October 1, 2025, Washington Department of Revenue, August 29, 2025)
UPDATE: Comcast filed a lawsuit against the State of Washington and its Department of Revenue on September 9, 2025, in Thurston County Superior Court, seeking to halt the sales tax on advertising services set to take effect on October 1. The company claims that the law introduced by Senate Bill 5814 targets internet-based advertising disproportionately, as ads via streaming services are taxed while ads via traditional media are exempt. According to the suit, Comcast is alleging that this violates the federal Internet Tax Freedom Act.
In response, the Department of Revenue is reviewing the lawsuit with legal counsel and preparing interim guidance on how the law will be implemented. The updated guidance is expected within the next two weeks. (Comcast Corp. v. State of Washington, Thurston County Superior Court, filed September 9, 2025.)