If your business has been struggling to keep pace with Washington State’s sweeping expansion of retail sales tax under Engrossed Substitute Senate Bill (ESSB) 5814, you are not alone. And, more importantly, you may not be too late. The Washington Department of Revenue (DOR) announced a temporary penalty relief program specifically designed to help businesses that have not yet complied with their new tax obligations. For affected taxpayers, this program represents an opportunity to resolve outstanding liabilities without penalty exposure.
Background: ESSB 5814 and the expansion of taxable services
ESSB 5814 represents a significant expansion of Washington’s retail sales tax regime. The legislation expanded the statutory definition of “retail sale” to encompass several service transactions that were subject only to Washington’s business and occupation (B&O) tax under the “service and other” classification.
The categories of services newly subject to retail sales tax include:
- Advertising services
- Information technology consulting and technical support services
- Custom software development and customization of prewritten software
- Custom website development services
- Investigation and security services, including monitoring and armored car services
- Temporary staffing services
- Certain live presentations and event-related services
As a result of the legislative change, providers of these services must now:
- Collect and remit retail sales tax on taxable transactions.
- Report the receipts under the retailing B&O tax classification rather than the service and other classification that historically applied. This change generally will help compliant taxpayers as the retailing B&O tax rate (0.471%) is lower than the services and other B&O tax rate (between 1.5% and 1.75%).
The law took effect October 1, 2025, but transitional rules applied to certain preexisting contracts through March 31, 2026. Given the quick implementation of ESSB 5814, the breadth of the change, and the number of industries affected, many taxpayers faced uncertainty regarding compliance. To address these transition challenges, the DOR has announced a temporary penalty relief program for taxpayers that failed to collect or remit the newly applicable taxes during the early stages of implementation. The program is also intended to encourage voluntary compliance with the new law.
Overview of the penalty relief program
To be eligible for relief, businesses must meet the following criteria:
- Covered liabilities: The program covers uncollected retail sales tax and unpaid use tax for the new categories of taxable services created by ESSB 5814.
- Covered reporting periods: Eligible reporting periods run from October 1, 2025, through December 31, 2026. For businesses with preexisting contracts that qualified for temporary sales tax relief, penalty relief begins when the contract no longer qualifies for such relief or on April 1, 2026 (whichever occurs first). Relief for businesses with preexisting contracts also ends on December 31, 2026.
- Application process: Applications must be submitted via the DOR’s Voluntary Disclosure Application system. Once the DOR determines that a taxpayer qualifies, it will issue a Penalty Relief Agreement that the taxpayer must sign and return within 30 days. After execution, the DOR will work with the taxpayer to determine the appropriate tax liability and issue a formal assessment. (Note that Washington law requires disclosure of taxpayer identity in the Voluntary Disclosure Agreement process.)
- Application deadline: Taxpayers must apply for penalty relief on or before September 30, 2027.
- Excluded penalties: Critically, not all penalties are on the table. The evasion, negligence, and tax avoidance penalties are not eligible for relief via this program.
- Taxes and interest still apply: The program does not eliminate the underlying tax liability. Businesses must still pay the full amount of tax due and any applicable statutory interest.
Ongoing legal challenges and proposed legislation
ESSB 5814 is not without legal controversy. There is pending litigation challenging the tax expansion as contrary to the Internet Tax Freedom Act, among other issues. Comcast Cable Communications Management LLC v. Washington. Additionally, the Washington Legislature has passed a bill (SB 6346), now sitting before the governor for signature, that would repeal the sales and use taxes for retail services included under ESSB 5814 – except for advertising services – as of January 1, 2029.
Key takeaways
The DOR’s penalty relief program provides some relief to taxpayers affected by ESSB 5814.
Companies that provide or purchase newly taxable services should evaluate their exposure promptly and consider whether participation in the penalty relief program may mitigate potential penalties while bringing their Washington tax compliance into alignment with the new law.
