Washington’s Sales Tax Law Raises Legal Questions

Earlier this year, Washington passed a law (SB 5814) designed to close a $16 billion budget gap by extending the state’s retail sales tax to a numerous business, personal and professional services. The law takes effect Oct. 1, as Vertex Chief Tax Officer Michael Bernard has discussed.

Notably, the law extends sales tax to some online and digital advertising services, such as search engine marketing, but excludes traditional advertising formats, including billboards, newspapers, radio and television. This dynamic may create a form of discriminatory taxation that potentially violates the Internet Tax Freedom Act’s (ITFA’s) prohibition on taxing e-commerce differently than traditional, analog commerce.

As a result, a group of state and local tax experts expect the new law to be subjected to one or more legal challenges. There’s a fair chance that this litigation could arise prior to Oct. 1 when sellers need to start collecting sales tax on newly taxable services. “The result, in our view — from a legal perspective — is that the law violates ITFA, and there will be litigation challenging that portion of the law at some point, hopefully before October 1,” Stephen P. Kranz of McDermott Will & Emery noted in a roundtable discussion published in Tax Notes.

In addition to the discriminatory taxation issue, Washington’s new law could also be challenged based on other aspects of the ITFA as well as other laws and legal precedents, including those related to discriminatory impacts on interstate commerce, economic protectionism, and arbitrary classifications.  Several trade association plaintiffs have presented similar legal and constitutional arguments in numerous cases in Maryland’s state and federal courts regarding Maryland’s highly contested Digital Advertising Gross Revenues Tax (DAGRT). Although the Maryland Digital Advertising Tax remains in effect, it has faced legal challenges since its proposal in 2019, and the case is far from a final resolution. No doubt that Washington’s Advertising Services Tax will likely encounter a similar contentious path as Maryland’s DAGRT.

Legal challenges related to Washington’s SB 5814 certainly warrant monitoring by tax groups whose companies sell taxable goods and services in the state. This law also reflects larger trends that have broader implications on state and local tax policymaking throughout the U.S., including:

• Budget shortfalls: Washington’s move to broaden its sales tax base was enacted to address a projected $16 billion budget gap. Other states are also contending with budget shortfalls, according to the National Council of State Legislatures (NCSL), which reports that states are forecast to spend approximately 0.6% less in fiscal year 2026 than they spent in fiscal year 2025. While many states have flush rainy day funds, a fair number of states will need to perform cost-cutting to avoid budget shortfalls. In states where budget shortfalls are larger, legislators will consider a range of options, including measures to broaden their sales tax base.
• Legislative speed can outpace tax policy complexity: The state and local tax experts who discussed Washington’s new law in Tax Notes pointed out that the tax legislation did not go through the normal review process (e.g., being subjected to a series of committee hearings). Washington’s “final tax package was put together relatively quickly,” noted MultiState’s Joe Crosby in TaxNotes. “I think that’s one of the hazards of last-minute legislative rushes that involve complex tax policy.”
• The ITFA looms large: Legal challenges to different forms of digital taxation (by extending existing sales taxes to select digital offerings or creating new taxes that apply to digital products and services) frequently cite the ITFA. In recent years, we’ve seen this play out in cases related to digital taxes in Maryland, Illinois, New Orleans, and Texas. Indirect tax leaders should expect to see more litigation related to ITFA challenges of digital advertising taxes, streaming service taxes, data services, and digital marketplace taxes.

However, beyond the numerous legal and economic issues surrounding Washington’s Advertising Services Tax, the other primary challenge for states is the ongoing economic impact of expanding a state's digital sales tax base. This is especially difficult during a period of national economic uncertainty for businesses, and particularly in e-commerce, given the recent end of the de minimis exemption in the US. This change is expected to significantly increase costs and complexities for e-commerce businesses and consumers alike.  Regulatory uncertainty raises cross-border and interstate risks adding operational costs, all which are eventually passed on to consumers. In fact, one of the main challenges with the Washington Advertising Services Tax are the ambiguous sourcing rules.

Keeping tabs on ITFA-related tax litigation is especially important given the range of trends affecting indirect tax policymaking this year. In its July 28, 2025 Primer on Taxation of Digital Products, the National Conference of State Legislatures effectively advices states to:  “Avoid Internet Tax Freedom Act problems upfront by conducting an analysis of existing sales tax exemptions and exclusions.”