Washington Senate Bill 5814: What Businesses Need to Know About Sales Tax on Professional Services

On October 1, 2025, Washington’s Senate Bill 5814 (ESSB 5814) went live — and it’s changing how professional services are taxed. For the first time, many service providers (including design, IT, marketing, and consulting firms) must collect retail sales tax from Washington-based clients.

If you’re a business that provides or receives these services, you’ll want to understand how this affects your contracts, your pricing, and your client relationships.

1. What’s Changing Under ESSB 5814

Washington has historically taxed the sale of tangible goods and a narrow set of services. ESSB 5814 broadens the definition of “retail services,” meaning many professional offerings that were previously subject only to B&O tax are now also subject to sales tax.

That includes, among others:

• Custom software development and website design

• IT and digital marketing services

• Certain consulting or creative work tied to deliverables

In short: if your business creates or delivers something usable by a Washington customer, that transaction may soon include retail sales tax — typically around 10% depending on local rates.

2. What Happens to Existing Contracts

Many providers have long-term contracts or retainers already in place, and the natural question is: Do these new taxes apply to agreements signed before October 1, 2025?

Washington’s Department of Revenue (DOR) issued interim guidance that creates a limited “transition” period:

• Paid in full before October 1, 2025: If a client signs and fully pays before the effective date, that transaction is considered complete and is not taxable under the new rule.

• Signed but unpaid before October 1: If the contract is signed before October 1 but not yet fully paid, you may continue to treat it under the old rules until March 31, 2026, provided the contract is not materially altered (no change in scope, price, or duration).

• Changed after October 1: Any amendment, material alteration or new SOW after October 1 immediately subjects the new portion of the contract to retail sales tax.

After March 31, 2026, all active contracts fall under the new tax regime, regardless of when they were signed.

3. Why This Matters for Fixed-Fee Projects

Let’s say your company agreed to a $100,000 fixed-fee project earlier this year. The client budgeted exactly that amount. Now, with sales tax, the invoice total might rise to roughly $110,000.

That creates friction: clients may push back, claiming they “already agreed” on price. Unfortunately, Washington law requires the seller (you) to collect and remit sales tax once it applies. If you fail to collect it, the state can hold you liable — meaning you might have to pay it out of your own pocket.

To avoid that unpleasant surprise, businesses should immediately review how their contracts handle taxes.

4. Practical Steps to Ensure Compliance and Avoid Losses

• Step 1: Audit Your Existing Contracts

Make a list of all ongoing or recurring agreements:

• Which are fully paid before October 1? (Safe.)

• Which will remain active past that date?

• Which might need amendments after October 1?

This will help you plan which relationships fall under the “transition” rules and which will need tax applied right away.

• Step 2: Update Your Master Services Agreement (MSA)

If it doesn’t already, your MSA should now include a tax-pass-through clause by which the Client agrees to pay any sales or similar taxes:

This simple clause can protect you from absorbing a ~10% cost increase later.

• Step 3: Adjust Your Proposals and Statements of Work

In new proposals, state fees exclusive of sales tax.
Example:

Project Fee: $100,000 Sales Tax: To be added where applicable.

This keeps your pricing competitive while remaining transparent. You can also include a note explaining that the addition is a legal requirement — not a price increase.

• Step 4: Configure Your Invoicing System

Ensure your accounting or billing platform can:

• Identify Washington clients (by billing address)

• Apply the correct local tax rate

• Show tax as a separate line item

Many platforms already support destination-based tax rates for Washington.

• Step 5: Communicate Early and Clearly with Clients

Transparency goes a long way. Send a friendly notice to Washington clients:

“Starting October 1, 2025, Washington law requires professional services like ours to include retail sales tax. We’ll be adding this state-mandated tax to invoices where applicable. Our company doesn’t keep any of it — we simply collect and remit as required by law.”

Most clients understand when it’s framed as a compliance issue, not a discretionary fee.

• Step 6: Avoid “Material Changes” to Old Contracts

If you want to preserve grandfathering through March 2026, don’t modify existing agreements unless necessary.
Adding new deliverables, changing rates, or extending terms after October 1 could immediately make the contract taxable.

When in doubt, create a new SOW under your updated MSA with the proper tax language.

• Step 7: Monitor for DOR Updates or Litigation

Because the DOR’s guidance is “interim,” and some portions of ESSB 5814 may face legal challenges (especially regarding digital and advertising services), the rules could evolve.
Subscribe to DOR updates or check in with your tax professional quarterly.

5. What Happens if Clients Refuse to Pay Sales Tax

This scenario will happen — and soon.

A client might say:

“Our budget is fixed. We won’t pay an extra 10%.”

If your contract doesn’t explicitly state that fees are exclusive of tax, the DOR can still require you to remit the full tax based on your gross receipts.
In other words, the state gets paid — but you pay it if you didn’t collect it.

That’s why updating your templates now is critical. A single sentence can save you thousands.

6. How to Handle Unknown Client Locations

Many service providers don’t know where a potential client is based when sending a proposal.
To handle this gracefully, include a universal clause:

“If applicable sales or use tax applies in the jurisdiction where Client receives the Services, such tax will be added to the final invoice.”

This protects you if the client later turns out to be Washington-based (or located in another state with similar rules).

7. Will ESSB 5814 Be Repealed or Delayed?

At the time of writing, there is no official indication of repeal or deferral.
Industry groups have voiced opposition, and at least one lawsuit has been filed, but until a court or the Legislature acts, the law stands.

Businesses should plan to comply rather than wait for repeal.

8. Key Takeaways

• Plan now. Identify which contracts are affected.

• Update your MSAs and SOWs. Make sure all pricing is “exclusive of taxes.”

• Communicate early. Let clients know the change is state-mandated.

• Avoid scope changes to pre-October 2025 contracts if you want to preserve grandfathering.

• Monitor updates from the Washington DOR for evolving guidance.

For most service providers, the hardest part will be handling client expectations — not the mechanics of collecting the tax. But a clear, proactive approach now will save you future headaches and preserve your margins.

9. Need Help Updating Your Contracts?

Cruxterra can help Washington startups and service providers navigate this transition.
We regularly draft and update MSAs, SOWs, and proposal templates to address new legal and tax obligations while maintaining a modern, client-friendly tone.

If you’d like a review or template update in order to ensure compliance, contact us at:
📧 LetsGo@Cruxterra.com | 📞 425-830-9268