INSIDE SALT
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
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Washington’s Digital Ad Tax Enacted: Is Litigation Now Inevitable?

by , and | May 21, 2025 | , , , , ,

On May 20, 2025, Washington Governor Bob Ferguson signed into law Senate Bill (SB) 5814, a sweeping tax bill that expands Washington’s retail sales and use tax to digital advertising services and a range of high-tech and IT services. The new law takes effect for sales occurring on and after October 1, 2025.

As we noted previously, this legislation marks a significant shift in Washington’s tax policy, extending sales tax to categories of traditionally exempt business-to-business services. With enactment, legal challenges – particularly under the federal Internet Tax Freedom Act (ITFA) – are ripe and appear inevitable.

WHAT THE LAW DOES

SB 5814 amends RCW 82.04.050 by redefining “sale at retail” to include “advertising services,” broadly covering both digital and nondigital forms of ad creation, planning, and execution. The law specifically includes:

  • Online referrals
  • Search engine marketing
  • Lead generation optimization
  • Web campaign planning
  • Digital ad placement
  • Website traffic analysis

However, the law expressly excludes services rendered in connection with:

  • Newspapers (RCW 82.04.214)
  • Printing or publishing (RCW 82.04.280)
  • Radio and television broadcasting
  • Out-of-home advertising (g., billboards, transit signage, event displays)

With these carve-outs, it is difficult to see how anything other than internet advertising remains subject to tax. The structure of the new tax facially discriminates against e-commerce and is barred by ITFA.

ITFA AND THE CERTAINTY OF A LEGAL CHALLENGE

ITFA prohibits states from imposing taxes that discriminate against digital services when comparable offline equivalents are exempt. While SB 5814 purports to cover both digital and nondigital advertising, the exclusions for nondigital forms of advertising cause it to target the digital side of the industry. For example, a digital banner ad will be taxed, whereas a banner towed by an airplane promoting the same product will not.

This distinction mirrors the structure of Maryland’s Digital Advertising Gross Revenues Tax, which has been tied up in litigation since its enactment in 2021. A Maryland trial court found that law facially violated ITFA and federal preemption principles. That litigation continues, and Washington now finds itself on a similar path.

HIGH-TECH AND IT SERVICES ARE NOW TAXABLE

In addition to digital advertising, SB 5814 extends the retail sales tax to high-tech services, including:

  • Custom website development
  • IT technical support and network operations
  • Data processing and data entry
  • In-person or live-virtual technical training

Like advertising, these intermediate services typically are purchased by businesses in support of operations rather than for end consumption. Taxing their sale introduces tax pyramiding and adds costs that will ultimately be passed on to consumers. For Washington’s tech-driven economy, this change will inflate prices and reduce competitiveness.

Local advertisers and businesses that rely on digital marketing and high-tech services will see these costs rise and lead to higher prices for consumers.

OUTLOOK

While SB 5814 is now law, its enforceability remains far from certain. Taxing digital advertising services while expressly excluding offline media places the new law on a collision course with ITFA. A legal challenge is all but guaranteed.

At the [...]

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Washington’s Digital Ad Tax: A Lawsuit Waiting To Happen?

by , and | May 1, 2025 | , , , , ,

On April 27, 2025, the Washington Legislature delivered to Governor Bob Ferguson’s desk Senate Bill (SB) 5814, a sweeping tax bill that, among other changes, would expand the state’s retail sales and use tax to sales of digital advertising services and a range of high-tech and IT services. The bill now awaits the governor’s signature, with a decision due by May 20, 2025.

If enacted, the changes would take effect October 1, 2025, marking a significant expansion of Washington’s tax base into areas that have long been exempt, particularly intermediate business services such as digital marketing, data processing, and custom software support.

WHAT THE BILL DOES

SB 5814 amends RCW 82.04.050 by redefining “sale at retail” to include a broad range of services previously excluded from the sales tax. Specifically, it adds “advertising services,” defined as:

All digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements including, but not limited to: layout, art direction, graphic design, mechanical preparation, production supervision, placement, referrals, acquisition of advertising space, and rendering advice…

The definition also expressly includes:

  • Online referrals
  • Search engine marketing
  • Lead generation optimization
  • Web campaign planning
  • The acquisition of advertising space in the internet media
  • Website traffic analysis for determining the effectiveness of an advertising campaign.

However, the bill expressly excludes advertising services rendered in connection with newspapers (as defined in RCW 82.04.214); printing or publishing (RCW 82.04.280); radio and television broadcasting; and out-of-home advertising such as billboards, transit displays, and signage at events.

With that list of exclusions, it’s hard to imagine what advertising services other than internet advertising services are left to tax. This focus on internet advertising creates a prima facie discriminatory tax on electronic commerce barred by the federal Internet Tax Freedom Act (ITFA).

ITFA AND THE CERTAINTY OF A LEGAL CHALLENGE

ITFA prohibits states from imposing “discriminatory taxes on electronic commerce.” A tax is discriminatory if it applies to digital services but not similar offline equivalents.

While SB 5814 expressly includes both digital and non-digital advertising services, the carve-outs for traditional formats such as print, TV, and radio effectively leave out non-digital advertising. As the bill itself states, services connected to newspapers, publishing, and broadcast media are not taxable. This distinction creates a classic ITFA problem:

  • A digital banner ad campaign will be taxed.
  • A newspaper ad or radio spot promoting the same product will not.

This kind of structural bias has been challenged before. Maryland’s Digital Advertising Gross Revenues Tax (the first of its kind in the United States) was enacted in 2021 and quickly faced multiple lawsuits on ITFA and other grounds. In 2022, a Maryland trial court struck down the law as unconstitutional, citing ITFA violations and federal preemption (although the decision was later reversed on procedural grounds). That litigation continues while the stack of taxpayer refund claims on the Maryland Comptroller’s desk grows taller.

Washington faces a similar outcome. SB 5814’s facial discrimination against digital advertising is precisely the kind of unequal [...]

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Remote Retailers Held Responsible for Tax Collection in Washington

by and | Feb 6, 2024 | , , , , , ,

If there’s a lesson to be learned from the Washington Court of Appeals’ recent holding in Orthotic Shop Inc. and S&F Corporation v. Department of Revenue, No. 39321-6-III (Jan. 23, 2024), it’s that the use of a marketplace does not eliminate a remote seller’s tax responsibilities, particularly for pre-Wayfair periods.

The dispute in Orthotic Shop involved a retailing business and occupation tax (B&O tax) and a retailing sales tax assessment against two merchants for sales they made on an online retailer’s website. The audit report asserted that the merchants were “retailers” who maintained a nexus to Washington because they maintained a stock of goods in the online retailer’s warehouses located in the state. As such, the audit report concluded that the merchants were liable for retailing B&O tax and sales tax on sales to Washington customers made via the online retailer’s website.

The merchants admitted before the Court of Appeals that they sold their goods to consumers and not to the online retailer. However, the merchants challenged the assessment and argued that the online retailer’s provision of fulfillment services necessarily rendered it a “consignee” responsible for remitting retailing B&O tax and sales tax on transactions facilitated through its website in accordance with WAC 458-20-159. The merchants also asserted that the assessment was unfair because they lacked an understanding that they could incur a tax collection liability in Washington through the storage of their merchandise in an in-state warehouse.

The Court of Appeals determined that the merchants failed to show that the online retailer was a consignee with sole responsibility for tax collection. “A consignee,” the Court of Appeals explained, “makes sales on behalf of the consignor.” By contrast, the merchants’ product pages on the marketplace’s website listed the merchants as the sellers, not the online retailer. Accordingly, the Court of Appeals concluded: “[s]ince the merchants sold to buyers, they are liable for retailing B&O tax on those sales.”

The merchants’ failure to list the online retailer as the “seller” on their respective sales pages was also fatal to their argument that they were not liable for retailing sales tax on sales made via the online retailer’s website. The Department of Revenue’s administrative rules explain that while a consignee is responsible for collecting and remitting sales tax on sales made in its own name, when the consignee is selling in the name of the consignor, the consignor may instead report and remit the retail sales tax. Here, the Court of Appeals noted that while the online retailer’s agreement with the merchants provided that it would remit the sales tax if the merchants asked it to do so, neither merchant made such a request.

The Court of Appeals also was unimpressed by the merchants’ assertions that they did not understand that they could establish physical presence nexus and incur a tax liability based on the storage of their goods at a warehouse in the state. The Court of Appeals explained that ignorance of the law, was not an acceptable defense.

CASE TAKEAWAYS

Although Orthotic Shop [...]

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Seattle Payroll Expense Tax Upheld by State Appellate Court

by | Jun 23, 2022 | , , ,

This week, the Washington Court of Appeals affirmed a lower court’s decision to dismiss a challenge to the recently enacted payroll expense tax in Seattle, WA. Seattle Metro. Chamber of Commerce v. City of Seattle, No. 82830-4-I, 2022 WL 2206828 (Wash. Ct. App. June 21, 2022).

The tax, which went into effect on January 1, 2021, applies to entities “engaging in business within Seattle” and is measured using the business’s “payroll expense” (defined as “compensation paid in Seattle to employees,” including wages, commissions, salaries, stock, grants, gifts, bonuses and stipends). The tax only applies to businesses with a payroll expense of more than $7 million in the prior calendar year, and compensation is considered “paid in Seattle” if the employee works more than 50% of the time in the city. Additionally, if the employee does not work in any city more than 50% of the time, the employee’s compensation is treated as though it was “paid in Seattle” only “if the employee resides in Seattle.”

Although the tax is based on employee compensation, the Washington Court of Appeals held that incidence of the tax is on the employer, not the employee. This was a critical distinction because, under Washington law, municipalities generally are prohibited from levying taxes directly on wages (e.g., an income tax). By finding that the tax incidence fell on the employers, the Court was able to define the tax as an excise tax on the employer’s privilege of doing business in the city.

As expected, the tax is already bringing in significant revenue for Seattle. In its first year on the books, the tax brought in more than $230 million. Yet, despite this new revenue (as well as revenue from several other recently enacted taxes), Seattle is still projecting a financing gap of more than $100 million for 2022. Taxpayers are concerned that the city will explore even more revenue options to help close the gap.

The McDermott tax team is constantly monitoring tax developments on a state-by-state basis and will provide updates on the PNW specifically as they are made known.



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Washington State Capital Gains Tax Held Unconstitutional

by | Mar 8, 2022 | , , , ,

The Washington State capital gains tax, which went into effect on January 1, 2022, has been held unconstitutional by the Douglas County Superior Court. Created in 2021, the tax was ostensibly labeled an “excise” tax in an effort by the Washington State Legislature (Legislature) to avoid difficulties associated with implementing an income tax in the state of Washington. The judge, however, was not persuaded.

Citing to authority from the Washington State Supreme Court, the trial judge held that courts must look through any labels the state has used to describe the statute and analyze the incidents of the tax to determine its true character. Here, the judge reviewed the most significant incidents of the new tax, including:

  • It relies on federal income tax returns that Washington residents must file and is thus derived from a taxpayer’s annual federal income tax reporting;
  • It levies a tax on the same long-term capital gains that the Internal Revenue Service (IRS) characterizes as “income” under federal law;
  • It is levied annually (like an income tax), not at the time of each transaction (like an excise tax);
  • It is levied on an individual’s net capital gain (like an income tax), not on the gross value of the property sold in a transaction (like an excise tax);
  • Like an income tax, it is based on an aggregate calculation of an individual’s capital gains over the course of a year from all sources, taking into consideration various deductions and exclusions, to arrive at a single annual taxable dollar figure;
  • Like an income tax, it is levied on all long-term capital gains of an individual, regardless of whether those gains were earned within Washington and thus without concern of whether the state conferred any right or privilege to facilitate the underlying transfer that would entitle the state to charge an excise;
  • Like an income tax and unlike an excise tax, the new tax statute includes a deduction for certain charitable donations the taxpayer has made during the tax year; and
  • Unlike most excise taxes, if the legal owner of the asset who transfers title or ownership is not an individual, then the legal owner is not liable for the tax generated in connection with the transaction.

The court found that these incidents show the hallmarks of an income tax rather than an excise tax, and because the new capital gains tax did not meet the uniformity and limitation requirements of the Washington State Constitution, it was unconstitutional.

The Washington State Attorney General has already indicated that the ruling will be appealed; in all likelihood, this issue will ultimately be decided by the Washington State Supreme Court. In the meantime, if you have questions about the Washington State capital gains tax, please contact Troy Van Dongen.



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Washington State’s Mandatory Withholding for Long-Term Care Put on Hold

by | Jan 27, 2022 | , , ,

In 2019, the Washington State Legislature (Legislature) established the Long-Term Services and Supports Trust Program (LTSS Trust Program) to provide funding for eligible beneficiaries that they can apply to the cost of their long-term care. The LTSS Trust Program is funded through a 0.58% payroll tax on employee wages, which went into effect on January 1, 2022.

Though the LTSS Trust Program was intended to provide a baseline of benefits to Washingtonians lacking private long-term care insurance, the program drew public criticism in recent months because, among other things, employees had no easy way to opt out of it. The legislation provided that individuals could opt out by purchasing private long-term care insurance before November 1, 2021, and applying for an exemption by the end of 2021. However, shortly after the program went into law, most (if not all) private long-term care insurance providers pulled out of the state.

When the Legislature convened earlier this month, it fast-tracked new legislation to put the LTSS Trust Program on hold. Though many lawmakers were calling for an outright repeal of the program, the majority ultimately passed a bill to delay its implementation until July 2023. Washington Governor Jay Inslee is expected to sign the measure by Friday, January 28.

Since this delay comes after employers have already started withholding the tax from their employees’ wages and, in some cases, after the tax has been remitted to the Employment Security Department (ESD), refunds will be necessary. Under the new law, employers are required to provide refunds to their employees within 120 days of the collection. If the employer already remitted the tax to the ESD, the ESD is required to refund that money to the employer who is then required to pass it on to the employee.

If you have questions about the LTSS Trust Program or its delayed implementation, please contact the author of this article.



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Maryland Enacts First Digital Advertising Services Gross Receipts Tax: Now What?

by , and | Feb 12, 2021 | , , , , , , , , ,

General Assembly Veto Override

On February 12, 2021, the Maryland General Assembly overrode Governor Larry Hogan’s veto of HB 732 (2020) (the Act), a bill enacting a first-of-its-kind digital advertising services tax on the annual gross receipts from the provision of digital advertising services in Maryland. The tax only applies to companies having annual gross revenues (without deduction of any expenses) from all sources of $100 million or more. The rate of the tax varies, depending on the level of global annual gross revenues, from 2.5% (for companies with $1 billion or less in global annual gross revenues) to 10% (for companies with more than $15 billion in global annual gross revenue). The rate applies to gross revenues from the performance of digital advertising services in Maryland. For instance, a company subject to the 10% rate having $100 million of revenue attributable to the performance of digital advertising services in Maryland would owe an annual tax of $10 million that will be reported and paid on a quarterly basis throughout the year.



Effective Date

Even though the legislation says the tax is effective July 1, 2020, under the Maryland Constitution, vetoed legislation becomes effective the later of the effective date in the bill or 30 days after the veto is overridden. Based on today’s veto override, the bill should become effective on or about March 14, 2021. However, because the legislation is “applicable to all taxable years beginning after December 31, 2020,” the digital advertising services tax will be retroactive to the beginning of this year.

Looming Compliance Deadlines

The digital advertising services tax applies on an annual basis with a return due on or before April 15 of the following year. However, the tax also requires quarterly filing and payment for certain taxpayers. On or before April 15 of the current year, persons subject to the tax are required to file a declaration of estimated tax showing how much Maryland digital advertising services tax they expect they will owe for the calendar year. As part of the declaration and quarterly with returns filed thereafter, the Act requires that they pay at least 25% of the estimated annual tax shown on the declaration. There is a penalty of up to 25% of the amount of any underestimate of the tax. The Act also creates a fine of up to $5,000 and criminal penalties of up to five years’ imprisonment for willfully failing to file the annual return.

Filing and Guidance TBD

At the time of writing, the Maryland Office of the Comptroller has not published any of the forms necessary for making the declaration of estimated tax or the return due on April 15 of the current year. The comptroller’s office also has not adopted regulations as required by the Act, providing guidance on when advertising revenue is derived in Maryland, likely a daunting and complicated task since this is a novel question that other states have not addressed. Many aspects of the Act are vague at best [...]

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Washington Department of Revenue Announces LendingTree Decision Does Not Prevent Sourcing of Services to Customer’s Customer Location

by | Aug 17, 2020 | , ,

The Washington State Department of Revenue (the “Department”) recently announced its interpretation of the Washington Court of Appeals’ March 30, 2020, adverse ruling in LendingTree, LLC v. Dep’t of Revenue, no. 80637-8-I (Wash. App. Ct. Mar. 30, 2020). See here for our prior analysis of the LendingTree opinion. In its interpretation, the Department takes the view that the LendingTree opinion “does not represent a new legal framework,” but rather that the court simply followed the applicable business and occupation tax apportionment rules in sourcing service receipts to the customer’s location and rejecting the Department’s methodology sourcing to the customers’ customers’ location.

The Department’s response suggests that it intends to narrowly apply LendingTree‘s holding. The Department admits that the court agreed with LendingTree in designating the service at issue to be LendingTree’s referral services (lenders pay a fee to receive referrals of potential borrowers) and rejected the Department’s characterization of the service as marketing and outreach to potential borrowers. Under this characterization, the Department observes, in accordance with a Washington regulation sourcing services to where the customer’s related business activity occurs, the referral services are sourced to the lender’s location, where lenders evaluate the referrals received by LendingTree.

The response goes on to emphasize, however, that there are circumstances where the Department will continue to source service receipts to a customer’s customers’ location. The Department announced that one such circumstance would be for taxpayers who have revenues from the sale of marketing or advertising services to a customer engaged in the business of selling.

Taxpayers should be forewarned that despite the LendingTree ruling, they may still have to battle Department efforts to source service receipts based on the location of their customers’ customers (particularly if they are engaged in the sale of marketing or advertising services), despite a Washington statute requiring service receipts to be sourced to the customer and federal constitutional principles requiring that an apportionment method reflect a taxpayer’s in-state activity. (See: e.g., Oklahoma Tax Commission v. Jefferson Lines, 514 U.S. 175 (1995); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983).) Unfortunately, it appears that “look through” sourcing disputes between taxpayers and the Department will continue.



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Washington Surtax on “Big Banks” Struck Down as Unconstitutional

by , and | May 18, 2020 | , , ,

On May 8, Washington’s 1.2% surtax on “specified financial institutions” (banks with at least $1 billion a year in net revenue) was struck down by a King County Superior Court judge. Judge Marshall Ferguson ruled that the tax, which is imposed on top of all other taxes, violates the Commerce Clause of the US Constitution by discriminating against out-of-state banks in both purpose and effect.

In their briefs, attorneys for the Washington Bankers Association and American Bankers Association explained that an out-of-state bank would pay a much higher tax rate (and be at a competitive disadvantage) compared to an in-state bank because its global revenue is sufficient to trigger owing the surtax. The associations presented evidence that every bank meeting the definition of “specified financial institution” was an out-of-state bank, and that no in-state bank met the definition. Further, they pointed to statements by legislators appearing to show an intent to promote “local banks” and address a national wealth disparity and regressive taxation.

The state responded that the surtax is neutral on its face, applying to all businesses with $1 billion regardless of their headquarters location, and that none of the funds were used to subsidize or reduce tax burdens on in-state banks. They also argued that the tax should be presumed constitutional and rejected the plaintiffs’ standing to sue as associations. The actual effect of discrimination seemed especially persuasive to Judge Ferguson, who asked counsel for the state, “If the tax so clearly falls on non-Washington businesses, is that not a discriminatory effect?”

The state may appeal the case, Washington Bankers Association et al. v. State of Washington et al., No. 19-2-29262-8, to the Washington Supreme Court.

Practice Note: The structure of the tax struck down in this case, a surtax imposed only if the company’s global income exceeds a high threshold, has been on the rise. San Francisco’s gross receipts tax on businesses with over $50 million in receipts, Portland’s clean energy surcharge on businesses with over $1 billion in national gross revenue, and Maryland’s proposed digital advertising tax based on a sliding scale of global revenue all come to mind. This ruling may be the first sign that judges will not be afraid to subject such taxes to scrutiny under Commerce Clause analysis.



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Washington Appellate Court Rejects Department’s B&O Tax Apportionment Method

by | Apr 17, 2020 | ,

In a recently issued taxpayer-favorable opinion, the Washington Appellate Court rejected the apportionment methodology used by the Department of Revenue, which sourced service receipts to the location of a taxpayer’s customers’ customers. The Court then affirmed the taxpayer’s methodology, which sourced the receipts to the location of its customers. LendingTree, LLC v. State of Wash. Dep’t of Revenue, no. 80637-8-I (Wash. App. Ct. Mar. 30, 2020) (“LendingTree Op.”).

The dispute concerned the receipts LendingTree, LLC (“LendingTree”) earned from operating its online loan marketplace for purposes of Washington’s Business and Occupation Tax. LendingTree’s business sought to match prospective borrowers and lenders though its website. Prospective borrowers provided LendingTree with requested financial information for no charge, and LendingTree analyzed this data to make referrals to lenders. Lenders paid fees to LendingTree related to its referral services. On audit, the Washington Department of Revenue (“Department”) took the position that LendingTree should have apportioned its service receipts based on the location of potential borrowers rather than its lenders’ locations. Both the Administrative Review and Hearings Division and trial court found for the Department, and LendingTree appealed.

Washington law, like the law of other states, requires multi-state taxpayers earning income from the performance of services to apportion the income to Washington if a customer receives the benefit of the taxpayer’s services in Washington (see Wash. Rev. Code § 82.04.462(3)(b)(i)). A related Washington regulation clarifies where a customer engaged in business receives the benefit of a taxpayer’s service: If the service relates to a customer’s business activities (and the service does not relate to real or tangible property), then the benefit is received where the customer’s related business activities occur. See Wash. Admin. Code 458-20-19402(303)(c). Citing this regulation, the Appellate Court concluded that “taxes are attributed to the state where the lenders conduct their business activity that most closely or directly relates to the services performed by LendingTree” (LendingTree Op. at 5).

The Appellate Court went on to conclude that the services at issue were LendingTree’s referrals of prospective borrowers to lenders, and that the lenders’ related business activities were their receipt and evaluation of the referrals at lender business locations. The Court rejected the Department’s argument that lenders received the benefit of LendingTree’s services where the borrowers (LendingTree’s customers’ customers) were located, reasoning that lenders received no benefit from LendingTree’s services until LendingTree made referrals to lenders identifying prospective borrowers. In support of its conclusion, the Court noted that lenders did not even know the identity of potential borrowers at the onset of the referral evaluation process. (LendingTree Op. at 7).

In reaching its conclusion that service receipts must be apportioned based on where the customers received the benefit of the taxpayer’s services, rather than where the customers’ customers were located, the court relied on its recently published opinion in ARUP Laboratories, Inc. v. State of Washington Department of Revenue, no. 52349-3-II (Wash. App. Ct. Feb. 11, 2020) (“ARUP Op.”). Interpreting the same rules at issue in [...]

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