Washington to tax digital ads and tech services

• Washington ESSB 5814 expands the retail sales tax and retailing business and occupation (B&O) to many services used by businesses effective October 1, 2025.
• Advertising services, custom website development services, investigation and security services, IT services, and temporary staffing services are among the services that will be subject to Washington sales tax on and after October 1, 2025.
• Services related to newspapers, printing or publishing, and radio and television broadcasting will remain exempt from Washington sales tax.
• At least two businesses have challenged aspects of the new law, though one has dropped its case against the state.

Washington’s tax code is “heavily reliant on sales taxes,” explains Engrossed Substitue Senate Bill 5814 (ESSB 5814). As the state and nation move toward a more service-based economy, the state’s retail sales tax is reaching a “narrowing share of economic activity.”

For this reason, the Legislature “intends to modernize the sales tax” by extending the retail sales tax to computer-related services and removing exemptions for digital automated services and other services.

ESSB 5814 broadens Washington’s retail sales tax considerably. Starting October 1, 2025, Washington state and local sales and use tax will apply to retail sales of:

Advertising services 

“Advertising services” refers to all digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements, including but not limited to the acquisition of advertising space, art direction, graphic design, layout, mechanical preparation, placement, production supervision, referrals, and rendering advice concerning the best methods of advertising products or services. 

Advertising services also include the acquisition of advertising space in internet media, online referrals, search engine marketing and lead generation optimization, web campaign planning, and the monitoring and evaluation of website traffic for purposes of determining the effectiveness of an advertising campaign.

Advertising services do not include web hosting services and domain name registration; services related to newspapers, printing or publishing, or radio and television broadcasting; or services related to out-of-home advertising like billboards, naming rights, or transit ads.

See the Washington Department of Revenue for more information and examples.

Custom software and customization of prewritten software

“Custom software services” include the right to access and use custom software, and customization of prewritten computer software, where possession of the software is maintained by the seller or a third party, regardless of whether the charge for the service is per use, per user, per license, subscription, or some other basis.

Customization of prewritten software includes the right to access and use custom software, and customization of prewritten computer software to perform data processing.

Prior to October 1, 2025, sales of custom software and the customization of prewritten software were subject to the service and other activities B&O tax instead of the retailing B&O tax. See the Washington Department of Revenue interim guidance for more information and examples.

Custom website development services

“Website development services” means the design, development, and support of a website provided by a website developer to a customer.  Custom website development services include services that are performed for new and existing websites, but not web hosting or domain name registration services.

See the Washington Department of Revenue interim guidance for more information and examples.

Information technology services

“IT services” include assisting with network operations and support, data entry services and data processing services, help desk services, in-person training related to hardware or software, and network system support services.

The Washington Department of Revenue considers any service that supports or assists information technology infrastructure to be taxable. These services may include providing network assessments, planning, design, migration services, network security services, system upgrades, and other network maintenance services to a client’s information technology infrastructure. 

See the interim guidance for more information and examples.

Investigation, security, security monitoring, and armored car services

“Investigation services” subject to retail sales tax are generally services that rely on interviews, surveillance, and behavioral analysis: background check services, bounty hunting services, fingerprint services, lie detection and polygraph services, missing person tracing services, private detective or investigation services, and skip tracing services.

Taxable security, security monitoring, and armored car services include armored car transportation of cash and valuables, personal and event security, security guard and patrol services, and security system services and monitoring. This does not include cybersecurity services, forensic accounting services, internal human resources investigations, or locksmith services.

See the interim guidance for more information and examples.

Live presentations

Live presentations include lectures, seminars, workshops, or courses where participants attend either in person or virtually, and all participants can give, receive, and discuss information with each other in real time. To be taxable, presentations must allow for more than one attendee.

See the interim guidance for more information and examples.

Temporary staffing services

Temporary staffing is the provision of workers to other businesses on a contract or fee basis. This does not include providing workers to qualifying hospitals.

As the Legislature didn’t carve out exemptions for school districts, the department reportedly “understands that these taxes may also apply to school districts.”

See the Washington Department of Revenue interim guidance for more information and examples.

Exclusions 

Advertising, data processing, and digital automated services that involve human effort remain exempt from retail sales tax if the sale is between members of an affiliate group.

Telehealth services are also excluded from DAS (and therefore taxation) under ESSB 5814. See this interim guidance for more details.

ESSB 5814 also eliminates exclusions from “digital automated services” (DAS) for:

• Advertising services
• Data processing services
• Live presentations
• Services primarily involving the application of human effort by the seller

The Washington State Department of Revenue will publish additional guidance soon.

The department has also released interim guidance on how ESSB 5814 affects existing contracts — those established prior to October 1, 2025. The guidance provides examples that identify facts then state a conclusion; it’s a good read but shouldn’t be relied on to determine tax liability.

For the purposes of the guidance, all three of the following requirements must be met:

• The “existing contract” must have been signed and executed prior to October 1, 2025.

• The underlying services must be provided on or continue after October 1, 2025.

• The underlying services are considered a “retail sale” effective October 1, 2025.

Unaltered qualifying contracts are generally exempt from the retail sales tax and retailing B&O tax through March 31, 2026. Starting April 1, 2026, unaltered qualifying contracts are subject to Washington’s retail sales tax and retailing B&O tax.

However, if a qualifying existing contract is altered after October 1, 2025, it becomes subject to the retail sales tax and retailing B&O tax when the contract is altered. 

To “alter” means to materially or substantively change or amend the contract. This may include, but is not limited to: 

• Adding, removing, or exchanging the parties subject to the contract
• Changing the underlying contract activities
• Updating contractual terms

Avalara AvaTax customers will need to pass a new parameter for preexisting service contracts. See this Knowledge Center article for more details.

The following services were subject to Washington sales tax before the enactment of ESSB 5814:

• Construction services
• Installation, cleaning, and repair services
• Landscaping and landscape maintenance services
• Miscellaneous services (alarm monitoring services, car wash, catering and personal chefs, credit bureau services, escrow services, extended warranties, parking and vehicle towing, restaurant services, telephone services)
• Personal services (dating, personal training at athletic and fitness facilities, tanning, tattooing, Turkish and steam baths)
• Retail recreation services (fishing charters, service charges on professional sporting event tickets, sightseeing day trips)
• Specified digital products purchased for permanent or nonpermanent use
  • Digital goods (e.g., data, facts, images, information, and/or sounds)
  • Remote access software (RAS)
  • Digital automated service (DAS)

What are DAS? A digital automated service is a service that’s transferred electronically and uses one or more software applications. Examples include car history report services, chat rooms, photo sharing services, and services that crawl the internet and gather, categorize, and store information. 

Prior to ESSB 5814, DAS did not include advertising services, data processing services, internet access, live interactive presentations, payment processing, telecommunications, or web hosting, storage, and backup. Services that are primarily the result of human effort performed in response to a customer request are also not considered DAS.

That changed effective October 1, 2025.

Washington currently uses the Streamlined Sales and Use Tax Agreement’s standard sales tax sourcing rules for digital products, digital codes, and RAS.  
 
This is the hierarchy for sourcing.

• The seller’s place of business (if where the purchaser receives the digital product, code, or RAS)
• The location where the purchaser receives the digital product, code, or RAS (if not the seller’s place of business)
• The purchaser’s address according to the seller’s business records (if the location where the purchaser receives the digital product, digital code, or RAS isn’t known)
• The purchaser’s address as obtained at the time of sale (if no address is in the seller’s business records)
• The address where the digital product, code, or RAS is first made available for transmission by the seller (if no address is obtained at the time of sale)

Businesses purchasing digital products that are used concurrently within and outside of Washington may be entitled to the multiple points of use (MPU) sales tax exemption.

The MPU exemption provides a retail sales tax exemption for business purchases of qualifying products or services that will be simultaneously used at multiple locations inside and outside of Washington. It allows the purchasers to pay tax in proportion to a product’s use in each location.

Buyers claiming the MPU exemption pay use tax directly to the Department of Revenue instead of paying retail sales tax to the seller at the time of purchase. The use tax is apportioned based on use in Washington compared to use outside of the state.

For the MPU to be applied, buyers must provide sellers with a completed exemption certificate.

Washington will allow businesses to use the MPU exemption to purchase digital advertising services, but only if those services 1) meet the definition of a digital automated service under RCW 82.04.192(3)(a); and 2) are also used concurrently both inside and outside of Washington. If both these conditions are met, use tax must be apportioned based on where the advertising is first used — generally the location of the persons viewing or interacting with the advertisements. 

While claiming the MPU exemption can be beneficial for businesses, it can also pose certain compliance challenges. For example, it can be difficult to determine the applicability and value of the MPU exemption, or to accurately identify the source of advertising. Any business claiming an MPU exemption is therefore advised to keep solid records that can support their claims.

At least two companies have challenged the legality of Washington’s new tax on digital advertising and tech services.

In early September 2025, Comcast filed a complaint saying the tax discriminates against internet-based ads and violates the federal Internet Tax Freedom Act (ITFA).

“Almost all forms of advertising conducted over the Internet are subject to the tax,” reads the complaint for declaratory relief, “while most forms of advertising conducted off the Internet are not subject to the tax.”

Security Services Northwest, Inc. (SSNW) separately argued the law’s effective date violates the Due Process Clause of the U.S. Constitution and the state constitution, in part because businesses weren’t given adequate time to prepare. The Department of Revenue issued interim guidance for security services on September 12, just 19 days before the October 1 effective date. SSNW filed its complaint on September 30 and asked the court to delay enforcement until January 1, 2026.

On November 4, 2025, SSNW dropped its case against the state.

The Tax Foundation calls Washington’s digital ad sales tax “a legal and economic minefield.” And according to McDermott Will & Schulte’s Inside SALT blog, a legal challenge under ITFA was inevitable. “Taxing digital advertising services while expressly excluding offline media places the new law on a collision course with ITFA.”

Despite the legal complaint, Washington’s digital ad and tech tax is taking effect October 1, 2025, as planned. This isn’t unusual. Maryland’s digital ad tax has been under fire since before it took effect in 2021, yet the state continues to collect it. And Maryland is also expanding its sales tax base.

Effective July 1, 2025, Maryland taxes a long list of data and information technology services at a rate of 3%. The general sales tax rate is 6%.

The taxable services are identified by North American Industrial Classification System (NAICS) code sectors 518 and 519, and subsectors 5415 and 5132. They include computer systems design, data processing, information services, technology services, system software or application software publishing services, and web hosting.

However, the Maryland Comptroller warns that a business’s primary business activity code “is not determinative” of whether the services are taxable. “A business that has chosen a classification other than 518, 519, 5415, or 5132, but which sells a service described by those codes is required to collect and remit sales and use tax on the sale.” 

That could make tax compliance more complicated for businesses, as will Washington’s new tech tax.  

Many businesses with customers, vendors, employees, or locations in Washington and Maryland will be impacted by the tax law changes taking effect July 1, 2025, in Maryland and October 1, 2025, in Washington.

Automating sales tax compliance can help businesses comply with the services tax rule changes in Maryland and Washington. Contact Avalara to learn how our automated, cloud-based sales and use tax software can help your business keep pace with tax changes nationwide.