New sales tax on services set to take effect Wednesday

The Washington state Capitol on Nov. 11, 2024. (Bill Lucia/Washington State Standard)

A
contentious new sales tax on services that Democratic state lawmakers
relied on to pay for Washington’s latest budget is set to take effect
Wednesday.

Senate Bill 5814
is one of the biggest moneymakers used to bring in an estimated $3.6
billion over the next two years to fill a shortfall in the operating
budget. This law is expected to fuel $1.1 billion in the two-year budget
that began July 1, and $2.6 billion over four years. Hundreds of
millions of dollars will also flow to local governments, as they get a
share of state sales tax proceeds.

But a key piece of the new tax law is in question.

Cable juggernaut Comcast believes the measure’s sales tax on advertising services is illegal and is suing to get it overturned.
The state attorney general’s office is expected to respond to the
lawsuit in Thurston County Superior Court in the coming weeks. It could
be months before a judge weighs in on the provision’s future.

The tax on advertising services is
specifically expected to bring in roughly $475 million over the next
four years. It’s unclear what would happen to collections made under the
new tax if the law is later ruled invalid, a state Department of
Revenue spokesperson said.

A block on the tax would throw a
major kink into the $77.8 billion budget passed after months of
negotiations in the Legislature. The next 60-day legislative session
begins in January.

The law earns the state money by applying the retail sales tax to more services. Beyond advertising, it covers temporary staffing ($833 million over four years), security ($127 million), live presentations ($360 million) and information technology ($189 million), among others. Temporary staffing services hospitals use are exempt.

Over the summer, the Department of Revenue hosted listening sessions
with affected businesses. Over 90,000 businesses are expected to pay
under the law. Companies complained of a lack of clarity on how the
taxes would be implemented and the adverse effects this will have on
their bottom line.

The law also adds taxes on emerging
nicotine products, like Zyn pouches, which don’t kick in until Jan. 1.
Some other tax increases Democrats approved this year, including to
Washington’s primary business and occupation taxes, also take effect on
New Year’s.

Also starting Wednesday, financial
institutions with an annual net income above $1 billion will have a
business and occupation tax they pay raised from 1.2% to 1.5%. During
the session, Democrats estimated this would impact about 200 firms.

The business and occupation rate for service businesses with a gross income over $5 million is increasing from 1.75% to 2.1%.

Republicans universally opposed this Democratic-backed package of new and increased taxes and fees.

All of these proceeds go into the
state’s operating budget, which funds the bulk of Washington’s state
government programs and services.

The budget for transportation is separate.

The $15.5 billion two-year
transportation budget approved this year also relies on a slate of new
and increased taxes and fees, namely a rare gas tax hike implemented in
July.

These transportation funding streams
are estimated to bring in $3.2 billion over the next six years to fund
Washington State Ferries, highway megaprojects, maintenance of state
roads and bridges, Washington State Patrol and public transportation.