Tax Planning for Seattle Tech Companies: B&O Tiers, Sales Tax on Services and Washington's New Taxes

Washington still has no corporate income tax and, until 2028, no general personal income tax on wages. It raises money from businesses through the Business and Occupation (B&O) tax on gross receipts, a sales tax that now reaches many technology services, and, at the individual level, a capital gains tax. The 2025 and 2026 legislative sessions changed all three, so a Seattle tax plan written before October 2025 is out of date.

The main changes, checked against the Department of Revenue in October 2026:

• Service and Other Activities B&O moved to tiered rates on October 1, 2025.
• Custom software, IT services, website development and several other services became subject to retail sales tax on October 1, 2025 under ESSB 5814.
• A 0.5% B&O surcharge applies to Washington taxable income above $250 million from 2026 through 2029.
• The capital gains tax added a 9.9% tier on gains above $1 million starting with tax year 2025.
• SB 6346 (2026) creates a 9.9% income tax on adjusted gross income above $1 million beginning January 1, 2028, with first returns due in 2029.

For most early-stage startups, the B&O and sales tax changes matter now. The personal income and capital gains changes matter to founders planning an exit.

The B&O tax is a tax on gross income, not profit, so unprofitable companies owe it once they have Washington revenue. The rate depends on the classification of each revenue stream. From October 1, 2025, the Service and Other Activities classification uses tiers based on the prior-year taxable income of the business and its affiliated group:

Retailing and wholesaling carry much lower rates than services. A small business B&O credit reduces or eliminates the tax for very small filers; for businesses reporting mostly service income, the maximum credit is $160 per month and phases out as income rises. Washington calculates it automatically on electronic returns.

For example, a SaaS company whose service-classified Washington income was $3 million in the prior year pays 1.75% on that classification this year. Grouping affiliates matters, since the tier is tested on the affiliated group, not each entity. Returns are filed monthly, quarterly or annually with the Department of Revenue depending on your liability.

Washington taxes SaaS as a digital automated service, so SaaS sold to Washington customers is generally subject to retail sales tax, and the seller reports it under the Retailing B&O classification. Economic nexus for sales tax is $100,000 of gross receipts from Washington.

From October 1, 2025, ESSB 5814 added a list of services that used to be outside sales tax. For tech companies the important ones are:

• Custom software sales and development, and customization of prewritten software.
• Custom website development.
• IT services such as technical support, help desk, network operation and support, data processing, data entry, training and implementation.
• Digital advertising services, temporary staffing and some security services.

Income from the newly taxable services is reported under Retailing B&O instead of Service and Other Activities. That shift can lower your B&O rate on those receipts while adding sales tax your customers pay. The old rule that custom software was never subject to sales tax no longer holds, so revisit any statement of work that bundles development, implementation and support. The rate is based on where the customer receives the service; Seattle's combined rate is above 10%, and DOR's lookup tool gives the exact figure.

Seattle levies its own taxes on top of the state's. Under the Seattle Shield changes effective January 1, 2026, the city B&O tax threshold rose from $100,000 to $2 million. Businesses under it owe no Seattle B&O tax but still file a return, and businesses above it deduct up to $2 million of taxable revenue per year. Rates increased for all classifications at the same time.

The Seattle Payroll Expense Tax (often called JumpStart) applies for 2026 if your 2025 Seattle payroll expense was $9,074,409 or more and you pay at least one employee $194,452 or more. The tax applies only to compensation of employees above that level, at rates from 0.746% to 2.557% depending on the employee's pay and the company's total Seattle payroll. Returns are due quarterly from April 30, 2026, with the Q4 return due January 31, 2027.

Seattle's Social Housing Tax, approved by voters in February 2025 and effective from January 1, 2025, is 5% of Seattle compensation above $1 million paid to any single employee. It is imposed on the employer and cannot be withheld from wages. Few seed-stage companies hit these payroll taxes, but a founder's compensation package at a later-stage company can.

Washington's capital gains tax is 7% on long-term capital gains above the standard deduction ($278,000 for 2025, indexed annually) and 9.9% on taxable gains above $1 million, starting with tax year 2025 under ESSB 5813. It applies to sales of stock and business interests, with a deduction for the sale of a qualified family-owned small business that meets the statute's revenue and holding-period tests. Venture-backed founders rarely qualify for that deduction.

The bigger change is SB 6346. Starting January 1, 2028, Washington will tax individuals and joint filers on adjusted gross income above $1 million at 9.9%, with first returns due in 2029. How it will interact with QSBS and with the capital gains tax is still being worked out, and the Department of Revenue convened an advisory workgroup in August 2026. We checked this in October 2026; expect guidance and possibly litigation before 2028.

For founders with a likely exit in the next few years, the timing question is real. A sale that closes in 2027 falls under the capital gains tax alone; a sale in 2028 or later may also be measured under the new income tax. Model both with your advisor, and do not assume the federal QSBS exclusion will carry through to Washington.

1. Classify every revenue stream. After ESSB 5814, a single contract can mix Retailing (taxable services) and Service and Other Activities income, each with its own B&O rate and sales tax treatment.
2. Apportion service income. Service income from customers outside Washington is apportioned out of the B&O base, so a national SaaS company should apportion carefully and keep customer location data.
3. Watch the tiers. Know where your affiliated group's prior-year Service and Other Activities income lands relative to $1 million and $5 million before you budget.
4. Track Seattle thresholds. The $2 million city B&O threshold, the payroll expense tax thresholds and the $1 million social housing threshold all reset annually or depend on individual pay.
5. Plan multi-state income tax. No Washington corporate income tax does not mean no income tax. Employees or customers in Oregon, California or New York can create income tax filings there.
6. Use federal planning. With Washington's no-income-tax status, federal items such as the R&D credit, QSBS and §174A expensing do most of the work.

We handle Washington B&O and sales tax returns, Seattle business tax filings, R&D credit studies (Washington has no general state R&D credit), 409A valuations and multi-state income tax compliance for Seattle startups. The most common issue we fix is a company still reporting custom development or implementation work as non-taxable services after October 2025.

This guide reflects Washington and Seattle rules as of October 2026. It is general information, not tax advice for your specific facts, and Washington's tax rules are moving quickly enough that you should confirm current rates with the Department of Revenue or your advisor before filing.