Introduction

Effective October 1, 2025, Washington’s Engrossed Substitute Senate Bill (ESSB) 5814 expands the retail sales tax base to a broad range of services, including IT, advertising, staffing, and custom software. To ease the transition, the Department of Revenue (DOR) has issued interim guidance on how contracts signed before the effective date will be treated. The guidance addresses whether such “existing contracts” remain outside the scope of retail sales tax and under what circumstances the relief continues or lapses.

1. Fully Paid Contracts Prior to October 1, 2025

Contracts executed and paid in full before October 1, 2025, are deemed completed transactions. The timing of service delivery does not affect the treatment.

• • Example: A website development contract signed in August 2025 and fully prepaid, even if the work is delivered in November, is not subject to retail sales tax.

2. Existing Contracts Without Modification (Unpaid or Partially Paid)

Where services are contracted before October 1, 2025, but payment is not made upfront, transitional relief applies. These contracts may continue under pre-ESSB 5814 treatment until March 31, 2026. Thereafter, sales tax applies.

• • Example: A five-year IT maintenance agreement signed in July 2025, billed annually, is exempt from retail sales tax until March 31, 2026. Amounts billed after that date are taxable.

3. Modified Contracts After October 1, 2025

Any material change made to an existing contract after October 1, 2025—including scope adjustments, price increases, extensions, or substitutions—removes the contract from transitional relief. From the date of modification, the contract becomes fully subject to retail sales tax.

• • Example: A staffing contract signed in June 2025 is amended in December 2025 to add additional personnel. All services under the contract are taxable from the date of amendment.

4. Periodic or Recurring Billing Arrangements

Contracts structured with recurring billing cycles (e.g., monthly retainers) are only shielded until March 31, 2026 provided that the contract remains unchanged. Payments made until March 31, 2026 will be unaffected.

• • Example: A marketing services retainer signed in September 2025 with monthly billing is non taxable for amounts received after October 1, 2025 until March 31, 2026 provided the contract remains unchanged.

5. Partially Paid Contracts

When a portion of the contract price is prepaid before March 31, 2026, only that prepaid portion escapes retail sales tax. The balance paid after March 31 is taxable.

• • Example: A $200,000 consulting contract signed in August 2025 with $50,000 prepaid. The $50,000 is exempt; the remaining $150,000 received after March 31, 2026 is taxable.

Quick Reference Table

Closing Note

The DOR’s interim guidance provides transitional clarity but underscores that most ongoing service contracts will eventually fall within Washington’s retail sales tax base. Businesses should review existing agreements, consider the benefits of prepayment, and avoid amendments after October 1, 2025, unless prepared for immediate tax application. With transitional relief ending March 31, 2026, early planning is essential.

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