‘It’s unbelievable’: Digital agencies slam new sales tax law in Washington as legal challenge looms

Curtis Costner spent Memorial Day Weekend on a trip with his father in Utah. As they passed through the so-called Silicon Slopes, he saw signs of a growing tech economy.

“There’s a lot of talent, a lot of infrastructure,” Costner said. “The state seems friendly and supportive and they would value what we do.”

He can’t say the same about his home state.

Costner is president of Sands Costner, a digital marketing firm based in Tacoma, Wash., and one of many businesses affected by a sweeping new tax.

Last week, Gov. Bob Ferguson signed Senate Bill 5814, which expands Washington’s retail sales tax to include advertising agencies, software development firms, IT support providers, and other digital service businesses.

It’s one of several new taxes on businesses aimed at addressing the state’s $16 billion shortfall.

Starting in October, these companies will be required to collect sales tax — more than 10% in the Seattle area — on their services.

Costner said the tax could prompt clients to seek out-of-state providers.

“It makes it harder for local businesses to work with other local businesses,” he said.

John Rubino, partner at Seattle-based agency GreenRubino, said he’s worried about local clients — including nonprofits and small businesses — who may not be able to absorb the added cost from the tax.

“They’re just stuck with it,” Rubino said. “It’s unfair and it seems unreasonable. It’s unbelievable.”

Democratic lawmakers introduced the bill in mid-April. It passed just eight days later, near the end of the legislative session in Olympia.

Rubino and Costner both feel blindsided and targeted by the legislation, which applies to digital advertising — but excludes physical ads such as billboards or newspaper placements.

“That’s a completely unfair tax treatment,” Rubino said.

Legal challenges to the bill are “ripe and appear inevitable,” according to tax law experts with McDermott Will & Emery. In a blog post last week, they cited the federal Internet Tax Freedom Act, which prohibits states from “discriminatory taxes on electronic commerce.”

“Taxing digital advertising services while expressly excluding offline media places the new law on a collision course with ITFA,” the lawyers wrote. “A legal challenge is all but guaranteed.”

Aaron Johnson, a tax lawyer with Ballard Spahr in Seattle, agreed.

“ESSB 5814 creates some serious concerns with the Internet Tax Freedom Act,” he said via email.

Washington is one of the only states to broadly tax digital ads. Maryland passed a similar law in 2021 that is still under litigation. That law applies to only companies with at least $100 million in annual revenue.

“If it was a great idea, every state in the country would be doing this,” Rubino said.

Washington lawmakers frame their bill as a way to tweak the state’s tax system as the economy shifts toward services and digital products.

“The legislature recognizes that our state and nation have moved away from a predominantly goods-based economy towards a more service-based economy,” the bill reads. “As a result, Washington’s tax code, which is heavily reliant on sales taxes, continues to reach a narrowing share of economic activity subject to the retail sales tax.”

Sen. Noel Frame (D-Seattle), who co-sponsored the bill, called the law a “good government update to make our tax code more appropriate for the 21st century.”

“As more and more of our economy happens with computers and technology, this bill is doing the work to modernize the tax code to match,” Frame said during a Senate floor debate on April 19.

Washington is one of a few states without a personal or corporate income tax. Most state revenue comes from sales, property, and B&O taxes — a system critics say disproportionately burdens lower-income residents.

Rubino said he supports tax reform — just not this version.

“What they’re doing is not helping the regressive tax system — it’s regressively hurting small business,” he said.

Emily Vyhnanek, associate director of campaigns at the progressive think-tank Budget & Policy Center, said her group was disappointed that a proposed statewide wealth tax and new payroll tax — which drew strong opposition from companies including Microsoft — did not ultimately pass.

“Both of those would have been truly progressive ways to generate revenue,” she said.

SB5814, which also includes a tobacco tax on Zyn packs, is expected to raise approximately $1.1 billion over the 2025-27 biennium. Revenue will fund education, health care, and social services.

Gov. Ferguson last week also signed House Bill 2081, which increases the state’s business and occupation tax rate, and the “advanced computing surcharge” paid by major tech companies such as Microsoft and Amazon.

It’s unclear whether the sales tax expansion bill will affect advertising or marketing businesses within larger tech companies.

Costner said he’s contemplating next steps for his 12-person company — including paying for a tax compliance expert or even a potential relocation.

“Either way, both those options are very costly for a company like mine,” he said, adding: “Can we just get back to work and do the creative that we’re good at?”

Senate Bill 5814: New sales tax expansion law in Washington state by GeekWire on Scribd