By Brian Gass, Executive Director, Real Housing Reform Initiative
In May 2025, Washington State passed the largest tax increase in state history: a $9.4 billion revenue package designed to close a projected $16 billion budget shortfall. Buried within the headlines about new sales taxes on services and B&O rate increases was a dramatic escalation in how Washington taxes its most valuable industry: technology.
The advanced computing surcharge—a tax specifically targeting companies like Microsoft, Amazon, and other major cloud computing providers—jumped from 1.22% to 7.5%, with the annual cap increasing from $9 million to $75 million per affiliated group. For perspective, that's more than an eightfold increase in the maximum surcharge any single corporate family can pay.
This isn't just about big tech companies writing bigger checks. It's a case study in how Washington structures its tax system: who gets targeted, why certain industries bear disproportionate burdens, and what happens when the state faces revenue shortfalls.
Before diving into the surcharges, it's crucial to understand Washington's Business & Occupation (B&O) tax—a tax system unique in the United States.
Washington is one of just seven states with no personal income tax. It's also one of the few states without a corporate income tax. Instead, Washington levies the B&O tax: a gross receipts tax on business activities within the state.
Unlike income taxes (which tax profit), the B&O tax applies to gross revenue. This means businesses pay tax whether they're profitable or not. A company with $10 million in revenue and $11 million in expenses still owes B&O tax on that $10 million.
Standard B&O rates vary by business classification:
These might seem like small percentages, but on gross revenue, they add up quickly. A business with $100 million in gross revenue at the 2.1% rate owes $2.1 million annually—regardless of profitability.
The 2025 tax package (primarily ESHB 2081) didn't just raise base rates. It dramatically expanded surcharges targeting specific industries and large businesses:
Old rate: 1.22% with a $9 million annual cap per affiliated group
New rate: 7.5% with a $75 million annual cap per affiliated group
Effective: January 1, 2026
This surcharge applies to "select advanced computing businesses"—defined as members of an affiliated group where:
In practice, this targets Amazon Web Services, Microsoft Azure, and a handful of other cloud computing giants.
The math is stark. A qualifying company at the old cap paid $9 million maximum annually. Under the new system, that company could pay $75 million—an increase of $66 million per year, every year.
Old rate: 1.2%
New rate: 1.5%
Effective: October 1, 2025
This surcharge applies to "specified financial institutions"—members of a consolidated financial institution group that reported annual net income of at least $1 billion.
While less dramatic than the advanced computing increase, this represents a 25% rate hike on an already-substantial surcharge.
Rate: 0.5% on Washington taxable income over $250 million
Effective: January 1, 2026
Sunset: December 31, 2029 (temporary)
This is entirely new—a surcharge targeting businesses with more than $250 million in Washington taxable income annually, regardless of industry.
Key exemptions include:
An estimated 400+ businesses will pay this surcharge.
For businesses in the service classification, the rate structure became progressive effective October 1, 2025:
Hospitals and select advanced computing businesses remain at 1.5% regardless of income level.
Washington's decision to dramatically increase the advanced computing surcharge wasn't random. It reflects several political and economic realities:
Tech companies, particularly cloud computing providers, generate enormous revenue. Amazon and Microsoft alone account for a massive share of Washington's total B&O tax collections. When the state needs billions in new revenue, targeting the companies with the deepest pockets is politically expedient.
Unlike manufacturing or retail operations that can relocate relatively easily, cloud computing infrastructure is expensive and geographically sticky. Once Amazon has built massive data centers and fiber networks in Washington, they can't easily move to avoid state taxes.
The Wayfair decision (covered in a previous post) made it even harder for tech companies to escape Washington's reach. Economic nexus means Amazon Web Services pays B&O tax on revenue from Washington customers regardless of where the servers are located.
Taxing Amazon and Microsoft is far more popular than raising sales taxes on consumers or property taxes on homeowners. When faced with a $16 billion shortfall, legislators chose to concentrate pain on companies that can afford it and lack a sympathetic constituency.
The federal Tax Cuts and Jobs Act of 2017 significantly reduced corporate tax rates at the federal level. Washington's surcharge increases can be framed as capturing some of that windfall for state purposes.
Here's where this connects to Washington's broader tax structure: while the state aggressively pursues tech revenue through ever-increasing surcharges, it maintains broad exemptions for real estate transactions.
Consider the contrast:
Technology companies face:
Real estate transactions enjoy:
Why the different treatment?
Real estate transactions generate ongoing property tax revenue—Washington's second-largest tax stream at approximately $18 billion annually. Heavy taxation of real estate sales could reduce transaction velocity, potentially threatening that base.
Tech companies, by contrast, generate B&O tax on ongoing operations. Increasing surcharges doesn't reduce the tax base—it just extracts more from existing activity. Tech companies can't stop operating in Washington without abandoning customers and infrastructure.
The large business surcharge ($250M+ threshold) is officially temporary, with a sunset date of December 31, 2029.
Don't believe it.
This is a common legislative tactic: implement a "temporary" tax increase to address an immediate crisis, then extend it when the sunset date approaches. California's "temporary" taxes have been extended repeatedly for decades.
By 2029, Washington's budget will have incorporated that $400+ million in annual revenue. Legislators will face a choice: let the surcharge expire and cut services, or extend it "temporarily" for another few years.
We all know which option they'll choose.
One underappreciated impact of these surcharges is how they affect pass-through entities—S-corporations, partnerships, and LLCs where business income flows through to individual owners.
The millionaire income tax (covered in a separate post) taxes individual income over $1 million at 9.9%. But that income often includes pass-through income from businesses.
Here's the compounding effect:
A tech executive earning pass-through income from a cloud computing business could effectively face:
That's not double taxation—it's quadruple taxation on the same economic activity.
The surcharges themselves only hit large businesses. But their impact ripples through the economy.
When Amazon Web Services faces a $60+ million surcharge increase, they don't absorb it entirely. They pass costs through to customers via higher prices. Small businesses using AWS see their cloud computing bills rise, squeezing margins.
Similarly, when service businesses face the new progressive rate structure (2.1% for revenue over $5M), they adjust pricing or cut costs. That often means fewer employees, lower wages, or reduced investment.
The B&O tax is particularly brutal for startups and small businesses with thin margins. A software company with $10 million in revenue and $11 million in expenses (typical for a growing tech company) still owes $150,000+ in B&O tax despite losing money.
Beyond the tax itself, Washington's B&O system imposes massive compliance costs.
Companies must:
For Amazon or Microsoft with sophisticated tax departments, this is manageable. For a small consulting firm or software startup, it's a nightmare.
Third-party compliance software helps, but it's expensive—another hidden cost borne by businesses trying to operate in Washington.
Washington's 2025 tax package generates $9.4 billion over four years. But the state already faces another projected shortfall of $4-8 billion for the 2025-2027 biennium.
When the next shortfall arrives, where will legislators look?
The pattern is clear:
Real estate? Still largely exempted to protect property tax revenue.
Defenders of the surcharges argue they're necessary for tax fairness. Washington's tax system is regressive—the bottom 20% of earners pay 13.8% of income in taxes while the top 1% pays just 4.1%.
The tech surcharges help correct this by extracting more from the highest-earning sector. Combined with the millionaire income tax and expanded Working Families Tax Credit, the 2025 package does shift the tax burden toward higher earners.
But there's a competing fairness question: Is it fair to single out specific industries for dramatically higher taxation?
If the goal is tax fairness, why not apply uniform rates across all industries? Why should a tech company pay 7.5% on gross revenue while a manufacturing company pays 0.5%?
The answer comes back to revenue protection. Manufacturing supports jobs and property tax revenue. Tech generates massive revenue that's hard to offshore. The choice is clear: tax what can't escape, protect what generates secondary benefits.
Washington's aggressive tech surcharges are a direct consequence of the state's constitutional inability to tax income.
With no income tax and no corporate income tax, Washington must rely on sales tax, property tax, and the B&O tax to fund government. When revenue shortfalls emerge, the state has limited tools:
Tech companies became the easiest target: enormous revenue, physical infrastructure lock-in, and limited political sympathy.
The 7.5% advanced computing surcharge represents Washington's admission that the B&O tax system is inadequate for funding modern government. But rather than fundamentally reform the system, the state keeps adding surcharges and carveouts.
The result? A tax code that's increasingly complex, industry-specific, and arbitrary in its burden distribution.
Amazon and Microsoft can afford $75 million surcharges. But the next generation of tech companies might look at Washington's tax structure and decide to build elsewhere.
When that happens, the state won't just lose surcharge revenue—it'll lose the jobs, property taxes, and economic activity that tech companies generate.
By then, legislators will face another revenue crisis. And they'll raise taxes on whoever's left.
Next in this series: The Capital Gains Tax and its real estate exemption—$560 million collected, yet property transactions remain untouched.
Sources:
Real Housing Reform Initiative
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