One of the bills that the state passed to fill its budget gap would apply sales tax on selected services. This includes digital automated services, advertising, custom computer software, and temporary staffing services (SB 5814) which had been previously taxed under the service category for state B&O tax. Because the local sales tax piggybacks off of the state sales tax base, cities with these service activities in their jurisdiction may see additional sales tax distributions for these new sales taxes.

The Department of Revenue will be undertaking a rulemaking this summer to implement the rules for where these sales will be sourced for local sales tax collection. For the first full year of implementation, the state’s fiscal note estimated that cities would receive approximately $109 million from additional sales tax on these selected services.

In addition, cities that use services like temporary staffing and custom software may see some increased costs associated with these expenses.

The changes to the state’s definitions for retail and services will also mean that the city B&O tax model ordinance will need to be amended and adopted by the 52 cities with a local B&O tax. RCW 35.102.040 requires that the definitions for the classifications for retail and services use the state’s definition “as the baseline” for definitions in the model ordinance.

AWC will be convening a task force of city tax managers and finance directors to amend the City B&O Tax Model Ordinance this summer and fall for implementation by January 1, 2026. The model ordinance was last updated in 2019 to incorporate legislative changes to the apportionment formula for services.