Understanding ESSB 5814

ESSB 5814 is designed to broaden Washington’s tax base by including more service industries under the retail sales tax umbrella. Historically, services such as digital advertising and web development were exempt, which created a tax-free advantage over other taxable goods and services. By October 2025, however, these services will carry the same retail sales tax rate as products purchased in a store. The Washington Department of Revenue has already started notifying more than 90,000 businesses about the change, which underscores just how widespread the impact will be.

Under ESSB 5814, advertising services will now be taxed as retail sales. This includes digital marketing tactics such as search engine marketing (SEM), lead generation campaigns, pay-per-click advertising, social media promotions, and campaign planning. Even services like web traffic analysis or ad space acquisition fall under the new definition of taxable advertising.

For small businesses, this means every dollar spent on advertising will stretch a little less. A $10,000 annual digital marketing budget, for example, could cost several hundred dollars more once sales tax is applied. On the provider side, marketing agencies and freelancers will need to update contracts, billing software, and accounting practices to ensure that the correct tax is collected and remitted.

Website development is another area seeing a major change. Until now, custom websites were treated as non-taxable services. Beginning October 2025, however, any custom development project—whether it involves designing a brand-new site or coding unique functionality—will require sales tax collection. Prebuilt website templates or “out-of-the-box” platforms may not fall under the same rule, but once customization is involved, the service is taxable.

For small businesses, this can translate into larger upfront costs when launching or redesigning a website. A custom build that previously cost $8,000 could now come with an additional sales tax line item of several hundred dollars. For agencies and freelance developers, this requires clear communication with clients to avoid billing surprises.

The most immediate impact of ESSB 5814 is higher costs. Small businesses already balancing tight marketing budgets will now see their invoices increase by the applicable sales tax rate. While the additional cost may seem modest per project, it compounds over time—especially for businesses that invest consistently in advertising or rely on ongoing website maintenance.

Another challenge is the administrative burden. Service providers will need to implement new billing practices, collect taxes, and remit them accurately. Mistakes could lead to penalties from the Department of Revenue. Clients, in turn, may need to adjust their accounting practices to reflect the tax as part of operational expenses.

There is also the issue of tax sourcing. ESSB 5814 applies tax based on where the customer first uses the service, which adds complexity for out-of-state providers serving Washington clients. This may create confusion around compliance for both local businesses and remote vendors.

Finally, the bill has raised legal questions. Some experts suggest that taxing digital advertising but not traditional formats like print or radio may conflict with the Internet Tax Freedom Act. While potential challenges could arise, small businesses should plan as if the law will remain in place.

For Service Providers such as marketing agencies, design firms, and freelance developers, the first step is to audit your offerings. Identify which services are newly taxable and update your billing systems to ensure compliance. It is also important to train staff on the new requirements and to communicate clearly with clients. Preparing FAQs, updating contracts, and sending early notices can help build trust and avoid confusion when invoices start to include sales tax.

For Clients, the best strategy is to plan ahead financially. Build the sales tax into your marketing and IT budgets for the final quarter of 2025 and beyond. When engaging with agencies or freelancers, ask for itemized invoices that clearly show the service cost and the tax portion. Businesses may also want to evaluate whether bundled services or alternative strategies can deliver value while minimizing costs. For more complex situations, consulting a tax professional can provide clarity.

The Washington Department of Revenue has committed to publishing interim guidance and hosting listening sessions prior to the law taking effect. Small business owners should subscribe to the Department’s email alerts and check the official website regularly for updates. Remaining engaged in feedback opportunities will not only help clarify confusing areas (such as exemptions or sourcing rules) but also give small business owners a chance to voice their concerns before final guidance is finalized.

ESSB 5814 introduces a new layer of complexity and cost for small businesses in Washington. While advertising and custom website development remain critical for growth, these services will no longer be exempt from tax. The businesses most prepared for this transition will be those that budget early, communicate openly with service providers or clients, and stay informed as guidance continues to roll out. With a proactive approach, small businesses can adapt to the new rules while maintaining their growth strategies.