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Washington State Capital Gains Tax Ruled Unconstitutional

Washington State’s capital gains tax, which went into effect January 1, 2022, was ruled unconstitutional by the Douglas County Superior Court. Created in 2021, the tax was ostensibly referred to as an “excise” tax as part of an effort by the Washington State Legislature (Legislature) to avoid the difficulties associated with implementing a tax. on income in Washington State. The judge, however, was not convinced.

IN DEPTH


Citing the authority of the Washington State Supreme Court, the trial judge held that courts must examine all of the labels the state uses to describe the law and analyze the incidents of the tax to determine its true character. Here, the judge reviewed the most significant incidents of the new tax, including:

  • It relies on the federal income tax returns that Washington residents must file and is therefore derived from a taxpayer’s annual federal income tax return;

  • It levies a tax on the same long-term capital gains that the Internal Revenue Service (IRS) classifies as “income” under federal law;

  • It is levied annually (like an income tax), not at the time of each transaction (like an excise tax);

  • It is levied on an individual’s net capital gain (like an income tax), not on the gross value of the property sold in a transaction (like an excise tax);

  • Like an income tax, it is based on an aggregate calculation of an individual’s capital gains during a year from all sources, taking into account various deductions and exclusions, to arrive at a single annual dollar figure. taxable;

  • Like an income tax, it is levied on all long-term capital gains of an individual, whether or not such gains were made in Washington and therefore regardless of whether the state conferred a right or a lien to facilitate the underlying transfer that would entitle the state to collect an excise;

  • Like an income tax and unlike an excise tax, the new tax law provides a deduction for certain charitable donations that the taxpayer has made during the tax year; and

  • Unlike most excise taxes, if the legal owner of the asset transferring title or ownership is not an individual, the legal owner is not liable for the tax generated as part of the transaction. .

The court concluded that these incidents exhibited the characteristics of an income tax rather than an excise tax, and because the new capital gains tax failed to meet the requirements of uniformity and limitation of the Washington State Constitution, it was unconstitutional.

The Washington state attorney general has already indicated that the decision will be appealed; in all likelihood, this issue will ultimately be decided by the Washington State Supreme Court.

© 2022 McDermott Will & EmeryNational Law Review, Volume XII, Number 62


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