Are Consulting Services Taxable in Washington State?

Determining if consulting services are taxable in Washington is complex because its tax system differs from common corporate income tax structures. Whether a consultant’s revenue is subject to tax depends on the specific activities performed for the client, requiring a detailed analysis of the service provided.

Washington’s Primary Business Taxes

Washington’s tax structure for businesses is built on the Business and Occupation (B&O) tax and the retail sales tax. The B&O tax is a gross receipts tax calculated on a business’s total revenue without deductions for expenses like labor or materials. The B&O tax rate applied to a business’s gross income varies based on its activity, which the Washington Department of Revenue organizes into more than 30 classifications.

Retail sales tax is a transactional tax collected from the customer at the point of sale, which the business remits to the state. The state-level rate is 6.5%, but the total rate is higher as it includes local sales taxes that vary by location. While the B&O tax applies to the seller, the sales tax is a direct cost to the buyer for goods and services defined as “retail sales.”

Classifying Your Consulting Service for Tax Purposes

The classification of your specific services determines whether you owe B&O tax, must collect retail sales tax, or both.

Professional Services

Many consulting activities fall under the “Service and Other Activities” B&O tax classification. This category includes services like management consulting and strategic planning where the primary deliverable is the consultant’s expertise and analysis.

Income from these professional services is subject to the Service and Other Activities B&O tax, with a standard rate of 1.5%. A higher rate of 1.75% applies to businesses with gross income over $5 million, which is scheduled to increase to 2.1% on October 1, 2025. These services are not subject to retail sales tax, so the consultant pays B&O tax but does not charge clients sales tax.

Digital and Data Services

Tax treatment is more complex for services involving digital products. Washington law identifies “Digital Automated Services” (DAS) as services transferred electronically using software applications. These are subject to both B&O tax and retail sales tax.

If a consulting service is a DAS, such as providing access to an online platform that automatically generates reports, its revenue is reported under the “Retailing” B&O classification. This classification has a rate of 0.471%, scheduled to increase to 0.5% on January 1, 2027. The consultant must also collect and remit retail sales tax from their Washington-based customers.

A significant change takes effect on October 1, 2025, when the definition of “retail sale” expands. It will include a broad range of services, such as custom software development, IT consulting, digital advertising, and information services. These services will then become subject to both retail sales tax and the Retailing B&O tax.

Sourcing Rules for Service Income

For consultants with clients inside and outside of Washington, the state uses a “market-based sourcing” rule to apportion service income. This rule sources revenue to the location where the customer receives the benefit of the service, not where the consultant performs the work. This prevents a business from avoiding Washington tax by performing services remotely.

To determine a business client’s location, the Department of Revenue uses a three-step hierarchy. The primary location is where the customer ordered the service. If unknown, it defaults to the customer’s billing address, and if that is also unknown, the location is the customer’s commercial domicile.

For example, a consultant in California advising a company in Seattle provides a service whose benefit is received in Washington. The revenue from this client is subject to Washington’s B&O tax, even if the work was performed entirely in California. If a service’s benefit is received in multiple states, income can be proportionally attributed, but the taxpayer must provide proof for the allocation.

Registration and Filing Process

Consultants must apply for a Washington business license, which simultaneously registers the business with the Department of Revenue.

Information and Documents Needed

To complete the business license application, a consultant will need to provide fundamental information about their enterprise, including:

• The legal business name and any trade names (DBA)
• The physical business address
• Details about the ownership structure
• A Unified Business Identifier (UBI), if previously assigned
• The North American Industry Classification System (NAICS) code that best describes the consulting activity

Step-by-Step Filing Guide

Once registered, the business is assigned a filing frequency—monthly, quarterly, or annually—based on its estimated tax liability. Taxes are reported on the Combined Excise Tax Return, and the Department of Revenue requires all taxpayers to file and pay electronically through its “MyDOR” online portal.

The process requires logging into the MyDOR system with a Secure Access Washington (SAW) user ID. Within the portal, the taxpayer selects the appropriate tax classifications and enters their gross income for the period. The system then allows for any applicable deductions or credits before calculating the final tax due and prompting for payment.