SEATTLE — Amid questions from school districts about the budget impacts of Washington state’s new retail sales tax, Democratic lawmakers say they expect to make changes to the law in next year’s legislative session.

The expanded retail sales tax, which went into effect on Oct. 1, is expected to raise about $1.1 billion through 2027 via new levies on services such as digital advertising, information technology, security, temporary staffing and live presentations.

The late-session law pushed by state Democrats was billed as an effort to modernize the state’s tax code.

School districts, which heavily use temporary staff for hard-to-fill positions and special education services, initially believed they’d be exempt, like hospitals. The law also took effect after districts approved their budgets, which left little time for thoughtful adjustments, district leaders said.

The state Department of Revenue has been rolling out interim guidance on how businesses and taxpayers will be affected, but final guidance won’t come until next year, which will give lawmakers the chance to make adjustments, the department said.

The guidance has left unanswered questions, and some districts are worried they will have to sink any extra funds the state allocated to them last year to pay the new taxes.

Last week, a coalition of more than 40 districts and K-12-connected organizations wrote to Gov. Bob Ferguson and the Legislature requesting a fix to “correct the unintended consequences” of the bill.

The coalition said that applying an average 10% sales tax on the new services could potentially add millions in expenses to school districts statewide that are already facing tight budgets.

The letter, signed by groups including the Washington State School Directors’ Association, Washington State PTA, Seattle Public Schools and Mead School District, explains that districts rely on contracted and temporary staff to provide “essential” services, such as speech, occupational and physical therapists, nursing and personal care, often because of ongoing staff shortages. The tax on live presentations and IT services will also raise professional development costs, they said.

“ … By taxing the very services that schools are legally required to provide, the law has produced the opposite effect,” they wrote. “As districts are forced to scale back or redirect limited funds to cover these added taxes, educators lose access to high-quality, real-time learning that directly strengthens classroom practice.”

The education sector is not the only one that’s pushed back on the law.

While Democrats say they intend to make changes to the law, Senate Republican Leader John Braun, R-Centralia, who opposed the bill, wants it repealed. He admits that’s a long shot given the state’s projected revenue shortfall. He also criticized the bill’s late introduction, which he said led to a rushed process and the short window for the Department of Revenue to draft interim guidance for businesses and taxpayers.

“It’s really caused a lot of havoc and confusion out there in different business segments,” he said.

April Berg, D-Mill Creek, who chairs the House Finance Committee, asked for patience and said the Department of Revenue was working on a clarification bill, which lawmakers will review.

The Department said Wednesday that it is preparing a clarifying bill that will address technical corrections," but "would not make substantive or policy changes to the law.

It’s not uncommon for tax bills like these to require updates in the following session to address legislative intent and other gaps, Berg said.

“I think in a perfect world there’d be complete certainty and an understanding of what exactly is being taxed and when, but the facts of each individual taxpayer’s case is different,” Berg said.

One potential change could involve fully exempting school districts from the tax, said Senate Majority Leader Jamie Pedersen, D-Seattle, who acknowledged the law's “ambiguities.” But that option has trade-offs, including reducing needed revenue, he said.

Sen. Noel Frame, D-Seattle, the bill’s prime sponsor, expressed a similar sentiment in a statement.

“All modifications will be considered carefully and weighed against what programs will have to be cut as a consequence of changes that result in revenue loss,” she said.

The Department of Revenue has posted guidance on its website to help explain the law, but also said there isn’t a blanket answer for when districts will have to pay the new sales tax. It has encouraged school systems to contact the department with questions or seek a binding ruling, which will lay out their specific tax obligation.

Districts that signed interlocal agreements with other school systems or with educational service districts for temporary staff will not have to pay the sales tax for those services because those transactions are not treated as retail sales, the department said recently.

That clarification will ease some concerns at educational service districts, which often provide temporary staff to small school systems, said Jeff Snell, the executive director of the Washington Association of School Administrators.

The Office of Superintendent of Public Instruction is working with Berg in an effort to limit taxes on government entities that do business with each other, OSPI spokesperson Katy Payne said in a statement.

“While school districts already pay sales tax for privately acquired services, adding a new tax for government-to-government work will make an already complex financial situation for many districts even more challenging,” Payne said.

If districts don’t have to pay the tax on temporary staff contracts with other school systems, Northshore School District will be able to shave about $70,000 off the estimated $1.8 million the new taxes could cost the district, said JoLynn Berge, the district’s deputy superintendent and chief financial officer.

But the Department of Revenue’s response also left some uncertainty over whether districts will have to pay the tax if the temporary staff comes from a private vendor.

Berge explained that temporary staff hired through companies that offer services for students with special education needs, nurses and counselors, generally remain employed by the vendors.

So far, no vendor has sought to collect the tax from Northshore, Berge said last week, adding that vendors are also uncertain about whether they should charge districts.

Berg, the lawmaker, said her colleagues had not considered this hiring structure in deliberation as the tax applies to temporary staffing agencies. She added that until the Department of Revenue finalizes its guidance, there is no definitive answer on when the taxes will apply.

Sen. Gerry Pollet, D-Seattle, said he believes districts should have been exempt because they are not businesses.

He argues that the tax, if applied to school districts, is the equivalent of a cut to basic education.

“There are unintended consequences here, and they need to be examined,” he said.

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