Effective January 1, 2026, Seattle has reclassified seven categories of activity from the Service & Other Activities classification to the Retail Sales & Retailing Services classification for Seattle B&O tax purposes. The applicable rates fall from 0.658% to 0.342% on affected receipts. For founders running SaaS, IT services, advertising, or staffing businesses in Seattle, this is a meaningful Seattle B&O rate cut. It also raises a separate question about retail sales tax collection that some businesses will need to answer carefully.
The Seven Reclassified Activities
Under the City of Seattle's implementing guidance for Ordinance 127259, the following activities are reclassified from Service & Other Activities to Retail Sales & Retailing Services for Seattle B&O tax purposes, effective January 1, 2026:
- Advertising services
- Custom software and customization of prewritten software
- Custom website development
- Information technology services
- Investigation, security, and armored car services
- Live presentations
- Temporary staffing services (excluding hospitals)
The Rate Impact
The headline is straightforward. Before the reclassification, these activities were taxed at Seattle's Service rate. Beginning in 2026, they are taxed at the Retail rate.
| Classification | 2026–2032 rate | 2033 onward |
|---|---|---|
| Service & Other Activities (old) | 0.658% | 0.526% |
| Retail Sales & Retailing Services (new) | 0.342% | 0.273% |
That is almost a 50% reduction in the applicable Seattle B&O rate for affected receipts. For a Seattle business with $5 million of reclassified taxable revenue above the new $2 million standard deduction, the difference is approximately $9,500 per year in Seattle B&O tax through 2032.
The reclassification interacts with the broader Seattle Shield changes I covered in Seattle's New B&O Tax: How Higher Rates Are Designed to Work. The $2 million annual revenue threshold, the $2 million standard deduction, and the automatic 2033 step-down all apply uniformly across classifications, so reclassified receipts get the lower 0.342% rate (2026–2032) and the lower 0.273% rate (2033 onward) on the same terms as other Retail Sales & Retailing Services receipts.
The Sales Tax Question
This is the part of the analysis founders should not skip. Seattle's reclassification changes only the Seattle B&O treatment of these activities. It does not automatically change the Washington State retail sales tax treatment.
Whether your activity is subject to Washington retail sales tax collection is determined by RCW 82.04.050 and related Department of Revenue guidance, which use their own definitions of “retail sale.” A given activity can be classified as Retail for Seattle B&O while being classified as Service for state retail sales tax — or vice versa.
That said, the activities Seattle has reclassified overlap meaningfully with categories that the Department of Revenue has historically treated as retail or as subject to sales tax (for example, prewritten computer software and certain digital products under RCW 82.04.192). Whether your business now has a sales tax collection obligation is a fact-specific question that turns on what you actually sell.
Practical advice: if your business falls into one of the seven reclassified categories, ask your tax advisor two questions for the 2026 tax year:
- Are my Seattle-sourced receipts properly reported under the new Retail Sales & Retailing Services classification on my Seattle B&O return?
- Do any of those same activities trigger a Washington State retail sales tax collection obligation under RCW 82.04.050 — and if so, am I registered and collecting?
What This Means for SaaS and Custom Software
The reclassification of “custom software” and “customization of prewritten software” is the most consequential change for Seattle's tech economy.
Washington historically distinguishes between custom software development services and sales or licenses of prewritten (“canned”) software, which can produce very different sales tax outcomes. If you sell pure custom software development services to Seattle-located customers, your Seattle B&O rate drops from 0.658% to 0.342% beginning in 2026. If your business is a hybrid — part custom development, part prewritten SaaS access, part implementation services — you should expect your tax advisor to allocate receipts among classifications, both for Seattle B&O and for state retail sales tax.
Many SaaS businesses selling access to prewritten software or taxable digital products have historically had Washington retail sales tax collection obligations. Those obligations are determined under state law and are independent of Seattle's B&O reclassification.
What This Means for IT Services
“Information technology services” is a broad bucket. Seattle's published guidance does not currently provide an especially detailed limitation on the term. If your business provides managed IT, infrastructure consulting, systems integration, or similar services to Seattle-located customers, your Seattle B&O rate drops in 2026.
Seattle B&O applies only to Seattle-taxable gross receipts under the city's sourcing and apportionment rules. Founders in this category should be especially careful to (a) document the Seattle-source portion of their receipts under apportionment rules, and (b) confirm with counsel whether the services are also retail for Washington sales tax purposes.
What This Means for Advertising and Agencies
Advertising services have historically been treated as a Service classification in Washington. Seattle's reclassification to Retail Sales & Retailing Services is a city-level move; it does not change the underlying state classification. If you run an agency in Seattle, your Seattle B&O rate falls — but your state B&O reporting under the Service & Other Activities classification should continue as before, subject to the new tiered state rates effective October 1, 2025.
Filing Implications
Affected businesses should update three things for the 2026 tax year:
- Seattle B&O return. Report reclassified receipts under Retail Sales & Retailing Services rather than Service & Other Activities.
- Internal allocation. If your business has mixed activities, your books should support the classification you report.
- Sales tax registration. If a reclassified activity also constitutes a retail sale under state law, confirm registration and collection are in place.
Authority
- City of Seattle, Seattle Shield Business & Occupation (B&O) Tax Changes
- City of Seattle, Certain Service Activities Reclassified to Retail, effective January 1, 2026
- Seattle Ordinance 127259
- RCW 35.21.710 (city B&O rate cap) and RCW 35.21.711 (voter-approved excess-rate authority)
- RCW 82.04.050 (definition of “retail sale”) and RCW 82.04.192 (digital products)
- Washington Department of Revenue — Digital Products & Software Industry Guidance
Have questions about your specific situation?
If your Seattle business falls into one of the seven reclassified categories — or if you are not sure whether it does — the 2026 tax year is the right time to sort the classification and the sales tax question together. Book a 20-minute call to talk through it.
Disclaimer
This post is for general informational purposes only and is not legal, tax, or accounting advice. Reading it does not create an attorney-client relationship. Tax classifications and obligations depend on the specific facts of your business; consult qualified legal and tax advisors before acting. Information is current as of May 26, 2026, and may change as the City of Seattle, the Washington Department of Revenue, or the legislature issue further guidance. Attorney Advertising.
