Larry's Tax Law

As previously reported on May 7 and June 17 of this year,  Washington state lawmakers enacted a new capital gains tax, set to go into effect on January 1, 2022, but two lawsuits were initiated to declare the tax unconstitutional.  To date, the court cases are continuing their way through the judicial process.

On November 2, 2021, as part of the statewide general elections process, Washington voters were not asked to vote on the new state capital gains tax; rather they were asked for their opinion on the tax.

The specific question posed, as written by the Office of the Attorney General, is as follows:

Last fall, the IRS announced, with respect to pass-through entities (LLCs or other entities taxed as partnerships or S corporations), that, if state law allows or requires the entity itself to pay state and local taxes (which normally pass through and are paid by the ultimate owners of the entity), the entity will not be subject to the $10,000 state and local taxes deductibility cap (the “SALT Cap”). 

On February 4, 2021, Senate Bill 727 (“SB 727”) was introduced in the Oregon Legislature.  SB 727 is Oregon’s response to the IRS announcement (see discussion below).

On June 17, 2021, after some amendments, SB 727 was passed by the Senate and referred to the House.  Nine days later, the House passed the legislation without changes.  On June 19, 2021, Oregon Governor Kate Brown signed SB 727 into law, effective September 25, 2021.  In general, it applies to tax years beginning on or after January 1, 2022.  Interestingly, SB 727 sunsets at the end of 2023.

In relevant part, SB 727 allows pass-through entities to make an annual election to pay Oregon state and local taxes at the entity level.  For pass-through entities that make the election, their owners will potentially be able to deduct more than $10,000 of Oregon state and local taxes on the federal income tax return.  However, it gets even better—SB 727 includes a refundable credit feature that may result in further tax savings for some owners of pass-through entities.

As song writer and musician Bob Dylan said in his hit song, “The Times They Are A-Changin'”:

Come gather’ round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
Then you better start swimmin’ or you’ll sink like a stone
For the times they are a-changin’

The federal tax laws are certainly about to change. With the need to raise revenue as a top priority for the Biden Administration, everyone is expecting dramatic changes to the Internal Revenue Code.

Prologue

Kyle N. Richard recently joined Foster Garvey.  Kyle’s practice is primarily focused on assisting our municipal clients in bond and tax matters.  With his tax experience, however, he assists our tax practice group clients on broader federal, state and local tax matters.  We are excited to have Kyle join our tax team, adding to our already robust bench strength.

The article below was authored by Kyle.  Expect to see more of Kyle’s contributions to Larry’s Tax Law in the future.

Larry

On September 30, 2021, the Washington State Supreme Court upheld the constitutionality of the additional 1.2 percent business and occupation (B&O) tax imposed by the 2019 Substitute House Bill 2167 (“SHB 2167”) on “specified financial institutions”—financial institutions with annual net income of more than $1 billion.  SHB 2167 increases the tax rate for these institutions from 1.5 percent (the rate generally applicable to financial institutions) to 2.7 percent.

The tax was codified in Section 82.04.29004 Revised Code of Washington (“RCW”).  Like other B&O taxes in Washington, the amount of tax due is measured by the amount of the specified financial institution’s gross revenues attributed to Washington State, which is generally based on an apportionment formula (contained in RCW 82.04.460-.462).  The effect of this apportionment regime is that a certain percentage of a financial institution’s total gross income for the year is treated as earned in Washington and taxed under Washington law.

The Washington Bankers Association and American Bankers Association (taxpayers) commenced a lawsuit, arguing that the tax violated the U.S. Constitution’s Dormant Commerce Clause (“DCC”).  At trial, the court concluded that the taxpayers had standing to challenge the tax under the Uniform Declaratory Judgments Act (“UDJA”) and held that the additional graduated tax rate discriminated against out-of-state businesses, in violation of the DCC.  The trial court denied reconsideration of its decision.  The Washington Department of Revenue then appealed directly to the Washington State Supreme Court.

As I previously reported, on May 4, 2021, Washington State Governor Jay Inslee signed Senate Bill 5096 ("SB 5096") into law, creating the state's first capital gains tax.  It is set to go into effect on January 1, 2022. 

The new law has had a turbulent ride during its infancy.  Before Governor Inslee could even sign the bill into law, opponents to the legislation filed a lawsuit in the Superior Court of Washington for Douglas County, challenging the new tax regime as a tax on income – a violation of the state’s constitution.  The plaintiffs in that case seek to enjoin the taxing authorities from assessing and collecting the tax or otherwise enforcing the new law. 

On May 4, 2021, Washington Governor Jay Inslee signed Senate Bill 5096 ("SB 5096") into law, creating a capital gains tax regime in Washington.  The bill has had a brief, but colorful journey so far.  It appears that the journey is continuing.

Will Washington's capital gains tax be here to stay?  At this point, it is anyone's guess.

SB 5096 was originally introduced to the Washington State Senate on January 6, 2021.  It was passed by the Senate on March 6, 2021, after a hearing in the Senate Committee on Ways and Means, three readings and some floor amendments.  The bill's passage margin in the Senate was narrow, receiving 25 affirmative votes and 24 negative votes. 

On April 25, 2021, the Washington State Legislature passed Senate Bill 5096 (SB 5096).  The bill was immediately sent to Governor's Inslee's desk for signature.  It brings a new tax regime to the state of Washington.

Before we go into the details surrounding the new tax, I have to mention that it was challenged even before the governor had the opportunity to sign it into law.  A group of potentially affected taxpayers filed a lawsuit in Douglas County, Washington, to strike down the new law as being unconstitutional.  So, it is possible that SB 5096 will never breathe life. 

Knowing that the new tax regime is under attack, it is still important to have a good understanding of it in the event it survives the battle.

Last week, we reported on Maryland’s new gross receipts tax on revenues derived from digital advertising services (the “Tax”), the first of its kind in the nation.  Affected taxpayers and tax practitioners alike can breathe a sigh of relief—the Tax will not apply to tax years beginning before 2022.  Additionally, the broadcast news industry secured a significant victory by obtaining an exclusion from the Tax.

Background

During the COVID-19 pandemic, the federal government enacted three major pieces of legislation to provide financial relief to individuals and families.  The American Recovery Plan Act (“ARPA”), the most recent legislation, provides the third round of Economic Impact Payments (“EIPs”), also referred to as stimulus payments (and “recovery rebates” in the acts), to millions of Americans.

Maryland recently enacted the nation’s first tax on digital advertising.  The new tax, the Digital Advertising Gross Revenues Tax (the “Tax”), became law on February 12, 2021. 

The Tax has been surrounded by controversy from the very moment it was introduced in the Maryland House of Delegates.  In fact, a lawsuit to prevent the Comptroller of the Treasury of Maryland from enforcing the Tax was recently filed by a group of affected taxpayers.