WA seeks new tax revenue from software, but not from Microsoft
Washington state legislators, searching for ways to resolve a $2.8 billion budget shortfall, aren't making many friends in the software industry these days. Except, perhaps, for one. — A proposed sales tax on “custom software” …
Context & Ripple Effects
Washington legislators hunting for revenue to close a $2.8 billion budget shortfall have landed on custom software as a taxable service — and, per the proposal, carved Microsoft out of it. That carve-out is striking given how closely the company and the state already work together, including the time they jointly sued scareware purveyors back in September 2008.
The exemption is what turns an otherwise routine budget measure into an industry grievance: every non-exempt software shop selling custom work in Washington now faces a cost its dominant in-state competitor does not, which is why TechFlash notes lawmakers "aren't making many friends" in the sector.
First-order effects
- Custom-software developers selling into Washington absorb or pass along a new sales tax on their services, directly raising the price of bespoke builds for the state's business and government buyers.
- Microsoft gains a structural pricing advantage on any engagement where it competes against taxed custom-development firms, purely by virtue of the exemption.
Second-order effects
- Non-exempt Washington software firms face pressure to shift pricing, restructure contracts, or argue for parity — and they now lobby against a bill whose biggest potential beneficiary sits silent.
- Buyers of custom software get a fresh incentive to favor exempt vendors or packaged offerings over local bespoke development, redirecting contract flow within the state.
Third-order effects
- If the pattern holds, states under fiscal stress will treat software services as an untapped taxable base — and the shape of exemptions will decide which companies effectively subsidize the budget and which are spared, making tax carve-outs a competitive weapon rather than a technicality.
The trend: Budget-strapped states are moving to tax software services, with politically negotiated exemptions determining whether the burden lands on the industry's incumbents or everyone else.