Court Holds Washington Capital Gains Tax is a Constitutional Excise Tax
On March 24, 2023, the Washington Supreme Court (in a 7-2 opinion) held that the controversial capital gains tax enacted by the Washington State Legislature in 2021 (SB 5096; Chapter 82.87 RCW) is constitutional. Notably, in reaching its conclusion, the Court determined that the capital gains tax is an excise tax rather than a non-uniform tax on property that would violate the Washington Constitution. However, in doing so, the Court declined to revisit its arguably inconsistent 1933 decision in Culliton v. Chase, which held that an income tax is an unconstitutional tax on property and not an excise tax. Capital gains taxes have broadly been considered to be an income tax in other jurisdictions that impose them.
What it Means
It is possible that the decision could be appealed to the United States Supreme Court on the grounds that the tax violates federal law. Or, a ballot measure to repeal the tax could be proposed by the Washington voters. However, the issue of the tax’s constitutionality under Washington law is now settled. This means the tax is effective as of January 1, 2022, and individuals who are subject to the tax, as summarized below, should consult with their tax advisors as soon as possible.
The tax imposes a 7% tax on the sale or exchange of long-term capital assets allocated to Washington State. The tax applies only to individuals reporting over $250,000 of Washington capital gains in the relevant tax year (adjusted annually for inflation). There are various deductions and exemptions available, most notably an exemption for the sale of real estate and the sale of assets held in certain retirement accounts.
Individuals subject to the tax are required to pay the tax and file a capital gains tax return with the Department of Revenue by the due date of that individual’s corresponding federal income tax return. While the due date for filing the return can be extended, the due date to make payment cannot. Payments and returns to report 2022 capital gains tax are due April 18, 2023.
If you have any questions related to the capital gains tax, please contact Ryan Montgomery, Matthew Hart, or one of the other attorneys in the tax and estate planning department.