The controversial capital gains tax in Washington state could go ahead with collection, as a formal legal decision on the legislation is scheduled for next year.
The Supreme Court granted a “pause” in a previous ruling in March, when a lower court ruled the tax was unconstitutional.
This means that all effects of that decision are suspended and the state can start issuing the rules and adjust collection before next year’s tax payment date. The State’s Attorney General had requested to “remain” earlier this month.
A Supreme Court case to determine the tax’s constitutionality will begin on January 26.
Targeting large stock sales for Washington state residents, the tax was approved by both the state legislature and the governor in 2021. After Governor Jay Inslee signed the measure into law, his opponents successfully blocked the measure in Douglas County court.
Douglas County Supreme Court Judge Brian Huber sided with opponents who claimed the new tax was an illegal income tax under the state constitution that sharply limits income taxes. In a written resolution, Huber said the tax “shows the characteristics of an income tax rather than a consumption tax,” as state lawmakers have suggested.
Attorney General Bob Ferguson later appealed the decision directly to the state Supreme Court. Then this summer, the state’s highest court agreed to bypass the lower appellate court and take over the case.
All payments made before that date will be refunded if the court decides the tax is unconstitutional, a Department of Revenue spokesperson told the Seattle Times.
The statewide capital gains tax imposed a 7% excise tax on the sale of stocks, bonds and businesses – the first tax of its kind in the state’s history.
Key issue for the court: Is capital gains tax an income tax or sales tax? Proponents of the tax say it is not an income tax, but rather an excise or sales tax that is collected only when enough stocks are sold.
In nearly every state — and within the IRS — capital gains are classified as income. But Washington is outlaw for one legal reason: It’s the only state in the country to classify income as property. This hindered any attempt to approve any income tax because all income taxes are therefore subject to sharp constitutional restrictions on property taxes.
There are no such restrictions on sales or excise taxes.
The Seattle tech community was in dispute over the tax. Some see this as a necessary change to the state’s declining tax system.
Others think the tax is detrimental to startups and tech companies because stock is often used as compensation.
A letter published last year by the Washington Technology Industry Association, which represents more than 1,000 tech startups and larger companies, warned that the tax would “eliminate a meaningful attraction and retention mechanism” for startups and “harm our competitiveness”. .
The tax will only apply to capital gains greater than $250,000. And it will exempt many other potential capital gains, including real estate land and structures; retirement accounts; livestock for farming or farming; and, among other exceptions, the sale of timber and timber lands.
According to Seattle-area wealth managers who spoke to GeekWire last year, some executives and business owners have cashed out after the law was passed.
The tax faced two lawsuits that were combined. The first was opened by the conservative Freedom Foundation; the latter was inaugurated by former Washington Attorney General Rob McKenna, who represented, among others, manufacturing businesses and the Washington State Farm Bureau.