The Washington State Legislature has passed Engrossed Substitute Senate Bill (ESSB) 5814, which introduces significant changes to the state’s sales tax laws. These changes, which will take effect on October 1, 2025, are aimed at modernizing the tax code. It is important for all business owners to understand how these new rules may impact their operations.

This article provides a summary of the key changes based on interim guidance from the Washington Department of Revenue.

Digital Automated Services (DAS) and the Definition of a “Retail Sale”

ESSB 5814 broadens the scope of services subject to retail sales tax and the retailing Business and Occupation (B&O) tax. Here are the key takeaways:

• Data Processing is Now a Retail Service: Services such as data processing will now be considered a retail service and will be subject to retail sales tax.
• Expanded Taxation of Digital Services: Previously, certain digital services were exempt from sales tax. This law removes those exemptions. Now, services such as digital advertising, data processing, live-streamed presentations, and services that involve significant human effort are all considered taxable retail sales.
• New Exclusion for Telehealth: A new DAS exclusion has been created for telehealth and telemedicine services.
• Affiliate Sales Exclusion: Certain sales between members of an affiliated group are now excluded from the definition of a retail sale.
• Clarification on Professional Services: The legislature has clarified that professional services will not become taxable simply because they are delivered electronically. The Department of Revenue has provided a framework to distinguish between professional services subject to the service and other B&O tax and taxable DAS.
• Sourcing DAS Sales: The new law outlines a clear hierarchy for determining the location of a DAS sale for tax purposes.

Learn more: https://dor.wa.gov/laws-rules/interim_guidance_statements/interim-guidance-statement-regarding-changes-made-essb-5814-das-exclusions-and-definition-retail

New Tax Treatment for Custom Software

The new law also changes how custom software is taxed. Here’s what you need to know:

• Custom Software as a Retail Sale: The sale of “custom software” and the “customization of prewritten software” will now be considered a retail sale. This means these sales will be subject to both retailing B&O tax and retail sales tax.
• Previous Tax Classification: Previously, these sales were taxed under the service and other activities B&O tax classification.
• Key Definitions:
  • Custom Software: Software created for a single person.
  • Customization of Prewritten Computer Software: An alteration or modification of prewritten software for a specific person.
• Sourcing Custom Software Sales: The sale of custom software is generally taxed based on the location where the purchaser receives the service.
• Multiple Points of Use (MPU) Exemption: Businesses that license custom or customized software for use in multiple states may be eligible for the MPU exemption. This allows the purchaser to apportion and pay use tax directly to the Department of Revenue instead of paying retail sales tax at the time of purchase. However, the MPU exemption is not available for bundled transactions.

Learn More: https://dor.wa.gov/laws-rules/interim_guidance_statements/interim-guidance-statement-regarding-changes-made-essb-5814-custom-software

What This Means for Your Business

The changes introduced by ESSB 5814 are complex and could have a significant impact on your business’s tax obligations. It is crucial to review your sales of services and software to determine how these new rules will affect you.

Please note that the information above is based on interim guidance from the Department of Revenue. The Department will be issuing final guidance in the future.

We encourage you to contact us to discuss your specific situation and ensure you are prepared for these changes when they take effect on October 1, 2025.

The U.S. Department of the Treasury has announced that, starting September 30, 2025, the federal government will stop issuing paper checks for most federal payments—including IRS tax refunds. The change is part of a broader initiative to improve security, reduce fraud and theft, and speed up payment delivery by transitioning to electronic methods.

At the same time, federal agencies—including the IRS—are moving incoming payments (what taxpayers send to the government) to electronic processing “as soon as practicable.” Treasury’s implementation guidance instructs agencies to phase out lockbox processing and adopt digital collection solutions. While that signals paper checks for tax payments are being phased down, a single, IRS‑specific cutoff date for mailed check payments has not been posted as of today.

Key takeaways

• Refunds: The IRS will no longer mail paper refund checks in the ordinary course for payments issued on or after Sept 30, 2025 (limited exceptions apply “to the extent permitted by law”). Plan now for direct deposit or another approved electronic refund option.
• Paying the IRS: Agencies are directed to process all receipts electronically as soon as practicable and eliminate lockboxes, which means paper checks for tax payments are being phased out. Move to electronic payment methods now to avoid disruption.
• What to use: Recommended options include IRS Direct Pay, EFTPS, and debit/credit card or digital wallet via IRS‑approved processors (fees may apply; cards aren’t for payroll tax deposits).

What’s changing for IRS refunds

Beginning September 30, 2025, federal disbursements will be electronic by default. For the IRS, that means no routine paper refund checks after that date. Exceptions will be limited and grounded in law and Treasury guidance. Electronic delivery is faster and significantly reduces the risk of mail theft and check fraud.

Direct deposit is the fastest way to receive your refund. Don’t have a traditional bank account? Some mobile apps and reloadable prepaid debit cards support direct deposit when they provide routing and account numbers—check with your provider to confirm.

What’s changing for payments to the IRS

The March 25 Executive Order directs the government to move all federal payments and collections to electronic methods, and Treasury’s implementation guidance tells agencies to eliminate lockboxes and process all receipts electronically “as soon as practicable.” For taxpayers, this means a continuing shift away from mailing checks to pay balances due or estimated taxes. Transition now, even though the IRS has not published a single hard cutoff date for accepting mailed checks as of this writing.

Your electronic options (and when to use them)

1) IRS Direct Pay (ACH from your bank account)

Best for individuals paying 1040‑series balances, extensions, or estimates. No fees; schedule each payment as needed.

Learn more: https://www.irs.gov/payments/direct-pay

2) EFTPS — Electronic Federal Tax Payment System

Ideal for businesses (and individuals who want scheduling, history, and recurring payments).

Plan ahead: after you enroll online, your PIN typically arrives by U.S. mail in about 5–7 business days before you can activate and pay.

Enroll: https://www.eftps.gov/eftps

3) Debit/credit card or digital wallet (IRS‑approved processors)

Convenient for one‑off payments; processing fees apply.

Note: You cannot pay federal payroll tax deposits by card—use EFTPS for those.

Options: https://www.irs.gov/payments/pay-your-taxes-by-debit-or-credit-card

If you receive federal benefits by paper check

This policy change covers most federal disbursements. If you still get a paper check for Social Security, VA, or other benefits, switch to direct deposit or, if eligible, a Treasury‑sponsored Direct Express® card using the options Treasury lists.

Enroll at GoDirect: https://www.godirect.gov/

Or call Treasury’s Electronic Payment Solution Center: 800‑967‑6857 (Mon–Fri, 9:00 a.m.–7:00 p.m. ET).

Always verify requests to change your payment method to avoid scams.

FAQ

Will the IRS still accept mailed paper checks after September 30, 2025?

Treasury’s guidance requires agencies to process all receipts electronically “as soon as practicable” and to phase out lockboxes, but it doesn’t set a single nationwide cutoff date for mailed checks to the IRS. The direction is clear: move to electronic payments now to avoid disruption.

What are my options if I don’t use a traditional bank account?

Some mobile apps and reloadable prepaid debit cards accept direct deposit if they provide routing and account numbers. Confirm with your provider before filing.

How long does EFTPS enrollment take?

After you enroll online, your PIN typically arrives by U.S. mail within about 5–7 business days. You’ll then activate and set your online password before making payments.

Why is the government ending most paper checks?

To fight fraud and theft, reduce costs, and speed up payments. The Executive Order mandates modernizing payments to and from the federal government, and Treasury is implementing it across agencies.

Are there any exceptions to electronic refunds or payments?

Yes, the policy allows limited exceptions “to the extent permitted by law.” Treasury will publish exception processes where needed.

We can help you switch—today

Our team will help you choose the right electronic method for refunds and payments, enroll you in EFTPS if needed, and set up direct deposit accurately.

Contact us to get started now and avoid last‑minute scrambling.

For Washington’s investors and business owners, 2025 marks a pivotal shift in the financial landscape. A new era of taxation has begun, with the state implementing a capital gains tax rate that can reach as high as 9.9% on profits from the sale of long-term assets like stocks, bonds, and business interests. This change demands more than a simple adjustment to your tax filings; it calls for a fundamental reassessment of your asset management strategy.

Legally, this tax is classified as an excise tax on the act of selling or exchanging assets, a distinction upheld by the Washington Supreme Court, rather than an income tax. The revenue generated is earmarked to fund critical state priorities, including education, early learning, and childcare programs.

The New Reality: Washington’s Two-Tier Capital Gains Tax Structure

Effective January 1, 2025, Washington’s capital gains tax moves from a single rate to a two-tiered system :

• Tier 1 (7% Base Rate): Applies to the first $1 million of taxable capital gains (the amount of your gain after the standard deduction).
• Tier 2 (9.9% Surtax Rate): For taxable capital gains exceeding $1 million, a 2.9% surtax is added, bringing the total marginal rate to 9.9%.

A standard deduction, which is adjusted annually for inflation, is available to all filers. For 2024, this deduction was $270,000. Crucially, the $1 million threshold for the higher surtax is not indexed for inflation, meaning that over time, more taxpayers will likely find their gains falling into the higher bracket.

For example, if you realize a $1,500,000 taxable gain in 2025 (resulting in a $1,230,000 gain after the $270,000 deduction), your total tax liability would be $92,770. This is $6,670 more than under the previous 7% flat-rate system. The tax impact grows exponentially with the size of the gain.  

The Critical Question: What Is Exempt from the Tax?

Fortunately, the tax does not apply to all asset sales. The Washington State law (RCW 82.87) provides several key exemptions:

• Real Estate: All gains from the sale of real estate—including commercial buildings, land, and rental properties—are fully exempt from Washington’s capital gains tax. When selling an interest in an entity that owns real estate, the exemption applies only to the portion of the gain directly attributable to the property’s value, making an accurate appraisal essential.
• Qualified Family-Owned Small Businesses (QFOSB): Gains from the sale of a qualifying small business may be deductible. The primary requirements include:
  • The business must have worldwide gross revenue below a certain threshold ($10,790,000 for 2024) in the 12 months preceding the sale.
  • The taxpayer or their family members must have owned the business for at least five years and “materially participated” in its operation for at least five of the ten years before the sale.
  • Retirement Accounts: Capital gains realized within federally qualified retirement accounts, such as 401(k)s, IRAs, and Roth IRAs, are not subject to the tax.

  Advanced Tax-Saving Strategies: Beyond Simple Timing

  Effective tax planning requires a sophisticated approach based on a clear understanding of state law. Some widely known federal strategies may not apply in Washington, creating potential pitfalls for the uninformed.
   

  Strategies Requiring Caution

  • Qualified Opportunity Funds (QOFs): While the federal government offers significant tax deferrals for investing capital gains in QOFs, Washington State does not recognize this benefit. Even if you reinvest your gains into a QOF, you must still pay the Washington capital gains tax in the year the gain was realized.
  • Federal SALT Deduction: Attempting to deduct your Washington capital gains tax payment on your federal return is unlikely to succeed. The tax’s classification as an “excise tax” likely makes it ineligible for the State and Local Tax (SALT) deduction, which is primarily for income, sales, and property taxes. Furthermore, the federal SALT deduction is capped (at $10,000, though temporarily raised to $40,000 for 2025 with phase-outs for high earners), limiting its utility for those with significant tax liabilities.

  Effective Strategies for Washington

  • Qualified Small Business Stock (QSBS): This remains one of the most powerful tax-saving tools. Washington’s tax calculation begins with your federal net long-term capital gain. Under federal law (IRC §1202), gains from the sale of QSBS held for over five years can be excluded from federal tax. Because it is excluded at the federal level, the gain is also automatically exempt from Washington’s capital gains tax. This provides a strong incentive for founders and early-stage investors to structure their businesses as C-Corporations.
  • Installment Sales: Structuring the sale of an asset to receive payments over several years allows you to spread the recognition of the gain. This can help keep your annual gain below the $1 million surtax threshold, or even below the standard deduction, thereby reducing or eliminating your tax liability.
  • Change of Domicile: For intangible assets like stocks and bonds, the tax is based on the seller’s domicile at the time of the sale. Legally establishing residency in a state with no capital gains tax (such as Nevada or Texas) before a major liquidity event is a valid strategy. However, this requires a genuine relocation, substantiated by clear evidence like a new driver’s license, voter registration, and primary home, as the state will scrutinize such moves closely.

  Proactive Design, Not Post-Sale Reaction

  Washington’s new capital gains tax structure presents a complex but navigable challenge. The key to preserving your wealth lies not in last-minute maneuvers but in proactive, informed planning. The law itself, particularly the robust exemptions for real estate and qualified small businesses, offers the most reliable paths to tax efficiency. Before signing any major asset sale agreement, it is imperative to consult with a tax professional. A well-designed strategy, tailored to your specific circumstances and grounded in a thorough understanding of Washington’s tax code, can save you tens or even hundreds of thousands of dollars. In the 9.9% era, successful asset management begins long before the sale is final.