Washington

Washington state capital gains tax may be pushed ahead with pending Supreme Court case – GeekWire

The capital of the state of Washington in Olympia. (Photo by GeekWire/John Cook)

Washington state’s controversial capital gains tax may move ahead with the collection as an official legal decision on the legislation is due next year.

The Supreme Court “stayed” an earlier ruling in March when a lower court ruled the tax was unconstitutional.

That means the state can start enacting rules and setting up collection before the tax’s due date next year. The Attorney General had requested the “stay” earlier this month.

A Supreme Court trial to determine the constitutionality of the tax is scheduled to begin Jan. 26.

The tax, which targets large stock sales for Washington state residents, was approved by both the state legislature and the governor in 2021. After Gov. Jay Inslee signed the measure into law, her opponents successfully blocked it in Douglas County Court.

Douglas County Superior Court Judge Brian Huber sided with opponents of the new tax, who argued it is an illegal income tax under the state constitution, which severely limits income taxes. Huber said in a written decision that the tax “has the characteristics of an income tax rather than a consumption tax,” as argued by state legislatures.

Attorney General Bob Ferguson then appealed the verdict directly to the state Supreme Court. Then that summer, the state’s highest court agreed to bypass the lower court of appeals and take the case.

If the court finds the tax unconstitutional, all payments made to date would be refunded, a Treasury Department spokesman told the Seattle Times.

The statewide capital gains tax imposed a 7% excise tax on the sale of stocks, bonds and companies – the first such tax in state history.

The central question for the court: Is the capital gains tax an income tax or a sales tax? Proponents of the tax say it’s not an income tax, but a consumption or sales tax that’s only levied when a sufficient amount of stock is sold.

In almost every state — and within the IRS — capital gains are classified as income. But Washington is an outlier for a legal reason: It’s the only state in the nation that classifies income as real estate. This has thwarted attempts to authorize any form of income tax, as all income taxes are therefore subject to the harsh constitutional restrictions on property taxes.

There are no such restrictions on sales or use taxes.

Seattle’s tech community was at odds with the tax. Some see it as a necessary change to the state’s regressive tax system.

Others believe the tax hurts start-ups and tech companies, as stocks are often used as compensation.

A letter released last year by the Washington Technology Industry Association, which represents more than 1,000 tech startups and larger companies, warned that the tax will remove “a significant attraction and retention mechanism” for startups and “damage our competitiveness.”

The tax would only apply to capital gains greater than $250,000. And it would exclude many other potential capital gains including real estate, land and structures; retirement accounts; livestock for farming or ranching; and the sale of timber and woodland, among other exceptions.

After the law passed, some executives and business owners cashed out their stock holdings, according to Seattle-area wealth managers who spoke to GeekWire last year.

The tax faced two lawsuits, which were consolidated. The first was submitted by the conservative Freedom Foundation; the second was filed by former Washington Attorney General Rob McKenna, who represents manufacturing companies and the Washington State Farm Bureau, among others.

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