On May 4, 2021, Washington State Governor Jay Inslee signed into law a new “excise tax” on certain capital gains. Generally, this new legislation imposes a 7% tax on the net annual amount of long-term gains from the sale or exchange of stocks, bonds, and other capital assets in excess of $250,000 (for both single and married filing joint filers). The legislation states this new revenue will be used to fund certain K-12 education, early learning, and childcare programs.
In response, several lawsuits challenged the validity of this new “excise tax” because the Washington state constitution bars an income tax, and a tax on capital gains is generally considered a tax on income under federal and state tax principles.
In a consolidated lawsuit (Quinn v. Washington and Clayton v. Washington), the plaintiffs, via a motion for summary judgment, asked the State Superior Court to rule the excise tax unconstitutional.
On March 1, 2022 the Superior Court judge granted (here) the plaintiff’s summary judgment motion, ruling that the excise tax “is not levied upon ‘the sale or transfer’ of capital assets” and instead “levies a tax on receipt…of capital gains.” In other words, the judge ruled the “excise tax” is, in form, an income tax.
In response to the Superior Court decision, the Washington State Attorney General (here) stated “[w]e respectfully disagree with this ruling, and we will appeal” to the Washington State Supreme Court.
This means the Superior Court’s decision will be re-argued for a final decision by the Washington State Supreme Court, at later date yet to be determined. The fate of this new “excise tax” therefore remains uncertain.
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There are numerous exemptions (meaning gain from the sale of certain capital assets is not subject to this new tax) in the excise tax, including gains from the sale of:
Long term capital gains or losses derived from the sale of intangible personal property are allocated to Washington state and subject to the tax if the taxpayer was domiciled in Washington at the time the sale or exchange occurred. But gain from the sale of goodwill associated with certain auto dealerships is exempt.
Gain from the sale of tangible personal property is allocated to Washington state if the property is located in the state. Gain from the sale of tangible personal property not located in Washington state at the time of sale can still be allocated to Washington state if the property was located in Washington state at any time during the taxable year, the taxpayer was a Washington state resident at the time of the sale or exchange, and the gain is not subject to tax from another taxing jurisdiction. A credit is allowed against the B&O tax for any excise tax owed from the same sale.
Only individual Washington state residents are generally subject to this new tax. This includes individuals allocated a share of long-term capital gain from a pass-through or disregarded entity, such as a partnership, S corporation, grantor trust, or limited liability company taxed as one of the former. Taxpayers owing tax under this new legislation will be subject to a new tax filing regime with the Washington State Department of Revenue.
What does this mean to you? Our state and local tax professionals are here to ensure you stay informed on how new legislation could affect your organization.
This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.
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