Effective January 1, 2026, Seattle reclassified specified service activities as Retail Sales & Retailing Services for city B&O tax purposes. The 2026–2032 retail rate is 0.342%, compared with the service rate of 0.658%. Those are two rates for the same period, not a comparison of 2025 and 2026 tax bills. Businesses must also account for Washington's separate ESSB 5814 changes, which took effect October 1, 2025.
The Seven Reclassified Activities
Under the City of Seattle's implementing guidance for Ordinance 127353 (codifying the SB 5814 changes via the AWC model ordinance), 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
For affected receipts, the relevant comparison is Seattle's retail rate versus its service rate for the same tax year. A year-over-year tax comparison must also account for changes to the rates, deduction, taxable receipts, and classification.
| Classification | 2026–2032 rate | 2033 onward |
|---|---|---|
| Service & Other Activities | 0.658% | 0.526% |
| Retail Sales & Retailing Services | 0.342% | 0.273% |
The retail rate is approximately 48% lower than the service rate for 2026–2032. Assuming $5 million of Seattle-taxable receipts all fall in the reclassified activity and the full $2 million standard deduction is available against them, the $3 million balance produces $10,260 of retail B&O tax, versus $19,740 at the same year's service rate: a $9,480 difference. This comparison does not establish the change from the business's actual 2025 bill.
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
Seattle B&O, state B&O, and state retail sales tax are separate obligations. Seattle's ordinance does not itself amend state law, but state law also changed. Reviewing only the city return can therefore miss a state reporting or collection obligation.
Under RCW 82.04.050, specified advertising and IT services, custom software, and other covered activities fall within the state retail-sale definition. State retail B&O treatment is addressed in RCW 82.04.250. Check the applicable definitions, exclusions, exemptions, sourcing, and collection requirements for each transaction.
ESSB 5814's state changes began October 1, 2025, before Seattle's January 2026 reclassification. Do not treat these as merely a possible overlap with older software rules. Review the state treatment of covered transactions from the earlier effective date, including any applicable transition relief. See the ESSB 5814 sales-tax and penalty-relief guide.
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?
- Are these transactions correctly classified for state B&O and retail sales tax, including the October 2025 changes, and are applicable collection obligations being met?
What This Means for SaaS and Custom Software
Custom software businesses should review both the city classification and the changed state rules. A SaaS business already reporting retail receipts does not receive a new classification benefit merely because it sells software.
The historical state distinction between custom and prewritten software is not a reliable guide to current sales-tax treatment. The October 2025 changes brought custom software and customization of prewritten software within the retail definition, subject to applicable exceptions. For a mixed offering, classify the actual transactions and evaluate bundling and allocation rules; do not assume that describing a charge as custom development makes it a nontaxable service.
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
For IT services, review the defined activity and applicable exclusions rather than assuming every technology-related consulting engagement has the same treatment. Covered receipts use Seattle's retail classification. State law separately includes specified IT services within its retail definition.
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
The state reporting instruction matters here: covered advertising services are subject to state retail B&O treatment and retail sales tax under the October 2025 changes, subject to applicable exclusions and exemptions. An agency should not continue reporting all advertising receipts under the state Service & Other Activities classification merely because that was its historical practice. Review both city and state returns, along with sales-tax collection.
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. (Note the City’s transition rule: for existing contracts, taxpayers were permitted to continue reporting income from the reclassified activities under the Service classification until April 1, 2026.)
- Internal allocation. If your business has mixed activities, your books should support the classification you report.
- **State reporting and sales tax.** Review the state B&O classification as well as registration and retail sales-tax collection. Correct affected periods beginning in October 2025 where required, taking account of applicable exclusions, exemptions, and transition relief.
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 127353 (reclassification of service activities to retail); Seattle Ordinance 127259 (Proposition 2 rate and threshold changes)
- 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.
Seattle also imposes two payroll taxes on employers — the JumpStart tax and a 5% excess compensation tax. See Seattle’s Payroll Taxes in 2026 for how they work and where the planning is.
