Key Takeaways
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Washington, New Mexico, Hawaii, and Arizona impose taxes on gross receipts, not net income
- Many services are taxable, even where sales tax typically wouldn’t apply.
- Market-based sourcing can create out-of-state exposure based on where the benefit is received.
Welcome to this edition of state tax developments. The State Tax News and Views is published weekly. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance and incentive needs.
As states continue to explore alternative ways to generate revenue, non-traditional tax regimes are becoming more prevalent. Certain states impose gross receipts and excise taxes that differ significantly from the more familiar sales and use tax model.
When expanding into new states, many businesses assume sales and use tax rules will feel familiar. However, a handful of states impose gross receipts or excise taxes that operate differently—and can create unexpected exposure if not identified early. In many cases, these regimes allow only limited deductions or exemptions, which can increase the overall tax burden.
These taxes often function as a hybrid between sales tax and income tax, applying to gross receipts rather than net income and frequently extending to services as well as tangible goods. South Dakota and Mississippi, for example, impose contractor-specific excise taxes in addition to their sales and use tax regimes.
Understanding where these rules apply can help avoid surprises and improve pricing and compliance strategies. This is particularly relevant for service-based businesses, contractors, and companies expanding into new states with a limited prior footprint. A few of the most common jurisdictions where these rules arise include:
Washington B&O Tax: A Tax on Gross Income
Washington imposes a Business & Occupation (B&O) tax on gross income sourced to the state. Effective October 1, 2025, the state expanded its retail sales tax base to include a broader range of services, increasing overlap between retail sales tax and B&O classifications.
Sourcing rules differ by activity:
- Retail sales are generally sourced based on delivery location
- Service income is sourced using market-based rules (i.e., where the benefit is received)
This structure can require careful analysis to ensure proper reporting. It also means businesses may owe tax regardless of profitability.
Key facts to keep in mind:
- B&O tax rates vary based on the type of activity (e.g., retailing, wholesaling, services)
- Reported on the same return as sales and use tax
- A filing obligation can arise with limited in-state presence, including having an employee
New Mexico Gross Receipts Tax: Broad and Service-Oriented
New Mexico’s Gross Receipts Tax (GRT) applies broadly to both goods and services. The state uses market-based sourcing for services, sourcing receipts to where the benefit is received—regardless of whether the customer is located in-state or out-of-state. This approach was significantly expanded effective July 1, 2021, increasing the state’s ability to tax service revenue tied to in-state customers.
For businesses entering the state, it is important to evaluate both service taxability and sourcing, as these rules can create filing obligations even without a physical presence.
Key facts to keep in mind:
- Includes many service-based transactions not typically taxed elsewhere
- Imposed on the seller’s receipts, though often passed through to customers
- Local rates add complexity and variation across jurisdictions
PLANNING TIP: Businesses should closely review how receipts are characterized, as small structural differences can materially impact the tax base.
Hawaii GET: A Broad-Based, Transaction-Focused Tax
Hawaii’s General Excise Tax (GET) applies broadly to nearly all business activity, including goods, services, and construction. The state generally uses market-based sourcing for services, while tangible goods and construction activity are sourced based on where the activity occurs or where property is delivered or installed.
Because the GET is imposed on the business rather than the customer, it can result in multiple layers of tax across a transaction chain.
For businesses entering Hawaii, evaluating sourcing across different revenue streams is critical, as this directly impacts liability and pricing.
Key facts to keep in mind:
- Applies broadly, with limited exemptions
- Imposed on gross receipts rather than a traditional sales tax transaction
- Rental income, including certain real property leases, may be subject to GET
Arizona Transaction Privilege Tax: Contractors, SaaS, and Sourcing Complexity
Arizona’s Transaction Privilege Tax (TPT) is imposed on the privilege of doing business in the state and applies across multiple classifications. For construction (prime contracting), receipts are generally sourced to where the project is physically located.
Arizona’s treatment of software and SaaS has evolved through administrative guidance and case law. Early guidance (e.g., LR09‑007, issued in 2009) established that hosted software access is taxable. This position was later upheld in ADP, LLC v. Arizona Department of Revenue (January 31, 2023), with the Arizona Supreme Court declining review in September 2023. More recently, TPR Ruling 24‑1 (December 6, 2024) further clarified nexus and sourcing considerations.
As a result, SaaS is treated as a taxable rental of tangible personal property, which can create nexus and filing obligations based on in-state use or activity—even for out-of-state businesses.
Key facts to keep in mind:
- Imposed on the business rather than the customer
- Construction receipts are generally sourced to the project location
- Sourcing and taxability depend heavily on classification
- SaaS treatment can create nexus and compliance obligations based on in-state use
Why This Matters in Practice:
While most states follow a traditional model where contractors are treated as the end consumers of materials, these states take a different approach by taxing gross receipts or contract value. This can result in:
- Higher effective tax costs
- Expanded taxability of services
- Earlier and broader nexus exposure
A proactive review of these rules can help ensure your business is properly registered, pricing services accurately, and managing risk effectively as you expand into new states.
