Washington State has enacted a significant tax change that will impact businesses statewide. Starting October 1, 2025, most temporary staffing services will become subject to retail sales tax. This change is part of a larger effort by the state to modernize and align its tax system with today’s economic realities. For businesses that use or provide temporary staffing, understanding this update is crucial to staying compliant and planning effectively for the future.
In this blog post, we’ll walk you through the details of the new law, explain what it means for staffing agencies and their clients, and offer practical advice on how to prepare. Businesses that rely on or provide temporary staffing should understand these changes now to remain compliant and financially prepared.
The Washington Legislature passed Engrossed Substitute Senate Bill (ESSB) 5814, which Governor Bob Ferguson signed into law on May 20, 2025. This bill changes how certain services are taxed in Washington State, explicitly including temporary staffing services under retail sales tax for the first time.
The main points of this legislation are:The law defines temporary staffing services as supplying workers to a client for a limited time to meet temporary workforce needs. This includes filling skill gaps, contract-based assignments, or short-term placements across a variety of job functions.
A key aspect of these arrangements is control: typically, the client company directs the workers’ day-to-day activities rather than the staffing agency. This distinction sets temporary staffing apart from consulting or professional services.
Staffing services provided to licensed hospitals under RCW 70.41 or 71.12 remain exempt from retail sales tax. Instead, these are taxed based on the nature of the healthcare work performed, much of which is still exempt.
For staffing firms, this new tax rule introduces several compliance responsibilities starting October 1, 2025. Agencies must register for Washington sales tax collection if they haven’t already. Billing systems will require updates to include sales tax on invoices for staffing services.
Proactively communicating this change to clients is critical to avoid confusion and disputes over increased costs. The revenue from these services must now be reported under the Retailing classification for B&O tax purposes rather than under service or other categories. This change could affect how excise tax returns are filed and might alter tax liabilities.
Staffing agencies should also review their existing contracts carefully to determine if they allow passing the new taxes onto clients. Pricing models may need adjustment to either absorb or share the additional tax burden. Clear communication and early preparation will make this transition smoother.
Companies that rely on temporary staffing services should expect to see an increase in invoices due to the added sales tax. Washington’s current state sales tax rate is 6.5%, with additional local taxes potentially raising that percentage further depending on location.
Workforce planning budgets should be adjusted to account for higher labor costs beginning October 2025. Reviewing master service agreements with staffing providers is essential to understand how taxes will impact pricing and invoicing terms.
Clients must also update internal procurement and accounts payable systems to process invoices that now include sales tax. While healthcare providers may be less affected due to exemptions for hospital staffing, industries such as manufacturing, logistics, and IT, where temporary workers are a big part of operations, should prepare for noticeable cost increases.
These additions highlight Washington’s broader effort to modernize its tax code and capture revenue from high-growth service industries.
Businesses across many fields should evaluate whether their offerings or purchases fall under the updated taxable categories and adjust accordingly.
For Staffing Agencies
The first step is assessing your readiness. Confirm your registrations for sales tax collection and review your reporting processes. Accounting and billing software should be updated to handle sales tax on staffing invoices.
Training your team, especially those in sales, finance, and operations, is essential so everyone understands how the new rules work. Begin communicating with clients now to give them ample notice of upcoming changes.
Review tax reporting categories to ensure revenues are properly reported under the Retailing classification.
For Client Companies
Start by forecasting your budgets with the new tax costs in mind for 2025 and beyond. Conduct thorough audits of contracts with staffing providers to clarify responsibilities around taxes.
Ensure procurement policies reflect these updates and that accounts payable systems can manage invoices with added sales tax. Consulting with tax advisors can help optimize compliance while identifying any potential exemptions or planning opportunities.
Consult with tax advisors on whether exemptions apply, particularly in healthcare, nonprofit, or interstate service arrangements.
This update is more than a minor tax adjustment, it reflects the broader national trend of states expanding sales tax to services once considered exempt. States are increasingly taxing services that were once free from such charges, reflecting changing business models and economic structures.
For businesses, this means more complex compliance requirements and greater importance placed on having a solid tax strategy. Proper accounting expertise will be vital to stay ahead of such changes and manage their financial impact effectively.
Navigating evolving tax rules can feel overwhelming, but it doesn’t have to be that way. At Tarsus, we specialize in simplifying complex regulatory landscapes so your business can focus on growth.
Whether you provide temporary staffing services or rely on them, we offer tailored solutions for sales tax compliance, B&O tax reporting, contract reviews, pricing strategies, and comprehensive financial management.
Businesses that prepare now will avoid compliance issues and cost surprises later. Tarsus helps staffing agencies and client companies update systems, review contracts, and build compliance strategies tailored to Washington’s evolving tax landscape.
Washington’s decision to apply sales tax to temporary staffing services marks a major shift in how services are taxed. With an effective date of October 1, 2025, agencies and their clients must prepare for higher costs and new compliance requirements. Proactive
planning, from contract reviews to financial system updates, will make all the difference. Partnering with experts like Tarsus ensures your business can adapt with confidence.
With deep expertise in financial strategy, compliance, and operational efficiency, Tarsus helps businesses of all sizes adapt confidently to regulatory shifts. Our team works closely with you to identify opportunities, mitigate risks, and implement solutions that support growth while maintaining full compliance. From audit preparation to CFO advisory and multi-industry financial consulting, Tarsus provides actionable insights and hands-on support so you can focus on driving your business forward with confidence.
Ready to navigate change with confidence?
Contact us today to discuss how we can support your business.