Washington State Rules on Long-Term Capital Gains Excise Tax
- Apr 11, 2023
In a 7-2 decision, the Washington State Supreme Court ruled the excise tax on long-term capital gains (“tax”) is constitutional, upholding the March 2023 law.
The Washington Supreme Court’s conclusions are summarized below:
Excise Tax Is Not a Property Tax on Income
The tax is an excise tax rather than a property tax on income. This is an important distinction due to the limitations the state of Washington enacts on property taxes. An excise tax is levied when a taxpayer exercises its power and rights to the property (i.e., sells or transfers property). A property tax on income is a tax imposed due to the mere ownership of property and the income the property generates. The Washington State excise tax is imposed only when the taxpayer sells the property. Thus, the Washington State Supreme Court concluded the tax is an excise tax. Property taxes are subject to uniformity and levy limitations in Washington State. If this tax were deemed a property tax, the $250,000 exemption would violate Washington State’s uniformity requirements as well as the maximum rate limitations.
No Violation of Washington State Constitution Privileges and Immunities Clause
No evidence presented supported that the tax violated the Washington State Constitution privileges and immunities clause. The burden is on the plaintiff to prove the tax favors some Washingtonians over others. The Washington State Supreme Court explained that even if the tax did grant immunity or privilege, it will fund public education in the state of Washington, which is a reasonable ground to grant immunity. As noted in the opinion, Washington State’s “paramount duty” is to provide public education for Washingtonians.
No Violation of the U.S. Constitution Dormant Commerce Clause
The tax does not breach the dormant commerce clause of the U.S. Constitution because the tax meets the four-pronged tests established under the Complete Auto Transit case. The tax applies the domicile rules, which constitutes substantial nexus. Fair apportionment exists because the tax utilizes the tangible and intangible property apportionment rules, and the state offers a tax credit to mitigate double taxation. The tax does not discriminate against interstate commerce because it provides a method of allocation and a credit for double taxation. All parties agree the tax fairly relates to the services provided by the state.
Now that the Washington State excise tax on long-term capital gains is here to stay, taxpayers should consult with their tax advisors on how to plan and remit this tax, which is due April 18, 2023.
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Alyssa Rausch is a Senior Tax Manager in the Private Client Services Group. She provides comprehensive tax compliance and advisory services to high net worth individuals, closely held businesses and their owners, S corporations and partnerships.
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