As most people know our Governor signed into law a  tax bill that significantly expands the number of services formerly classified as “professional services”  that will now classified as “retail” businesses, subject to sales tax.   Temporary staffing services are impacted by this change. Starting October 1, 2025, customers of “temporary staffing services” will pay a statewide retail sales tax of 6.5% plus local city taxes.   

The purpose of this blog is to make sure our customers know about this pending tax liability, but also, and perhaps more importantly, to keep us all in the loop regarding those areas of the law where it’s not yet clear about what services actually will be covered under the new statuate. Those of us in the business of staffing, which includes temporary, quickly saw that the language embedded in the text of the statuate contains enough ambiguities that we would need the DoR to provide additional guidance. Staffing agencies like PACE who perform a wide range of staffing and recruiting services, need to know what specific services are or are not covered under the “temporary staffing” umbrella before we can feel comfortable charging a sales tax to our customers. We asked for guidance, and the DoR is targeted to relase that guidance in September.     

In the meantime, we wanted to walk you thru the basics of what we know now as of end of August 2025.   

What changes will be made to our current tax structure and how will those changes impact most staffing companies and their customers?

• Temporary staffing services,  which until now have been classified a “professional service” for B&O tax purposes, are now being classified as “retail” business. Services that are considered “temporary staffing” will now report to the DoR as a retail service with a new B&0 tax rate that is considerably less than the B&O tax rate applied to professional services.   
• There will now be a sales tax to be paid by the users of “temporary staffing services”. DoR currently defines temporary staffing services as services that “provide workers to other businesses for limited periods of time to supplement their workforce and fill employment vacancies on a contract or fee basis”.     
• What’s changed is that Washington state will now earn a tax both from the users of temporary staffing services (a sales tax) and a tax from the company/agency providing the temporary staff (a B&O tax). Both taxes are calculated based on the gross receipts received from providing “temporary staffing” services.          
• Effective date: The new sales tax will be owed on all qualified temporary staffing services delivered on or after October 1, 2025.
• Documented Exceptions:  There is one exception to the new law which is to exclude temporary staffing services delivered to licensed hospitals in the State of Washington.  Licensed hospitals will not be charged a sales tax on any job category used by a licensed hospital. The staffing agency will report revenues and pay B&O taxes as before.  In other words for licensed hospitals in Washington State nothing has changed.  
• Local taxes: The actual sales tax to be paid by the customer will be subject to both State and local jurisdictions.  This means that the actual sales tax to be collected and paid to state and local governments will be based on where the employee works – the tax rate for that jurisdiction.  Local sales tax rates vary but the total sales tax is likely to range between 7-10%.   

Who is impacted by this new sales tax and how?

• Staffing firms are now mandated to include the applicable sales tax on all invoices for qualified temporary help services and remit the monies collected to State and local tax agencies . They will continue to report their gross receipts to the DoR but will now report under the retail classification rather than the professional services classification.   
• Customers of staffing firms should expect their invoices for qualified temporary staffing services after October 1 to include an itemized line item for the applicable sales tax.   
• Customers with multiple locations or working with employees remotely, should expect to pay a sales tax based on the sales tax rate of the local jurisdiction where the actual work is performed. This means there could be different sales tax rates for people doing the same job depending on where they are working.

What will staffing agencies need to know before they can include a sales tax on their customer’s invoices?     

PACE Staffing Network, like many staffing agencies, provides a wide range of services to local employers with temporary staffing being one of several services offered to PACE customers. While some of our service offerings are very traditional temporary staffing services that we know will be subject to sales tax, other services that we provide on a regular basis are hybrid versions of professional recruiting fees and employer of record services that may or may not fall under the definitions of temporary staffing services currently being offered by the DoR.

DoR is aware of these ambiguities and during the month of July, they met with several members of our industry and affiliated industries to listen to our questions and concerns.  The reoccurring theme of the feedback given to the DoR revolved around their need to clearly define “temporary staffing”……. 

• Does it include scenarios where a staffing agency might refer 1099 contractors, not W2 employees, to a company for interim work?
• Will the new tax classification structure require that a sales tax be collected on fees that would be paid to a staffing agency for locating an employee who will be hired by the customer but assigned into a temporary role?
• Does the law require a staffing agency to collect a sales tax on pay agent services where we as a pay agent play no role in either sourcing or selecting the employee but perform a variety of payroll, timekeeping, and benefit administration services on the client’s behalf?   
• Does the law require a staffing agency to collect sales tax on employer of record services where, similar to pay agent services, we provide administrative and payroll services for a client but additionally act as the employee’s “employer of record” with respect to the reporting of earnings and payment of payroll taxes to the IRS on our client’s behalf?   

The Department of Revenue (DOR) has agreed to address all these questions in what are called Interim Guidance Statements (IGS) to be released in September. We expect this interim guidance to address…. 

• The required coverage for different types of co employer work arrangements that would appear to fall outside their current definition of temporary staffing.   
• The deductibility of certain potential pass-through costs (e.g., the employee’s wages/benefits) when calculating the taxable component of a temporary staffing invoice. 
• Local taxing authority – how to determine the location where the customer receives temporary staffing services given on-site vs. remote, multi-site engagements

More Detailed Background Information for our Employer of Record Customers….   

For our readers who use us for Employer of Record services, unfortunately we’re not yet able to provide you with the information about your tax status on October 1.  We have our own speculations based on the regulations currently in play, but its just that, speculation.   While a bit in the weeds here’s a summary of the current statuates and the administrative rulings that make up the current tax landscape for staffing/recruiting agencies and might provide insights into how the DoR might decide what is or is not covered under the “temporary staffing” umbrella:      

• Washington’s administrative code WAC 458-20-274, defines a temporary staffing service as a business that recruits, hires,  and assigns its own employees to other organizations, typically temporarily, to work under the client’s supervision.  This definition represents what we consider to be the typical understanding of temporary staffing.  Agencies who perform this type of service currently report and pay B&O taxes based on gross receipts under the professional services classification.    
• WAC 458-20-274 already has a provision that requires temporary staffing agencies to collect retail sales tax from clients when the employee they assign to a client performs work that directly impacts a client’s personal property. Invoices from these types of work assignments are classified as retail, making them subject to a retail sales tax.  For example, if we sent a temporary painter to paint a client’s facility we are required, by current law, to collect a sales tax on the invoices related to that assignment.  In these  scenarios there is no allowable deduction for wages or payroll expenses, which suggests to us that the DoR is not going to allow any form of deductibility for any sale that falls into the retail tax classification.   
• Ongoing tax rulings, in particular WS ETAs 3181 and 3196, that have been in play since 2013 already contain provisions that carve out different types of tax treatment for pay agent and employer of record services, different from the tax treatment applied to more traditional temporary staffing service.   Very specifically these ETAs allow direct costs (ex. employee wages, taxes, benefits etc) to be deducted from an agency’s gross receipts for purposes of calculating B&O taxes IF they are considered pass-through or reimbursable costs. To meet this reimburseable or pass thru benchmark, ETAs 3181 and 3196 require there to be an agent/client contract that defines who does what in the co employer relationship, plus clear documentation of same provided to all parties (the employee, the client, the agency). We suspect (but do not know) that the DoR may find a basis for separating out services like Employer of Record where the primary service is not providing an employee but rather administering the pay and benefits of a client’s employee as a “professional service”    
• Of special note, is that WAC 458-20-274 specifically excludes Professional Employer Organizations (PEO) from other forms of staffing or employment services.  This carve out is of interest in the current context because most Employer of Record service models look more like PEO services than staffing.   

What’s Next?

As it stands now, “temporary staffing services” is the only service amongst many different service options that has been explicitly made taxable as of October 1, 2025.  While direct hire recruiting fees and PEO services are still considered professional services and not included, the DOR has acknowledged that the scope of what counts as “temporary staffing” is still unsettled. They will need to draw a line between…

• When a company is really supplying labor (taxable as a retail service), and
• When it’s just providing administrative/payroll services (taxable as a professional service, or,  as in the case of pay agent services, might be classified as data processing)

The Interim Guidance Statements (IGSs) to be released in September, are expected to directly address the questions surrounding pay agent or employer-of-record services. 

Once IGSs are published, DOR will later go through a formal rulemaking process under the Administrative Procedure Act that will result in a more permanent codification of how “temporary staffing” is defined.

FINAL THOUGHTS

To help our readers, particularly our customers who use our Employer of Record service, get a better understanding of the legal status of the different types of staffing services that are now being looked at as potentially sales taxable, we’ve prepared the following chart to describe each service and its potential tax status……