Washington state to tax millionaires, create new sales tax exemptions

• Washington’s new millionaires’ tax, created by SB 6346, is designed in part to reduce the state’s reliance on sales and use tax.
• SB 6346 provides a sales and use tax exemption for diapers, grooming and hygiene products, and over-the-counter drugs.
• The millionaires’ tax bill also removes sales and use tax and retailing B&O tax on certain business-to-business (B2B) services that became taxable on October 1, 2025, under ESSB 5814.

SB 6346 provides a sales and use tax exemption for certain essential items. Effective January 1, 2029, the following products will be tax free:

• Diapers for adults, children, and infants
• Grooming and hygiene products
  • Antiperspirants
  • Cleaning solutions
  • Mouthwash and toothpaste
  • Shampoos and soaps
  • Suntan lotions and screens
     
• Over-the-counter drugs
  • Products labeled as a drug (as required by 21 C.F.R. Sec. 201.66 (2026) as it existed on the effective date of this section)

The legislation also exempts some (but not all) of the B2B services that became subject to Washington sales and use tax on October 1, 2025, under ESSB 5814.

Effective January 1, 2029, Washington sales and use tax (and retailing B&O tax) no longer apply to:

• Custom website development services (i.e., the design, development, and support of a website provided by a website developer to a customer)
  
  
• Information technology training services; technical support; and other services including, but not limited to, assisting with network operations and support, help desk services, in-person training related to hardware or software, network system support services, data entry services, and data processing services
  
  
• Investigation services, security services, security monitoring services, and armored car services
  
  
• Live presentations, including, but not limited to, lectures, seminars, workshops, or courses where participants attend either in person or via the internet or telecommunications equipment that allows audience members and the presenter or instructor to give, receive, and discuss information with each other in real time
  
  
• Temporary staffing services (i.e., providing workers to other businesses, except for hospitals licensed under chapter 70.41 or 71.12 RCW, for limited periods of time to supplement their workforce and fill employment vacancies on a contract or fee basis)

Additionally, as of January 1, 2029, the term “retail sale” does not include the sale of or charge made for custom software or the customization of prewritten computer software, meaning sales and use tax does not apply to these transactions.

SB 6346 also aims to undo some of the most perplexing policies created by ESSB 5814. Taxpayers were so confused by (or unprepared for) some of the sales tax requirements that took effect on October 1, 2025, that the Washington State Department of Revenue decided to temporarily waive penalties for businesses that voluntarily report and pay retail sales and use taxes on affected services.

However, the language of SB 6346 is also confusing. For example, while it exempts live presentations, temporary staffing, and the other services listed above starting January 2029, certain sales of these services are exempt effective July 1, 2026. Specifically:

• Effective July 1, 2026, the following are not considered live presentations and are not subject to sales tax, use tax, or the retailing B&O tax:
  • Before and after school care provided in-person and on-site by elementary schools
  • Presentations given by nonprofit organizations exempt from federal income tax under Title 26 U.S.C. Sec. 501(c)
  • Musical, dramatic, comedic, or similar performances, including any incidental instruction
  • One-on-one instructional activities including tutoring and consulting
  • Music lessons regardless of the number of participants
     
• Effective July 1, 2026, temporary staffing services “do not include staffing services utilized by hospital-based clinical providers to supplement their fulfillment of hospital contracts for professional services and that are utilized for limited periods of time to supplement hospital staffing.”
  
  
• Effective July 1, 2026, Washington sales tax, use tax, and retailing B&O tax does not apply to custom software and customization of prewritten software; custom website development; information technology services; investigation, security, and armored car services; live presentations; or temporary staffing services when purchased by educational service districts, K-12 schools, library districts, library service centers, public libraries, or school districts.
  • Note that sellers making tax-exempt sales to such purchasers must obtain a valid exemption certificate from the buyer and retain a copy of the document for their records.

The sales tax exemptions provided by SB 6346 will lower costs for Washington residents and businesses currently subject to those taxes. Yet these new exemptions will be null and void if the millionaires’ tax established by SB 6346 is challenged and overturned.

SB 6346 establishes a 9.9% state tax on Washington adjusted gross income exceeding $1 million beginning January 1, 2028. The tax only applies to individuals, and Washingtonian households with an annual adjusted gross income of less than $1,000,000 will not owe this tax.

Certain sources of income are exempt, including, but not limited to, the sale of qualified family-owned small businesses, and the sale of residential and other real property.

Surcharge for high-grossing businesses

SB 6346 also amends a temporary 0.5% B&O surcharge on high-grossing businesses with Washington taxable income above $250 million in a calendar year. This surcharge took effect on January 1, 2026, and expires December 31, 2029.

Certain income is exempt from this surcharge effective January 1, 2029, including, but not limited to, Washington taxable income that’s:

• Attributable to the provision of health care services by a qualifying licensed health care provider
  
  
• Attributable to the warehousing and reselling of qualifying drugs for human use
  
  
• Attributable to wholesale sales of food and food ingredients (per RCW 82.08.0293), provided the products are sold by a wholesaler not affiliated with the retailer or manufacturer of such food and food ingredients
  • This exemption does not apply to income attributable to the wholesale sale of bottled water, dietary supplements (as defined in RCW 82.08.0293), or soft drinks.
     
• Received by a qualifying hospital
  
• Subject to an additional tax on financial institutions

Some of the most famously wealthy Washington state residents are decamping to more tax-friendly locales in response to the tax on millionaires. The day the Legislature passed SB 6346, Starbucks founder Howard Schultz said he was moving to Florida, where Amazon founder and former Washington state resident Jeff Bezos now resides.

Washington’s millionaires’ tax bucks a national trend to reduce or eliminate income taxes. Georgia and Utah are among the states with planned personal income tax rate reductions; Missouri and South Carolina are among the states that could join them.

That said, Washington isn’t the only state interested in levying so-called Robin Hood taxes on the wealthy to serve the less well-off. New York City Mayor Zohran Mamdani wants to tax the city’s wealthiest residents; Rhode Island Governor Dan McKee is eyeing a millionaires’ tax; and uberwealthy Californians are battling a proposed billionaires’ tax.

Importantly, the Washington income tax could run afoul of the state constitution, and the Legislature is anticipating pushback. The bill states, “If a court of final jurisdiction invalidates section 201 of this act [i.e., the income tax], sections 1 through 1003 and 1201 through 1209 of this act are null and void in its entirety.” This would eliminate the millionaires’ income tax and tax credit expansions tied to it, the changes to the temporary 0.5% surcharge on taxable income over $250 million, the sales tax exemptions, and certain other provisions. 

Washington SB 6346 levies an individual income tax on income over $1 million beginning January 1, 2028. The bill also amends a 0.5% B&O surcharge on high-grossing businesses, defined as one with taxable income exceeding $250 million (subject to certain exclusions).

The income tax revenue will allow Washington to exempt certain products and services from sales and use tax. Effective January 1, 2029:

• Diapers, certain grooming and hygiene products, and qualifying over-the-counter drugs are exempt from sales and use tax.
• Custom website development services; custom software and the customization of prewritten software; information technology training services; investigation, security, security monitoring, and armored car services; live presentations; and temporary staffing services are exempt from sales and use tax and B&O tax.

Finally, SB 6346 clears up some of the confusion created by ESSB 5814. Starting July 1, 2026, certain taxpayers and transactions are not subject to taxes established by ESSB 5814.

Governor Ferguson signed the legislation on March 30, 2026. We’ll update this blog post once the Washington Department of Revenue publishes guidance.

In the meantime, if you’re struggling with tax compliance in Washington or other states, considering automating compliance with Avalara Agentic Tax and Compliance™.