Historically, the primary source of revenue for the U.S. federal government was import duties, while state governments funded themselves largely through taxes on land, property, and later, the sale of physical goods. Land was visible, difficult to conceal, and represented one of the largest concentrations of wealth. Over time, taxation expanded to include homes, buildings, and commercial real estate through local property taxes.
However, services were generally exempt from taxation. The American economy was primarily rooted in agriculture and manufacturing, in which goods were tangible and easier to measure, track, and tax. Services, by contrast, were more difficult to monitor and administratively burdensome to tax effectively.
As the U.S. economy gradually shifted toward services, states recognized that they were missing a rapidly growing potential tax base. Over time, many states began taxing services such as legal work, accounting, cable television, entertainment, and hotel accommodations. Even then, most of these services were locally delivered and relatively easy to tie to a physical location.
Yes, services have been taxed in the U.S. for decades. But historically, those taxes were narrower, less aggressive, and far less comprehensive than the taxes imposed on physical goods.
On Oct. 1, 2025, Life Changed for Technology Services Firms
In fall 2025, significant changes occurred around taxation and technology services in Washington state. The old paradigms of taxation were both expanding and metamorphosizing, much to the disappointment of those delivering services of every type.
For companies that are located outside Washington but providing technology-related services to customers inside the state, the rules effectively created what can only be described—borrowing from Dean Vernon Wormer in the classic movie Animal House—as “double secret probation.” We can only speculate as to how John Belushi’s Bluto would have responded. Of course, he wasn’t studying computer science, and it wasn’t likely that the crew from Delta Tau Chi was going to start an IT firm in Seattle, one of the six cities of Silicon Valley.
Washington’s expanded rules broadly define taxable IT services to include activities such as:
- Managed IT and help desk services
- Network assessments, planning, and design
- Migration and implementation services
- Network security services
- System upgrades and maintenance
- Data processing services
- Custom software development
- Website development services
Washington state’s base retail sales tax rate is 6.5%. However, technology companies providing taxable IT or digital services to customers in Washington must also collect applicable local sales taxes, bringing the combined rates from approximately 6.5% to 10.6%, depending on the customer’s location. But the sales tax is only part of the story. Bluto would not be happy.
Sales Tax Is Only Part of the Problem
Washington also imposes a business and occupation (B&O) tax on gross revenue, not profit. Several cities in the state—including Seattle, Bellevue, Tacoma, and Renton—may also impose additional local B&O taxes. Importantly, this tax is paid by the company providing the service, not the customer purchasing it. Bluto would realize that the cost of accounting before the tax is paid is becoming prohibitive.
When you combine state sales tax, local sales taxes, B&O taxes, administrative overhead, registration requirements, and compliance costs, it suddenly becomes far more expensive—for both the customer and the technology company doing business in Washington State. The innate suppression on businesses in states that adopt these paradigms of taxation is incongruous with starting businesses, expanding them, or even remaining in those states. Possibly even more destructive are the unintended consequences related to businesses outside that state trying to conduct transactions remotely. This chaotic approach creates a major shift in risk exposure for companies operating remotely.
Today, an IT services company based on the East Coast can trigger Washington tax obligations simply by providing services remotely to a Washington-based customer. The threshold for economic nexus is only $100,000 in annual revenue sourced to a Washington-based firm—an amount that may represent less than the fully burdened cost of a single full-time employee.
In other words, your company may now be subject to tax obligations, compliance filings, registration requirements, and potential audit exposure in a state where you have no office, no employees, and no physical presence. You are on double secret probation. This is where Bluto meets Ayn Rand.
The challenge is that many technology companies still operate under outdated assumptions about nexus, believing physical presence determines tax liability. In the modern digital economy, states are increasingly less concerned about where your employees sit and more about where your customers are located. And there is another complication many companies fail to realize: There is generally no obligation for companies located in Washington to inform their out-of-state vendors that these tax rules apply.
That means a remote technology provider may unknowingly cross nexus thresholds, fail to register, fail to collect taxes properly, or fail to file required returns—all without realizing they have exposure.
Ignorantia juris neminem excusat—ignorance of the law excuses no one. Once again, you are on double secret probation.
Penalties and interest are now accruing on a tax you may not have even realized you were required to collect. Good luck attempting to recover sales tax from a customer 2 years after the work was completed and the invoices were paid. In most cases, that conversation neither starts nor ends well.
At the point in which a company finally discovers the issue and attempts to voluntarily correct it, the state’s perspective is often very different from the business owner’s perspective. The company may view the situation as an honest mistake in compliance.
However, the state may view it as uncollected tax revenue that should have been remitted from Day 1. As a result, interest and penalties will apply, and it is relatively rare for states to waive those amounts, even when the noncompliance was unintentional.
From the government’s standpoint, those taxes were never yours to keep. Therefore, penalties and interest continue to accumulate regardless of intent, awareness, or whether the company ever actually collected the tax from the customer. In many cases, the business is forced to absorb the liability directly out of its own revenue. There is rarely sympathy for “we didn’t know.” Ignorantia juris neminem excusat—ignorance of the law excuses no one. And once the state identifies the exposure, it will generally pursue every dollar owed, plus penalties and interest, regardless of the operational or financial consequences to the business.